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Angola: The withdrawal of fuel subsidies and the transformation of political legitimacy

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Rui Verde

  1. The decrease in oil revenues in the State Budget and the need for state funding

Following the guidelines of the International Monetary Fund (IMF), the Angolan government is gradually withdrawing fuel subsidies. The IMF defends this position because it believes that this measure will generate significant savings for the government and improve the state’s fiscal sustainability, since fuel subsidies represent a high cost for the General State Budget (OGE), reaching 9.1 billion kwanzas between 2021 and 2024. In addition, there are concerns about fuel leaks to neighboring countries and distortions in the domestic market . [1]

In a recent interview with LUSA, Angola’s finance minister, Vera Daves, confirmed that further cuts in fuel subsidies will be made this year, assuming that this is a “path that must continue”, although the speed depends on various factors .[2]

The truth is that Angola’s State Budget is facing ever greater challenges due to its historical dependence on oil revenues, a factor that jeopardizes the country’s financial stability . For decades, oil represented the main source of revenue, financing investments in infrastructure, health, education and other key sectors. However, the volatility of international oil prices has highlighted the need to diversify public revenues, especially since 2014.

For this reason, in recent years, the Angolan government has adopted tax and fiscal reform measures, seeking to strengthen non-oil revenue. The creation of specific taxes, the modernization of collection systems and incentives to formalize companies have reflected an attempt to reduce dependence on the energy sector. Despite these efforts, the budget deficit and the pressure on public accounts continue to be worrying challenges, as demonstrated by the delays that sometimes occur in paying the salaries of state workers, and the widespread delays in paying for supplies and services .[3]

The practical result is that the state needs to tax the population and cut spending that is irrational from an economic point of view[4] , as is the case with the fuel subsidy. This changes the pre-existing relationship between the state and the people. In the past, the state didn’t need the people to finance itself, now it does.

 In fact, there are already around 5,205,380 individual taxpayers and 320,440 individual taxpayers with commercial activity in Angola, meaning that more than 5.5 million people are registered to pay taxes in the country[5] . While this is a remarkable number, it is also true that considering that there are around 14 million people with the potential to be taxpayers, there is still a lot of scope for broadening the tax base. At the same time, in 2022, Angola collected 4,638 billion kwanzas in non-oil taxes. Luanda province was responsible for 92.2% of this revenue. In the first quarter of 2023, non-oil revenue amounted to 976 billion kwanzas, an increase of 13% on the same period last year.[6][7] The key point is that non-oil revenue in Angola has shown significant growth in recent years . [8]

2-The need for taxes and subsidy cuts and the changing paradigm of political legitimacy

Since 2002, the political legitimacy of the Angolan system of government has rested on two factors: victory in the civil war and direct access to oil revenues.[9] In real terms, the people were not part of the equation for legitimizing power. José Eduardo dos Santos could govern without the people and without needing them. All he needed was military victory and oil money. The formal legitimizations of power, such as the 2008 elections or the 2010 Constitution, were just that, mere acts validating a previous reality that had been imposed.

Legally, the government was based on popular sovereignty and the Constitution, and all legal-formal acts were taken over time with a valid legal basis: elections, the Constitution, legislation, votes in parliament, etc. However, there was the notion that the constitutional and governmental system was based on a previous pact in which victory in the war and access to oil funds gave power to the government, which in return guaranteed the development of the country and the evolution of society. It is in this context that the political rationality of the fuel subsidy can be seen.

The point is that since 2014, when the price of oil fell enormously and Angola entered almost ten years of crisis, this political legitimacy has been destroyed. On the one hand, the generation and memories of the war have diminished. A large percentage of the Angolan population was born after the end of the civil war (2002). Around 65% of Angolans (more than two thirds) are under the age of 25, which means that 21 million Angolans are under this age group. This means that the legitimacy of the war already means little or nothing to them, as the victor has no right to exercise power.

In addition, the need to take revenue from the people and withdraw subsidies from them changes the 2002 social pact: if political power needs the people, then the people will participate in political power. There is no turning back from this equation that has been affirmed throughout history.

The payment of taxes has historically been a determining factor in the formation of political systems and the consolidation of democratic rights. In medieval England, the need to collect taxes led to the creation of institutions such as Parliament, where representatives of the nobility and the bourgeoisie discussed the king’s requests for money to pay for royal weddings or wars. The Magna Carta of 1215 was a milestone in establishing that taxation had to rely on some level of consent from the subjects, reinforcing the idea that government authority could not impose arbitrary taxes without representation. This principle evolved over the centuries, directly influencing the development of modern parliamentarianism .[10]

In the context of democracy, the concept of “no taxation without representation” became central. The Glorious Revolution of 1688 in England consolidated Parliament as a fundamental body in governance, restricting the absolute powers of the monarch and reinforcing the role of citizens in fiscal decision-making. The idea that taxes should be debated and legitimized by elected representatives helped shape democratic systems in Europe and North America. As nations sought greater popular participation, control over taxes became a crucial mechanism for defining citizens’ rights and strengthening representative democracy.

The relationship between taxation and independence became especially evident in the American Revolution (1775-1783). The British colonists in America rejected taxation without their direct participation in the decisions of the British Parliament. Legislation such as the Stamp Act of 1765 and the Tea Act of 1773 were seen as violations of colonial autonomy, leading to protests such as the Boston Tea Party. The refusal to accept taxation without representation resulted in the revolutionary movement that culminated in the independence of the United States, enshrining the idea that the legitimacy of a government depends on the participation of citizens in defining fiscal policies.

Thus, throughout history, the payment of taxes has not only been a means of financing states and governments, but also a catalyst for significant political transformations. Parliamentarianism, democracy and the independence of several countries were shaped by debates over who should have the power to define and collect taxes. The struggle for the right to influence tax policies contributed to the creation of institutions that ensured effective popular participation in government and the basis of its legitimacy.

3-Conclusion: the transformation of the political legitimacy paradigm in Angola

Political legitimacy in Angola is undergoing a significant transformation. The concept of the “right to govern”, previously associated with the MPLA, has lost its validity. This change reflects the growing awareness of the Angolan tax-paying population (and not recipients of fuel subsidies) of their role in sustaining the state, especially through the payment of taxes. The relationship between citizens’ tax contributions and the state’s ability to function has become a central element in the country’s political dynamics, transcending ideologies and public demonstrations.

This transformation marks a new phase in Angolan politics, where the power of the people is manifested in a more concrete way. The voice of citizens, based on their economic contribution, will redefine political arrangements and the structure of governance. This phenomenon highlights the importance of legitimacy that goes beyond mere legality, demanding a deeper connection between the rulers and the ruled.

The 2027 elections will represent a milestone in this context. For the first time, political legitimacy will be debated at the ballot box, transcending the legal sphere. This event promises to be a turning point in Angola’s political history, where the weight of social and economic transformation will have a direct impact on the choice of leaders and the definition of the country’s future.

[1] https://www.msn.com/pt-pt/pol%C3%ADtica/governo/governo-angolano-confirma-mais-cortes-nos-subs%C3%ADdios-aos-combust%C3%ADveis-este-ano/ar-AA1DGdmi

[2] https://www.angola24horas.com/sociedade/item/31715-governo-angolano-confirma-mais-cortes-nos-subsidios-aos-combustiveis

[3] https://observador.pt/2024/08/02/governo-angolano-diz-que-salarios-de-julho-dos-funcionarios-publicos-ja-foram-pagos/

[4] We have our doubts about this cut before the fuel market structure is reformed to make it a competitive market, but that’s a subject we won’t discuss here.  See:  https:

[5]https://www.ucm.minfin.gov.ao/cs/groups/public/documents/document/aw4x/mju4/~edisp/minfin1258130.pdf

[6] https://expansao.co.ao/angola/detalhe/luanda-arrecadou-922-do-total-da-receita-fiscal-nao-petrolifera-em-2022-60224.html

[7] https://forbesafricalusofona.com/impostos-arrecadados-pela-agt-em-angola-atingem-os-13-bilioes-kz-em-2022/

[8] https://www.opais.ao/economia/arrecadacao-nao-petrolifera-acima-dos-4-bilioes-de-kwanzas/

[9] Rui Verde, 2021, Angola at the Crossroads. Between Development and Kleptocracy, IB.Tauris. London.

[10] Rui Verde, 2000, The Harmonious Constitution. Judges and the Protection of Liberty. Newcastle upon Tyne.

Sonangol: the need for a new strategic vision

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The Annual Accounts: 2019

On 22 September 2020, Sonangol presented its annual accounts with reference to 31 December 2019[1]. The net result was USD 125 million (one hundred and twenty-five million US dollars), equivalent to AOA 45 854 million (forty-five thousand, eight hundred and fifty-four million kwanzas), with EBITDA (Results before Interest, Taxes, Depreciation and Amortization) of USD 4,779 million, representing an increase of 10% in relation to the previous year.

Revenues were identical to 2018, while operating costs fell 11%.

Oil production was also similar to the previous year while gas production increased by 6% and LNG by 8%. The production of refined products grew 37%, after resuming operations at the Luanda Refinery.

This is the accounts’ summary as announced by the Company’s Board of Directors[2].

Fig. 1 – Summary of Sonangol 2019 Accounts according to the Board of Directors

ITEM  NET RESULTS
Net Profit  125 M USD
EBITDA  4,799M USD
Oil Revenue and Production  Similar 2018
Gas  +6%
LNG  +8%
Refined Products  +37%

The accounts make ample references to the ongoing Regeneration Plan, which has as essential goals to place the company’s focus on the activities of the oil industry value chain, that is: prospecting, research and production of crude oil and natural gas, refining, liquefaction natural gas, transportation, storage, distribution and marketing of derivative products[3].

Combating corruption at Sonangol and strengthening the role of Non-Executive Directors

The key issue of these accounts begins to be formal, as, finally, accounting reserves that lasted for 15 years were eliminated and the financial reporting is endowed with enhanced transparency.

An effort to eliminate Sonangol’s role as an “epicenter of corruption” is visible[4], that is, as the main public financier of the business and private pleasures of the Angolan ruling elite.

This can be seen in the attempt to improve the transparency of financial reporting and in the appointment of non-executive directors such as Marcolino Moco and Lopo do Nascimento, two individuals with recognized integrity. These are moves to ensure that Sonangol’s revenues are not used for these private businesses.

To these measures are added the termination of Sonangol’s functions as a National Concessionaire and the privatization of several expensive units of the group, which in many cases were only vehicles for withdrawing public money for private purposes.

However, within this framework it would be important that the Non-Executive Directors, in addition to publicly signing the report and accounts, issued a declaration of verification that there was no significant and visible appropriation of public funds by private entities. Transparency has to go further.

Fig. No. 2- Measures to combat corruption at Sonangol

Sonangol’s weaknesses:

If the first task of the Government and of the Sonangol’s governing bodies is to eliminate corruption[5] within the company, the second and no less important task is to make the company profitable and with prospects for the future.

And here despite the implementation of the so-called Regeneration Plan, this is not enough. A full qualitative leap is needed at Sonangol.

If we look at the company’s net profits, they dropped in 2019 to 46 billion kwanzas (about $ 125 million) compared to the 80 billion kwanzas ($ 316 million) in 2018. There are several reasons why this happened, from the low price of oil to the cessation of receiving supplies as a National Concessionaire. However, this number represents an additional weakness of the company.

In a study recently issued, Reuters[6] reported that Sonangol’s core activities in 2019 lost 351 billion kwanzas ($ 995 million), compared with a profit in 2018 of 69 billion kwanzas ($ 274 million) ). In 2019, debt payments were spent US $ 1.8 billion, while operating profits from oil production, sale and refining of US $ 1.570 million.

In addition, the total liabilities in 2019 were US $ 36 billion, referring to loans, risk provisions and accounts payable.

It should be noted, moreover, that the final net profit mentioned above is the result of unrepeatable extraordinary results such as cancellation of old debts and sales of some assets. They do not result from the central activity of the company.

KPGM points out that Sonangol’s liabilities or obligations exceed its assets, something that has not happened since 2016.

This means that the company’s core business is not competitive. Therefore, modeling the Regeneration Plan in a mere return to the core business isn’t the best solution.

This means that it is not enough for Sonangol to focus on its core business, as indicated by the Regeneration Plan. It is not enough and it cannot happen.

Fig. No. 3- Sonangol: Compared data between 2018 and 2019 (millions of dollars)

In addition, in 2019 Sonangol had sales of US $ 10 billion, 4% less than in 2018, which is understandable, as mentioned above, since in the middle of the year it stopped receiving earnings as a National Concessionaire. However, in addition to sales being stagnant, the production of barrels of oil is also stalled at 232 thousand barrels per day. In addition, it is feared that in the future oil will lose its importance in the world economy.

If we look at the amount of expenditure in the Angolan State Budget for 2020 in the revised version, it is US $ 23 billion. As only a part of Sonangol’s sales accrues to the State, we have a direct contribution from Sonangol to the national economy much lower than in the past. It should also be noted that the Angolan GDP is around US $ 105 billion. In this sense, Sonangol’s total sales do not reach 10% of GDP.

These elements lead us to two conclusions:

I) Sonangol’s oil activity is stagnant;

II) the company no longer has the magnitude to be the driving force of the Angolan economy.

These two conclusions have repercussions for the national economy and for Sonangol itself.

As far as the national economy is concerned, the solution is clear and is already beginning to be taken: broadening the national productive base, diversifying the sources of public income, promoting the creation of a strong agricultural and livestock support in the country, promoting the opening of companies, investment and competition in the market. It is a painful and difficult process, but a necessary one.

Harmonium Strategy. Going beyond the Regeneration Plan

Regarding Sonangol, it is understood that it is not enough and it is not the best idea to just focus on oil. The company’s reform has to be more ambitious and forward thinking.

On that matter we have already advocated in previous work[7] and it lays on the partial privatization of the company. The privatization of 100% of the company is not advocated, but the privatization of 33% of its capital in order to bring international investment, involvement of Angolan capital and motivation of its workers. These three objectives would be achieved through the following partial privatization model. Of the 33% of share capital to be privatized, 15% would be for foreign investors and would be the subject of an OFS (Public Offer for Sale) on an international reference exchange with abundant liquidity. The other 10% would be for national investors and would be subject to an OFS in Luanda. And finally, the remaining 8% would go to Sonangol workers, who would also become owners of the company for the ownership of their shares.

There would be new money, fresh ideas and people without connections to the past. This would allow a different approach to the problems and a renewed vision of the future.

However, in view of the negative evolution of the world and Angolan situation in recent months, partial privatization alone will not suffice, as the Regeneration Plan is not enough.

A new strategy for the company is vital.

The strategy no longer involves excessive attention to the oil focus. That which is not profitable and in which the company is not competitive must be sold. Free the company from its weaknesses. Decrease. But at the same time, increasing the company’s capacity and scale. Hence this option is designated as the Harmonium Strategy.

The remaining activities are expected to remain at Sonangol, while a renewal strategy is launched, based on developing a stronger downstream business, increased refining capacity, expansion for chemical products, and investing abundant renewable energy in Angola, such as sun and water, at the same time. time creating new technologies through its R&D efforts and developing new lines of business through investments and acquisitions. This means that there must be a transformational effort by Sonangol and not a mere reduction or dismantling.

It is necessary to follow what many large foreign oil companies, whether dominated by the state like Aramco (Saudi Arabia), or private like BP, are doing.

And this is turning the oil company into an integrated energy company driven by the production of resources focused on providing energy solutions to customers. Construction on a scale of investments in renewable energy and bioenergy, initial positions in hydrogen and creation of a global portfolio of gas customers; there are several options that Sonangol faces to become a modern and competitive company.

[1]https://www.sonangol.co.ao/Portugu%C3%AAs/ASonangolEP/Relat%C3%B3rio%20de%20Contas/Paginas/Relat%C3%B3rio-de-Contas.aspx

[2]https://www.sonangol.co.ao/Portugu%C3%AAs/Not%C3%ADcias/Paginas/Not%C3%ADciasHome.aspx?NewsID=472

[3]https://www.sonangol.co.ao/Portugu%C3%AAs/ASonangolEP/Estrat%C3%A9gias%20Corporativas/Paginas/Estrat%C3%A9gias-Corporativas.aspx

[4] See for example on the topic: https://www.makaangola.org/2020/09/sonangol-o-epicentro-da-pilhagem-de-sao-vicente-parte-1/

[5] We use the word corruption not in a technical sense, but in the current common sense in Angola, like all illicit private appropriation of public values, basically corresponding to what is criminally referred to as embezzlement, abuse of trust, economic participation in business, fraud, etc.

[6] https://www.reuters.com/article/angola-oil-sonangol/angolan-energy-giant-made-no-money-from-oil-in-2019-as-debt-bites-idUSL8N2GP4V2

[7] https://www.cedesa.pt/2020/01/29/um-modelo-de-privatizacao-da-sonangol/