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African borrowing gets smarter

African borrowing gets smarter

Akinwumi Adesina, President of the African Development Bank (AfDB), recently revealed that Africa’s annual infrastructure gap now stands at as much as $170bn.

For many this will come as a shock. Only last year the bank projected a figure of $90bn – almost half. As Africa’s population booms – Nigeria for example will be the world’s third most populous county by 2050 – the need for robust infrastructure is paramount.

In terms of the African economy, the continent has long been reduced to raw material exports– with little to no value-added – due to the infrastructure bottlenecks associated with moving goods and services around the continent. African governments, however, are strapped for cash and often struggle to put hammer to nail.

Most economies were hard hit by a commodity downturn and the lack of funds led to what some are calling a ‘debt binge’. Last year the IMF pitted the average debt-to-GDP ratio at around 50%. In this context much of the mantle falls to the private sector to fill in the gaps. Yet the continent continually struggles to attract the capital it requires and infrastructure finance remains a sizeable barrier to development.

That said, there are a host of projects across Africa being financed through innovative methods and instruments and while the figures remain large the actors tackling the issue become ever more diverse.

Challenges to infrastructure finance

The challenges are many. As mentioned, many governments simply do not have adequate resources to finance large infrastructure projects. Their responsibility is then to create an enabling environment for the private sector to shoulder the bulk of the work. Yet even this can be a challenge.

Aside from paying for construction, governments are also under-resourced for designing projects and showcasing them to the international community. Investors, as opposed to in other emerging economies, must start from scratch; not only financing the project but seeing it through from inception to execution.

This pushes costs up by an estimated extra 10-15%, which is a huge disincentive for those looking to deploy capital. Extra costs are also incurred as investors must pay more to circumvent the continent’s lack of infrastructure; for example by paying for roads and electricity to link up any large project to the local market.

Tied into this issue is the relative technical skills shortage in Africa. This adds to the overall cost of the project as talent will likely be flown in from elsewhere. This, however, exacerbates the problem as a lack of African companies operating in the space leads to a lack of young Africans looking to pursue a career in project management and development.

Complex and often weak regulatory environments are also a significant barrier. Investors will want to know there are some financial failsafes in place if a project goes wrong. While much of the continent is creating robust legislation to provide legal security and clarity for foreign enterprises more could be done to assuage some of the risks associated with investing in Africa. 

Policy uncertainty also presents a problem. Notwithstanding the political risks associated with some of Africa’s less stable countries, a change in administration may drastically affect a project’s lifespan in many of Africa’s stable countries. Large infrastructure projects are often tied to individuals and ministers who may change after elections. A new political framework may bring in a shift in sector-focus and the abandonment of some of the previous regime’s developmental projects.

Finally, Africa’s relatively weak capital markets and local currency risks remain concerns for investors. The majority of investors provide capital in foreign monies, but take their revenue in local currency, creating a substantial foreign exchange risk.

Finding solutions

With a lack of domestic funds and obstacles to attracting adequate capital, African corporates and governments look towards creative ways to ramp up infrastructure across the continent.

Nigeria, for example, has recently been engaged in better borrowing in order to tie incoming capital to large infrastructure projects. It has issued a number of Eurobonds over the past year – most recently an oversubscribed $2.5bn sale earlier this year. 

Concerns have been raised by international lenders like the IMF over the country’s growing debt accumulation yet Kemi Adeosun, Nigeria’s Minister of Finance, has argued the debt has been tied to specific infrastructure projects and will not be used simply to service costs and pay salaries. This is a key distinction to make as previous administrations have seen debt as a largely short-sighted exercise.

Nigeria is beginning to borrow with better-defined objectives and through a more diverse array of instruments. Nigeria’s latest issuance is a prime example as the sale was used to refinance domestic Naira debt which had higher interest rates and shorter terms – the new Eurobond offered maturity terms of between five to 30 years. This signals smart financial management with an appetite to get more from money by tying the extended maturity rates to long-burning infrastructure projects.

Capital markets expanding

Babatunde Obaniyi, MD of Investment Banking at United Capital, argues both corporates and governments are engaging in smarter borrowing. “What we used to see in the market was vanilla bonds,” he says. “You would simply use your balance sheet to raise money, but I think the market is getting sophisticated to the level where you can start engaging in project finance and infrastructure finance.”

Obaniyi references the sale of a $100bn sukuk in 2017 which was oversubscribed and tied to a number of specific projects including the construction of the Kano Western bypass, of the Loko- Oweto Bridge in North Central and the rehabilitation of the Enugu-Port Harcourt road in the South East. A total of 15 projects were earmarked to benefit from sukuk proceeds. (See ‘Islamic Banking’, pp. 58-63.)

This is also true of the private sector. Obaniyi continues to explain that in the past the majority of issuers on the capital markets were banks. “If you look at the structure of the Nigerian economy the financial sector is less than 20% of GDP but prior to 2014, banks raised more than 90% of the capital on the local markets,” he says.

For Obaniyi this represents a mismatch and means that corporates were neglecting a key capital-generating instrument. “For any developed economy in the world you need a strong debt capital market where you can get long term financing,” he says. However in the past few years the markets have seen an increase in breadth and depth and new players from the power sector, hospitality and real estate have come to the markets to raise funds, he says. 

Nigeria’s public and private sectors are therefore beginning to borrow better and through more complex instruments, which should have a positive effect on the country’s ability to finance large projects. Industrial parks provide tax breaks and incentives, along with adequate power and infrastructure guarantees, to encourage foreign companies and investors to build much-needed factories and processing plants. Countries like Nigeria, Egypt and Ethiopia among many others, have all been capitalising on industrial parks to push development.

“Industrial parks are important for a number of reasons,” says Okechukwu Enelamah, Nigeria’s Minister of Industry, Trade and Investment. “The main reason is to concentrate infrastructure in locations where manufacturers are able to be competitive because you can’t roll out infrastructure all across the country in one go,” he says. This piecemeal approach, although by design insufficient, is a measured response to ensuring foreign capital brings infrastructure to the continent.

Chinese lenders have also been key for infrastructure in Africa. China has lent around $95.5bn in Africa between 2000 and 2015 with the majority being spent on infrastructure. This year Chinese money saw the completion of Ethiopia’s 466-mile, Addis Ababa to Djibouti railway – as just one example. n

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