The concept of the circular economy is becoming increasingly prevalent in discussions on product design, supply chains, sustainability, and geopolitical challenges. In addition to the environmental benefits, in terms of reduced consumption of natural resources and reduction in CO2 emissions, it has been argued that the adoption of a circular economy approach could also have a range of business and social advantages. It is also argued that adoption helps to create higher levels of security, self-sufficiency, and sustainability, allowing businesses to fulfil customer and service obligations while maintaining costs and competitiveness.

Africa is in a strong position to take advantage of these new economic opportunities. The African Circular Economy Alliance (ACEA) was established in 2017 with the specific aim of spurring Africa’s transition to a circular economy. However, while there has been progress at the national level (and an African Circular Economy Action Plan is in development), enforcement and implementation of different policies remain varied. It has also been argued that proposed changes to legislation could result in increased costs for manufacturers and potentially for consumers if it proves more expensive to repair an object rather than replace it.

KPMG hosted this roundtable discussion to explore, from an African perspective, whether the design and practice of tax approaches could help to unlock the circular economy and reconcile the tension between economic growth, sustainability and the issue of uncertain global supply chains resulting from geopolitical challenges. If so, which levers are best placed to make realistic change? The conversation was held under the Chatham House Rule and was attended by 11 participants from a variety of backgrounds (see below for a list of attendees).

Executive summary

  • This is a complex issue – with many overlapping and intersecting aspects – and it is essential to consider the social and political structures of each African nation which may make various measures more or less effective
  • Regulation must be carefully balanced with effective enforcement and must be carefully applied to avoid inhibiting innovation. Rigid regulation could be problematic in a still evolving environment.
  • There is an opportunity to leverage existing circular practices to facilitate a more rapid transition and circumvent issues present in other economies.

Regulation, Enforcement and Hypothecation

The balance between regulation and effective enforcement

Throughout the discussion, many participants expressed the need to carefully consider the level to which current regulation is being enforced and the potential barriers this presents to greater circularity.

One participant cited the eco-levy on plastics in Ghana which is hypothecated for a specific fund dedicated to recovering plastics from the environment. Those funds however cannot be accounted for, and the organization mandated to manage those funds was never established. Though some regulation is already in place to encourage and support a move towards a circular economy, the benefits will not be realized without effective enforcement.

Another participant emphasized that a circular economy tax – and the structure and implementation of such – will require much work for governments in Africa. It requires maturity in the market, consideration of how best to incentivize, and extensive discussion with revenue authorities to convince them to participate. This is especially salient considering current global economic pressures which may, one participant argued, lead to ‘a desperate drive to collect taxes where it is easiest to source.’

It is crucial to consider the social and political structures and potential limitations surrounding the enforcement capabilities in a specific country or region before regulation is introduced for regulation’s sake.

Context is key

Considering the unique social and political structures of each country is crucial to achieving circularity throughout the continent

One participant emphasized that there is no ‘silver bullet that will sort everything out.’ Across the continent, a variety of different needs and pressures require consideration before effective change towards greater circularity can be achieved.

One example given was the informal sector in Ghana which is estimated to total 85% of the workforce currently. When thinking about applying taxes of any kind this context is critical to consider. It was also noted that harnessing well-established mobile technology (e.g., mobile money platforms) has a role to play in formalizing the operations of the informal sector in Africa, as well as in improving the quality of financial and resource supply chain data.

In addition, we should also consider where, within a system, it would be most appropriate to tax to achieve the best possible outcome.

One participant suggested that as many African nations tend to be producers and exporters of raw materials – but also import a majority of their finished goods – they tend not to have considerable control over the design and quality of goods entering their economies. Importers of finished products that compete with locally made products don’t have the same taxes applied and create competitive unfairness. Another participant suggested that in a South African context, extended producer responsibility could be a key driver for the circular economy and overcome some of these challenges.

In the context of each national economy, the right incentive or disincentive must be considered to achieve the desired outcome. In some contexts, a tax may not be the most effective means to greater circularity especially if it results in less trust, particularly as a result of poor enforcement and/or complexity in the system.

An opportunity to leapfrog

Leveraging existing circular practices to facilitate transition

It was suggested that leveraging the circular practices already active in some African economies could facilitate a more rapid transition and allow certain barriers, present in other economies, to be circumvented.

One mechanism which has the potential to create a more circular economic model is the shifting of the tax base away from labor taxes and onto raw materials to encourage remanufacturing and refurbishment within the economy.

One participant highlighted that moving the tax base away from well-established labor taxes in European nations is an enormous challenge. Whereas in some African nations where there is a higher proportion of informal workers and, therefore less pre-existing reliance on labor taxes, there could be the potential for them to leapfrog to a more circular economy.

Another participant highlighted the opportunities presented by the sharing economy, as a means of reducing overproduction and throw-away culture. With a higher proportion of households sharing large appliances and vehicles than in European nations, this is another example of pre-existing sustainable practices which can be leveraged to circumvent barriers to circularity.

By considering the unique circumstances of African nations, greater and more effective change can be achieved towards circularity. It is important to identify and utilize what is already present and advantageous that can facilitate the change we want to see.

The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG International.