AFC: Why investing in African infrastructure pays

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Throughout history, we see a direct correlation between the wealth, power and development of nations and the state of their infrastructure. Infrastructure, however you define it and whatever form it takes – whether it is the systematic exploitation of natural resources, or transport networks, or the harnessing of energy – is the great enabler. Without adequate infrastructure, very little progress has ever been made.

We are all aware that Africa was bequeathed with the mere skeleton of an infrastructure framework at the end of the colonial period and that in most cases, this has become not only obsolete but totally inadequate to meet the urgent needs of Africa’s rapidly expanding populations and their development aspirations. We refer to this as the continent’s infrastructure gap – which has been estimated at around $90bn per annum.

So, while finding ways and means to closing this gap has exercised deep thought and concern among most governments and development agencies, actually being able to do so has been akin to the quest for the Holy Grail. This is not surprising. Modern infrastructure projects are very complex and very expensive. They require coordination and collaboration from diverse disciplines and stakeholders and the pay-off, often in intangible terms, is always long term. Further, success is perceived to hinge on being able to source sustainable and patient capital – the make or break factor.

Indeed finance, or the lack of it, has often been cited as the arch villain standing in the way of infrastructure development on the continent. However, as I hope to show in this piece, that is not the case. Private finance, world-wide, follows its own rules and imperatives – the chief of which is to turn a profit at the end of a venture. In doing so, private finance adds significant value to developing sound and impactful infrastructure projects that can drive Africa’s much needed socio-economic development. Over the last 10 years, we at the Africa Finance Corporation (AFC) have proven the private finance value add, and that African infrastructure projects are not only safe investments, but can be very profitable.

In the 2016 financial year, the AFC reported a 51% year-on-year surge in net profits, reaching $109.4m. This strong growth occurred despite the challenging economic environment in Africa.

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Unsurprisingly, some have lauded the achievement as AFC ‘finding ice in the Sahara desert’. The question of course is how an institution like the AFC, home-grown in Africa and using largely domestic resources, has been able to increase its investments in the continent by about $800m year-on-year when much of the continent is experiencing a slowdown due to low commodity prices and slow global growth?

I will examine home-grown innovation, leveraging on unique partnerships, risk mitigation and local stakeholder capacity building, as some of the many tools AFC has employed.

Home-grown innovation

The key to our success over the past years has been based on two principal aspects: One has been to take full advantage of our provenance. As an organisation originating from, rooted in and nurtured by Africa, I think I can say with justification, that we understand the continent perhaps better than most of our peers. At the AFC, we understand both the nature of the risks and rewards involved as well as the most effective ways of mitigating the risks while maximising the rewards.

Second, as major international investors with a galaxy of global expertise available to us both within the corporation and on tap, we also fully understand the concerns and requirements of investors and their shareholders – such as strong governance structures, rigorous due diligence and attention to detail that are essential prerequisites before any realistic engagement can be entered into.

The combination of these two factors, added to our ability to design flexible investment vehicles that incorporate and absorb the special challenges that many African countries throw up has allowed us to stand the difficulties associated with financing Africa’s infrastructure on its head.

As a result, we have received the trust and backing of strong international institutions allowing us to roll out a wide diversity of often innovative investment vehicles especially suitable for African conditions.

Unique partnerships

Perhaps the best example of this innovation and value from leveraging on partnerships is our joint venture with Harith General Partners. It involves aggregating multiple assets in one investment vehicle in order to generate scale required to fast track power sector investments across the continent. A combined operational and underconstruction energy generation capacity of over 1,575MW, supplying power to over 30m people across five countries was merged. The venture brought together $3.3bn capital value portfolio of assets, including the landmark Kpone Independent Power Project in Ghana and the Lake Turkana Wind Power farm in Kenya.

The new company will have its own balance sheet and attract financing faster and on a wider scale, thus revolutionising the approach of financing on a project by project basis which can take up to three years to close. This is critical for a continent with over 645m million unelectrified population and an energy infrastructure gap of $55bn.

Several complex matters around lender and shareholder approval, tax, regulatory oversight, political risk insurance, corporate governance, environmental and social impact, and operations management had to be carefully negotiated and structured around in order to achieve outcomes satisfactory to multiple stakeholders.

Another example of a different nature is our involvement in the $205m development of a high-grade bauxite mine in Guinea. This is the first international investment into the country since the outbreak of the Ebola crisis.

It is not just the typical sort of extractive mine investment that you see all over Africa. The Bel Air bauxite mine in the northwest region of the country also features a refinery to produce alumina, the raw material required to produce aluminium. This refinery process provides added value because it creates more jobs for Africans and helps strengthen the West African nation’s economy in the face of commodity price crashes.

Risk mitigation

An example of our ability to mitigate risks based on our deep knowledge of the African economic environment is our approach to handling exchange rate risk following the fall in a number of African currencies against the dollar. AFC, which is a dollar balance sheet organisation, is of course not immune to this problem.

One solution we have implemented is pegging the local currency to the US dollar. This type of contract allows a great deal of flexibility for both the investor and sponsor, because if the exchange rate moves either in a positive or negative direction, then the next bill will be adjusted to reflect a corresponding gain or loss for the sponsor, depending on how the currency has moved. With this type of instrument, both the investor and sponsor can hedge any currency movements.

We at the AFC feel that African and international institutions need to lead the way and share their experience with other investors and developers. This is critical to developing the local capacity required to fast track infrastructure development.

This is one reason why we launched the Africa Infrastructure Development Association (AfIDA), which brings together project developers, investors, public sector officials and advocates who have in-depth experience of developing projects in Africa. This platform will foster continuous dialogue among members, standardise project development documents, develop market norms, conduct independent research and serve as a policy advocacy forum for the industry with a view to ensuring more projects on the continent achieve bankability.

Far from there being a shortage of funding for Africa’s infrastructure or the perceived inability/unwillingness of private finance to take on African infrastructure finance risk, there is actually a wall of liquidity both within and outside Africa willing and wanting to invest.

What is required is to bring together people who understand and know how to deal with the unique challenges in Africa and international investors, and are willing to be innovative, flexible and partner for success. Associations like the AfIDA are a great help in this regard but the most persuasive argument is proof that investing in African infrastructure pays. The AFC, I am proud to say, is a living example of that proof.

*Oliver Andrews is the chief investment officer at Africa Finance Corporation (AFC).

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