Discussions

The new self-financing Mechanism of the African Union: Can the proposed AU levy be a step towards financial independence?

The new self-financing Mechanism of the African Union: Can the proposed AU levy be a step towards financial independence?

25 May 2017

In recognition of Africa Day 2017, Gerhard Erasmus, tralac Associate, comments on the significant recent decision by the AU to adopt a new self-funding mechanism

Introduction

The African Union (AU) has recently adopted an important decision to improve its own funding.[1] It has decided that all AU Member States should implement a 0.2% levy on eligible imports to finance the Organization. Implementation had to start in 2017 but has been postponed for another year.

The costs of running the AU are substantial. In 2016 the Assembly of the AU adopted a total budget of US$ 416,867,326, broken down into US$ 150,503,875 for the operating budget and US$ 266,363,451 for programmes. Member States have to contribute a total of US$ 169,833,340; while US$ 247,033,986 has to be secured from international partners.[2] Foreign donors include the European Union, the United States, China, the World Bank and the United Kingdom.[3]

Getting members to pay their dues is a challenge. On average about 30 Member States default annually either partially or fully; creating a significant funding gap.[4] Six countries (South Africa, Nigeria, Algeria, Angola, Egypt and Libya) contribute about 60% of the membership portion of the AU budget.[5]

The AU imposes sanctions on member countries that default twice on their annual contributions but shies away from openly naming and shaming defaulting Members. Defaulters can be barred from voting on AU decisions.

How will the new Levy work?

The AU import levy will apply to the Cost Insurance and Freight (CIF) value at the port of disembarkation for imports arriving by sea and road and the customs value at the airport of disembarkation for goods arriving by air. The revenue would be collected by local authorities and held in central bank accounts, from where it would be paid to the AU.[6] The levy will be used to finance the Operational Budget, Programme Budget and the Budget of the Peace Support Operations of the African Union. The aim is to generate $1.2 billion annually.

It is claimed that the 0.2% levy is not out of line with what is practiced elsewhere. “This type of tax is already operational in several regional economic communities and intergovernmental organisations, whereby imports for final consumption are levied through customs administration.[7] Another option, an oil levy, has earlier been rejected by oil-producing countries.[8] Hospitality levies on hotel accommodation, on text messages, and on air travel have previously been considered but rejected.

What are the Prospects?

It will take time to implement this proposal. Since the indications are that the proposed levy will come in the form of a new tariff, legislative changes are required; including changes to national Tariff Books. There must also be domestic mechanisms to ensure these funds will be treated as dedicated revenue streams. The present indications are that Governments will still have the final say about complying.

Some are sceptical about the effectiveness of this mechanism. The New Times quoted one commentator to have asked: “What is different in this proposal [from] the others?”[6] In the past Member States have failed to pay their contributions “not because of the lack of money” but because their leaderships displayed a “lack of determination, capability, propensity, willingness, energy and commitment” to their countries’ AU membership. He also expressed concern about the AU Commission’s capacity to oversee members’ contributions. The good news is that there have been improvements in recent years, with more member states paying up.

It must be noted that African States belong to several Regional Economic Communities (RECs) and that they already face a considerable financial burden. Some RECs have comparable arrangements in place and would have to assess the impact of an additional levy. The East African Community has a tariff whereby an import levy of 1.4 per cent is earmarked for joint infrastructure projects.[6]

Is it lawful?

There have been concerns about the lawfulness of the new levy. Some Members of the World Trade Organisation (WTO) have argued that the new mechanism may not be WTO compatible; it will be discriminatory in nature and a violation of MFN principles. Since the AU levy will apparently be implemented as a new tariff, bindings under WTO schedules will be affected. Some African countries could have zero tariffs for the affected imported goods. WTO rules, in addition, require that any fee connected to the importation of goods must be a fair reflection of the cost of a related service and must not amount to a taxation for fiscal purposes.[9] These issues were raised at a meeting of the WTO’s Goods Council on 6 April 2017. There have not been any suggestions yet that a special waiver might be sought.

Among the options suggested for getting around the WTO compatibility hurdle is that, if Africa was to become a Free Trade Area (FTA), then the levy would not be in breach of WTO principles. It is not clear how this argument will address all the concerns raised at WTO level. Members of an FTA retain jurisdiction over their own tariff regimes and remain individually responsible for WTO compliance. An FTA does not, like a Customs Union, have a common external tariff. But even the formation of such arrangements (which are difficult to foresee to include all 55 AU Members) will require that new tariff arrangements be negotiated and notified. The Continental Free Trade Area (CFTA) is presently being negotiated but this particular issue is not on the agenda.

The lawfulness of the new levy was among the topics discussed during the consultative meeting on AU reforms held in Kigali last year. Nigeria’s foreign affairs minister Geoffrey Onyeama has been reported to have expressed concerns; saying the continent ought to seek a way forward to ensure that the mechanism is legal. “A lot of countries have received letters from the US regarding WTO obligations. It is something we need to discuss in detail and take into consideration and also be aware of what the implications are. We need to find a way around it. We should agree on whether our response will be collective or different”.[10]

Conclusion

The AU faces major financial challenges. These include funding for the AU’s plans for deeper intra-African integration, Agenda 63, and the Sustainable Development Goals (SDGs) 2030 Agenda. These plans could compete with REC agendas.

The new formula is a forward-looking proposal to finance the AU’s own agenda but questions around modalities of implementation, transparency and compliance by Members must still be worked out. Rationalization and prioritizing of existing projects seem to be necessary. The AU’s challenges are to be met against the background of bigger picture issues; such as the fact that some are of the view that “the classic system of financing regional integration in Africa has reached its limit.[11]

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[1] “Retreat on Financing of the Union” 27th African Union Summit held in Kigali, Rwanda in July 2016. The new formula was proposed by former African Development Bank president Donald Kaberuka. See https://www.tralac.org/resources/by-region/african-union-resources.html#financing-the-union

[2] http://www.saflii.org/au/AUDECISIONS/2015/19.pdf

[3] The AU’s budget grew from $278,2 million in 2013 to $393,4 million in 2015, with external financing rising from 56% to 61,7% in the corresponding years. http://allafrica.com/stories/201701200093.html

[4] https://www.au.int/web/en/financingau

[5] http://allafrica.com/stories/201701200093.html. From 2016 Members’ contributions fall into 3 categories: 60% of the budget is equally contributed by countries with a GDP 4% above the continent’s total (Algeria, Angola, Egypt, Libya, Nigeria and South Africa), 25% by countries with a GDP between 1% and 4% (12 countries), and the 3rd category with a GDP lower than 1% (36 countries). They contribute the remaining 15%.

[6] http://allafrica.com/stories/201701200093.html

[7] http://www.panapress.com/AU-proposes-levy-system-as-self-financing-mechanism--12-544541-20-lang4-index.html

[8] Mail & Guardian 12 June 2015. https://mg.co.za/article/2015-06-11-aus-dependence-on-cash-from-the-west-still-rankles.

[9] GATT Art VIII.

[10] https://www.tralac.org/news/article/11595-africa-ponders-challenges-as-wto-steps-in-way-of-au-self-financing-model.html

[11] Prof Abdalla Bujra, Director of the ECA-based Development Policy Management Forum (DPMF). See 6, Ibid.