Qalaa is an African investment fund with $9.5bn on its books. One of its assets includes Uganda’s Rift Valley Railways.

Qalaa is held up by development institutions as a model for success. The European Commission says that Qalaa is a company that has become an “African success story”, and the company has recently joined the UN’s Global Compact. It has received hundreds of millions of dollars in loans from development institutions such as the European Investment Bank (EIB), the African Development Bank and the World Bank, as well as a number of smaller European development finance institutions.

But although it is undoubtedly successful, this Egyptian-based investment fund raises a series of questions about whether it represents the sustainable and inclusive growth Africa needs.

An investigation by the Illicit Finance Journalism Programme (IFJP), which is based in London, shows Qalaa has paid extremely low levels of corporation tax since it was founded more than 10 years ago and relies heavily on some of the most secretive financial jurisdictions in the world.

Qalaa holdings

Qalaa started as a private equity fund, buying companies, restructuring them and then selling them at a profit. This year, it rebranded as an investment holding company. It has made exceptional returns for its investors, which include the company management. In the first six years of the company until 2010, the firm delivered a stunning $2.2bn of returns to investors and shareholders.

To finance the company’s acquisitions, Qalaa received money from three sources: Gulf-based sovereign wealth funds, international export credit agencies, and development financial institutions (DFIs). According to Dr Ahmed Heikal, cash from these top-quality taxpayer-funded institutions “dictates a certain way of doing business”.

Qalaa, said Heikal, has no choice but to be mindful of human rights issues and even “the way we pay taxes.” He adds that there is “A whole slew of certain basic principles we have to adhere [to] because if we don’t, no one will give us money”.

But despite these lofty statements, a Qalaa investor presentation reveals that the company pays very little tax on their profits. Although there is no suggestion that Qalaa has done anything illegal, the document clearly shows that while the company has made €142m in post-tax profits since it was founded, it paid just over €298,000 in corporation taxes. This suggests an effective corporation tax rate of 0.2 per cent.

A spokeswoman for Qalaa said that focusing solely on corporation tax is not a fair reflection of its tax contribution and that the company has paid over $300m in taxes since it was founded.

“The company pays a great deal in other taxes. In fact, it is one of Egypt’s largest taxpayers,” she said.

But when asked to explain fully its tax contribution, the firm declined. It also did not respond when asked whether its claimed $300m tax contribution included taxes paid by employees. Qalaa is also a heavy user of tax havens. Its latest annual accounts show that out of 130 subsidiaries, almost a third are in tax havens. The company has 38 incorporated in the British Virgin Islands (BVI), five in Mauritius and one in Luxembourg.

Qalaa emphatically denies that its tax haven-registered subsidiaries are driven by tax minimisation.  The company spokeswoman explained that its use of the British Virgin Islands (BVI) was for legal reasons. BVI companies, she said, allow for more flexible corporate structures that accommodate the different needs of investors, which include development finance institutions.

Europe's investment

A look at Qalaa’s investments shows how development funds are invested in some of these tax haven-controlled companies. Qalaa’s most significant deal to date is a $3.7bn oil refinery project outside Cairo. The finance package for the deal was completed in 2012, when Egypt was in the midst of revolution, in large part thanks to a $450m loan from the European Investment Bank.

The money from the bank’s loans and the investments of a number of other state-backed development finance institutions is controlled by a company in the British Virgin Islands, Orient Investment Properties Limited. Another key asset controlled by Qalaa via the BVI is Rift Valley Railways, here in Uganda.

Rift Valley, is owned by KU Railway Holdings in Mauritius, which, in turn, is controlled by Ambience Ventures of the British Virgin Islands, which is controlled by Qalaa.

Rift Valley has received loans from the African Development Bank ($40m), the Belgian Investment Company for Developing Countries ($10m), FMO, the Dutch Development Bank ($20m), The International Finance Corporation ($22m), The ICF Debt Pool ($20m) and KfW a German Development Bank ($32m).

Outsourcing development

Qalaa is not the only finance company benefiting from these investments. A recent report by Eurodad, the European Network on Debt and Development, noted that over the last decade more than 50 per cent of funds allocated to the private sector by development finance institutions go to the finance industry - companies like Qalaa.

Private financial institutions will typically use the funds provided by development institutions to lend on to local business, or in the case of private equity, buy local businesses and sell them on for a profit.

The middlemen, people like Dr Heikal, stand to make huge profits from this cheap source of government-backed finance. Qalaa is keen to stress that its close relationship with development institutions means that it upholds the highest ethical and environmental standards, despite its offshore links.

But its links to weakly-regulated jurisdictions raise more questions for the development finance institutions, who have policies to prevent making investments with tax havens. Asked why the EIB had approved the Egyptian Refining Company investment even though it was controlled by a BVI company, a spokesperson said that in 2010, when the investment was approved, the British Virgin Islands were not considered a non-compliant jurisdiction (NCJ).

According to the EIB, the bank uses the OECD’s lists of tax havens. By 2012, the only countries left on the OECD list were the tiny Pacific island nations of Nauru and Nieu. The IFC give a similar justification for their investment in Rift Valley, that at the time of the investment, the company met norms of global transparency.  When questioned about the investment, an IFC spokesperson told the IFJP:

“IFC financed Rift Valley Railways International to rehabilitate the Kenya-Uganda Railway, a vital trade link from the coast of Kenya into Uganda that will spur cross-border trade and promote economic development in both countries. IFC’s investment in Rift Valley is in line with our Offshore Financial Centre Policy. During our due diligence, IFC found the project and its key financial partners to be in line with international tax transparency norms.”

The IFC also invested in Umeme, Uganda’s main power supplier, at a time when the company’s main shareholder, Umeme Holdings, was domiciled in Mauritius. In 2013 OECD compiled a new list of NCJs. This list included the BVIs and some other well-known secretive jurisdictions such as Panama and Switzerland. However, despite the BVI now being subject to DFI policies on offshore finance, both the EIB and the IFC say that the policy is not retroactive.

There are also a number of other jurisdictions that are absent from the OECD list. The Cayman Islands, The Bahamas, Bermuda, Guernsey, The Isle of Man, Jersey, Macau and Mauritius, have been given the all-clear by the OECD. This opens up hundreds of billions of development funds being lent to companies and investment funds based in low tax jurisdictions.

Public pressure

At the Africa-EU summit earlier this year, leaders from both continents agreed that there was a need to develop fair and effective tax systems for business. In Europe, The European Commission has undertaken a series of investigations into the tax structures of prominent international firms like Apple, Google and Fiat. But the role of development finance institutions like the European Investment Bank in financing offshore structures in Africa has so far received less attention.

But this is changing. The European Parliament’s International Development Committee recently decided to prepare a report on tax avoidance and evasion. Linda McAvan, a British Labour MEP who chairs the committee, said she would pass the results of the IFJP investigation to her colleagues working on the report to look into the matter further.

“We will not be able to meet our global development goals and tackle poverty unless companies pay their fair share of tax in an open and transparent manner,” said McAvan.

Campaigners are also advocating for more transparency. Mathieu Vervynckt, the?policy and research analyst?at Eurodad said: “At the very least, DFIs should be much more explicit about why the use of an offshore financial centre was deemed necessary, and what prevented them from investing directly. But even more importantly, it needs to assure citizens that its policy is properly implemented, by publicly disclosing beneficial ownership and country-by-country data on all its investee companies”.

In Rift Valley’s Case, this would show how much profit is generated in Uganda, and how much in the British Virgin Islands.

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George Turner works for the Illicit Finance Journalism Programme (IFJP), a project funded by the Tax Justice Network. The aim of the programme is to increase the quality and quantity of investigative journalism about offshore finance and illicit financial flows in developing countries.

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