Ahead of the Africa Investment Forum (AIF) in November, Daniel Akinmade Emejulu spoke to Oliver Andrews, a development financier at Africa Finance Corporation, to discuss how to boost infrastructure deals in Africa.
Last week, five African countries ranked among the top improvers in World Bank’s “Doing Business” rankings for 2020. While Djibouti and Togo are advancing legislation and data to spread access to credit, Kenya is simplifying the grant of construction permits. Nigeria and Zimbabwe have embarked on initiatives that move company name searches to the digital frontier. In this context, the Africa Finance Corporation (AFC) hosted a talk between Nordic investors and Africa’s leaders at this month’s Nordic-African Business Summit to brainstorm solutions to scale Africa’s remaining investment hurdles.
Oliver Andrews, a development financier at Africa Finance Corporation, was one of those offering his views on what more needs to be done to encourage dealmaking.
“There is a common misconception that Africa’s large infrastructure deficit should automatically translate to a surplus of sizeable, investible projects,” Andrews explains.
“In reality, major international private equity funds have had shut down their Africa businesses due to lack of “deal flow” in the past.”
The AFC have helped to bridge the wide gulf that exists between the investment needs of the continent, and the number of well-prepared projects. Essentially, they offer an infrastructure investment journey that travels beyond project “feasibility” and “viability” to ultimately achieve the investment holy grail: project “bankability”. Andrews says moving infrastructure projects beyond the first two milestones, requires mitigating and where possible eliminating the risks associated with projects.
“It is usually a long and expensive expedition which could cost as much as 5% to 10% of the total project cost, (and) often ignored in the planning process,” he says.
“Project development capabilities create investment opportunities, improve returns and control the investment experience in Africa.”
Short life span
Africa’s private equity investors often find the typical time frame of a five-year holding period is too short in the African markets. At the NABA summit in Oslo, Norway, investors on the continent agreed that portfolio companies tend to require wholesale change, currency risks are a challenge, and exit opportunities can be limited.
Andrews finds the “classic” private equity (PE) fund model is not the best practice for African infrastructure markets. Notably, the sector’s fixed-time structures emphasize quick deployment of cash, and exits within a pre-determined time frame.
PE incentives often incentivize a focus on acquisition, Andrews warns, but savvy investors will find that project development is more critical.
“Our experience has found that most large infrastructure projects will require several years of construction, operational ramp-up and debt service before cash generated will be available to equity investors,” Andrews tells us.
“Thus, the ideal structure is one which allows for an investor to own a portfolio of projects, including already operational assets that provide the essential cash flows to cover expenses and tide-over uncertainties, as a new pipeline of bankable projects is simultaneously being developed.”
Transparency meets sustainability
African investors are seeking more transparency about how a fund’s returns are generated, partly to fulfil commitments in the UN SDGs and the Paris Agreement. AFC is evolving a process of identifying, measuring and reporting on the developmental impacts created by its own projects across Africa.
“We are working to carefully define what developmental impact means to us, in order to be able to accurately recognize our impacts across the power, oil & gas, mining, heavy industries and transport sectors,” he explains.
“Our target is to ensure we report accurately and incisively on the direct and indirect impacts we create across our entire value chain.”
Africa’s silent revolution
Africa’s silent revolution is the under-reported uptake in green bonds.
Taking the first step in July 2017, Cape Town issued a municipal green bond. Nigeria issued the continent’s first sovereign green bond in December 2017. By August 2019, Kenya followed suit and approved the issuance of its first sovereign green bond.
Access Bank broke ground this year with first the corporate green bond in Africa. For investors seeking to follow suit on sustainable finance, Andrews shares AFC’s history of climate finance initiatives.
“We signed an Accreditation Master Agreement with the South Korean based Green Climate Fund, becoming one of the first African development finance institutions to sign such an agreement in 2015,” he explains.
“On another front, we secured a EUR 100 million climate financing line of credit with Agence Francaise de Developpement (AFD) to improve AFC’s competitive ability to fund climate-friendly projects.”
These arrangements disrupt intermediary models and provide Africa’s infrastructure investors with direct access to capital, which in turn they can reserve for low-carbon emission investments. In AFC’s case, sustainable finance facilities back projects in power, transport, heavy industries and telecoms.