By Nishika Bajaj
Day 1 of the Africa Partnership Conference (APC) witnessed a key panel discussion unfold in the afternoon around ‘Financing African Projects: Driving Investment, Development and Sustainable Growth in Africa’ ably helmed by the CEO of Fundsmith, Terry Smith, who is also a Board Director at the Economic Development Board (EDB). It may be noted that the EDB is co-hosting the APC together with the Ministry of Finance, Economic Planning and Development of Mauritius.
The panel comprised speakers across business, investment and economic research, such as Graeme Robertson, Chairman and CEO – Intrasia; Jarred Glansbeek, Executive Director and Chief Investment Officer at RisCura; Theuns Ehlers, Head of Resource and Project Finance at the Absa Group; and Wendy Hughes, the World Bank’s Regional Director for Infrastructure for Eastern and Southern Africa (AFE).
Terry broke down the topic into three cogent questions:
- Is Africa a compelling destination for investment?
- If not, how can it become so?
- If yes, how do we get people to recognise that, and act by it?
Why do African returns appear to be lower?
As a first question, he asked the panel why investors should consider Africa, because, on the surface, when we look at the returns from Africa over the last 20 years, the data shows the returns are materially lower than what you can get by buying an S&P tracker fund, for instance.
To this, Wendy replied that, as a Development Finance Institution (DFI), the World Bank, for example, lends across all sectors and has a US$350 bn portfolio across the world and 40% of that is in Africa. Apart from finance, the World Bank also renders technical assistance to businesses, she noted. She also stressed that, returns notwithstanding, there is a lot of private investment in infrastructure in Africa – US$85 bn in the last decade – while it is concentrated in a few countries and key sectors such as energy, for instance.
“Why should investors consider Africa? It is growing and there are structural forces such as infrastructure deficit dictating that the market will grow. It is easy to see there will be growth in infrastructure. Governments are in a tighter and tighter place. They are looking harder and harder to see how they can bring private investment into Africa. And they are starting to do things which in the past they hadn’t been able to do. In South Africa, in the last couple of years, part in response to load shedding, the government has changed the licence requirement for private sector to sell to dedicated buyers. In the last year, they have gone from 30 MW of private sector generation to a little over a thousand today. And the government has tabled a revision of the electricity act which is intended to stir up and change the market structure. Many companies are also looking to expand their portfolios into sustainable areas, particularly low carbon. In Africa, there are some of the best, untapped opportunities for investment into renewable energy areas such as solar energy and wind. There are some sectors where we are seeing exponential growth such as household energy,” she elaborated.
For his part, co-founder of emerging markets valuations major RisCura, Jarred, noted that in his advisory capacity to the fund management arena, he could provide certain key insights into the returns landscape in Africa. “What is interesting with the African market is that if we go back up to 2009, the PE multiples of Africa and the world markets were not too dissimilar. Now Africa is half that of the rest of the world. It is less an earnings story and far more a ratings story. If we look over our shoulder and say Africa hasn’t performed well, it is because of how earnings are assessed. If you look at listed markets, they are primarily banks, mining, and telecommunications. Go and measure those sectors, they haven’t performed well anywhere in the world. If you look at the unlisted sectors, you can’t have expected more. As an example of an unlisted portfolio, we looked at 150 companies in the portfolio, and if you look at the earnings growth from 2010 to today, how much is it? Roughly, 10%. Russel? 10%. Nasdaq? 10%. All roughly the same. Have they all performed the same? As we know, companies must be defined by their earnings and earnings growth. That has not been the problem in Africa – it’s the rating, and that is a sentiment driven issue.”
He then moved from equity markets to bond markets. “If you look at African fixed interest markets – such as Standard Bank which has a benchmark for sovereign debt in Africa that’s equal weighted – the returns on that market have been better than the world bond indices. Where do we start today? We start today at those ridiculously high rates we have moved to. Not only in most terms has Africa done better than global markets but we are stuck with a starting point of high yields to calculate our future returns. The biggest issue is that people don’t know what’s happening in returns, people haven’t explored enough, and there isn’t enough capital. However, when you tinker down and look at ground reality, you start to see that people have done well, but they are not priced fairly because of sentiment.”
Can Africa tap into its resource wealth without sacrificing sustainability?
Terry thanked Jarred for an insightful explanation and moved to his next question on whether Africa should consider tapping into its tremendous natural wealth from resources such as oil and natural gas, for instance, or would that rock the boat in terms of the push for sustainability?
To this, Graeme replied that as a mining entrepreneur, he would like to come clean on his motivation for replying to this question, but it would be fair to say that Africa is suffering from economic exploitation and has not been able to benefit from its own, vast reserves. He also noted that, apart from coal and oil, Africa also has cleaner energy reserves such as gas for instance, in Nigeria, Angola etc. He rued the many challenges in transporting goods across borders, for instance, he explained that moving coal from Tanzania, to Malawi, to Uganda and to Kenya, among others, was a nightmare as there were cross border blockings, difficulty in transacting across borders etc. “Most governments in Africa will deal with those reserves but there hasn’t been an economic development of those reserves satisfactory to the country that they are based in. It is really downstream processing that is so important. The Chinese, Europeans and Americans take out raw materials with no added benefit for African countries. A good country to look at is Indonesia which started out as an exporter of nickel but put in place a nickel ore export ban several years ago. It is currently the largest nickel producer in the world, and nickel smelters are being built as we speak, contributing to employment, taxes, and development.”
In terms of where the finance for such projects comes from, Graeme replied that Intrasia looks at bank financing at times, and at contractor financing at others, which can be structured through investment-grade destinations such as Mauritius to Africa.
For her part, Wendy added that it is less about anyone saying that Africa should or shouldn’t develop their coal or natural gas or other reserves, and more about the risks and opportunities of doing so. “An area that the World Bank has really started to look at with our country and climate development reports, is assessing the risks and opportunities. Developing new sources of coal or gas takes time. The global market is changing, not linearly and we don’t know the pace. It is important to look at the medium-term direction and ensure that countries are not heading down a blind alley. In terms of their domestic use, in a lot of cases, African countries have a long way to go to tap into their renewable energy sources such as hydrogen and solar as part of their energy mix and improve their balance of payments,” she explained.
Challenges in project financing – and the importance of good governance
On Terry’s question for outlining the major challenges in project development financing, Absa’s Theuns replied that the pipeline of ideas that get the development nod is growing at a massive, astronomical rate. ‘Is the unwillingness of banks to finance these deals really the crux of the issues?’ he queried.
“We have gone and looked at how power and infrastructure deals are getting financed in Africa. Most of these deals get done on a government- government basis, procured and executed and implemented by the government, and only a small proportion of deals are given to the private sector to do. When we speak to our public sector clients, we tell them to consider Public-Private Partnership (PPP) models or concession models, so they can undertake a greater degree of risk transfer to the private sector. Sovereigns are really struggling to raise money, as the bond market shows. We also tell our public sector clients that you get two types of deals – projects bankable on their own without government support, and then the social side that takes a lot of government intervention and subsidy. For us it is a matter of, when sifting through priorities on these projects, to pick the low-hanging fruits that can be done with less government subsidy and support,” he averred, giving the example of South Africa’s renewable energy programme that was successfully transitioned by the government to the private sector and saw exponential growth as a result.
Next, Terry enquired from the panelists what their views were on the importance of good governance – financial and non-financial – in ensuring that investors can consider projects in Africa.
From a listed business perspective, Graeme replied that, to his mind, governments must make meaningful efforts to lower corruption and translate into a seamless paradigm the ability of regulations to roll on, especially in extractive industries. In mining, the gestation period is especially long, he rued, and added that less government involvement and less regulatory involvement in developing a business is fundamental to the ability to raise financing and the overall ease of doing business in Africa. Balancing his views was Wendy from the World Bank, who noted that lack of transparency and good governance can be a major deterrent to investors. It also means that if countries do manage to get private sector involvement, it’s not the right private sector for the right project, she explained. If World Bank financing is involved, there are stringent procurement financing parameters on managing the finance to ensure it is corruption free and delivering intended results. On the other hand, to many of its client governments, the World Bank helps attract private sector investment to a project with the aim of helping structure the right PPP, guide with institutional set up, and operationalisation. Thus, the World Bank believes in not only bringing the private sector to the table but also to bring the right private sector for the right project with the goal of supporting governments and promoting investment more broadly, she remarked.
Doing well while doing good – getting sustainable projects to yield returns
On energy, Terry asked if producing a sustainable project helps to bring adequate returns? Here, Theuns replied that in South Africa, when renewable energy was first explored, the returns from an investor perspective were quite high as the risk was high. What has happened since, fast forwarding by a decade, is that the equity returns have come down to a few hundred basis points higher than the risk-free rates. So, it might appear on the surface that this would deter international investors. “What’s in it for them? They invest in a 20-year stream of rand revenue, and you know how volatile African currencies can be. Instead, what we are seeing in the SA market and other countries, is even more appetite from international RTPs and developers in these deals. When they calculate their returns, they don’t only look at the equity, but they also supply the kits, they look at the EPCs and also at maintaining the vehicles. As a package, the investment case is still quite healthy. Unfortunately, unlike South Africa, in most African markets, they are not developed enough to raise money in local currencies which does expose those markets to foreign currency risk. But increasingly, we actually want to make sure we do our piece to develop those local currency markets to ensure we can fund projects locally. This creates more investment opportunities for local pension funds.“
Wendy added that renewable energy projects have two big advantages compared to other energy projects. The cost of financing is considerably lower, while the time between the investment and revenue generation is shorter, making it much more modular compared to a coal power plant for instance. However, one specific feature is that you generate the energy where the renewable resource is, which goes on to pose the issue of the transmission grid being publicly owned in many cases, and that can easily become a constraint to renewable energy development. Recently, the UK reported that 15 Giga Watts of renewable energy projects will be stuck because of lack of transmission financing, she soberingly remarked.
For his part, Graeme noted that solar and wind are only 50-60% efficient. Hence, battery storage is critical to make up for the energy inefficiency of renewables, and is in the early stages of development. In Western Australia, for instance, they are developing 200 Mega Watts of battery storage that can potentially change the whole face of infrastructure in Africa, he explained. Where you have crops, refrigeration is important. One of the things that can change the face of Africa is storage of such energy. Transmission infrastructure is not cheap, and unless you have battery storage, renewables are a less efficient option of tapping into energy, compared to gas, for instance.
Wendy remarked that there are a range of ways to manage the variability of renewables and pointed out that level of utilisation of renewable energy domestically is low. She emphasised that “by utilising resources on the ground more efficiently, we can manage renewables better, and once that happens, then there would be a case to move to storage. Battery is one example, and so is interconnection of grids. In Namibia and parts of SA, you could really develop some extremely low cost energy, and being able to connect that by the Southern African power grid with states that have hydro storage and thermal capacity would make a lot of difference.”
De-risking to deploy more funds for development, leave no one behind
Next, Terry asked about the role the international financial institutions play in this landscape, where Jarred took this question up. By way of explanation, he noted that RisCura serves international financial institutions which have billions of dollars on the continent and he would try to elaborate on what their outlook is.
“Any risk reduction, general de-risking helps. They are investors already, so they will invest, but they will look at the quality of returns. ESG is far more of a financial risk quantification, but SDG is really about how good we are being to our planet. If you want to get normal investment institutions, we need to get the SDGs right. What is interesting is that a lot of them have signed on to the UN programme that has categorised SDGs into three topics – human rights, gender, and ‘leave no one behind’. It seeks to ensure that a Pension Fund in the US for instance is investing in Africa, so we cannot leave Africa in poverty. So, if we look at Africa, when someone walks into the kitchen and is wondering where the next loaf of bread is coming from, it is difficult for them to contemplate investment issues around a puff of smoke. Governments are in the difficult position of valuing something far more than an external agency would do. Unfortunately, looking at climate governance, countries in Africa value social far more than environmental parameters as they have an electorate to look after. We take the SDGs and map them to growth programmes of each country. And, once you do that, you create an environment where people on shore have the same leverage as those off shore. Finally, we need measurement of data to get these institutions to invest on the continent,” he explained.
What does the future of finance on the continent look like?
The final moderated question by Terry looked into the role of new financial technologies in the provision of financing. Theuns and Graeme both agreed that financing projects on the continent was about sticking to the basics and harked to the importance of ‘walking before you can run.’
Meanwhile, Jarred provided a balancing perspective by noting that he would extend the concept of new technologies further than crypto – to venture capital. “The IRRs on the continent for venture capital are in excess of 50% over three or four years. If we can leapfrog whatever technology is concerned from having Citibank offices or ATMs at each corner to having a higher technology, this is the wonderful position the continent is in. Business opportunities exist, and they are tailored to Africa, because there may not be a road, you may have to use another transport or logistics mechanism. But the amount of leapfrogging is potentially great. I am astounded. When it comes to crypto, there are a lot of issues around it. Blockchain is far better, far smarter so you can do a lot with it, and I believe many VC companies are looking at it. In general, technology allows us to shave off this history of waste and hopefully that allows us to move forward positively,” he concluded.
