Speak to any private sector participant in infrastructure projects in Africa today, and they are bound to concede that the global credit crisis has made their professional lives more difficult. Financing, they will say, especially from international sources, has become harder to come by, as capital markets have less appetite for infrastructure-related lending risk in Africa.
“The willingness of international lenders to provide project finance to African infrastructure has [been] reduced,” confirms Ramz Hamzaoui, head of corporate banking at Medicapital Bank, a London-based commercial bank focused on French-speaking countries on the continent. As a result, credit spreads have widened. For projects to attract funding, the structuring has to be watertight, and equity portions need to be significant. It helps if the project can generate revenue in the form of foreign exchange receipts: Western bankers conscious of currency risk tend to like that.
Business as usual
But although practitioners acknowledge the impact made by the credit crunch, they are also likely to describe it as modest. Why? Because commercial loans from Western institutions for African projects have never been abundant. The scarcity of funding today is only relatively more acute than what it was before the global crunch.
Besides, public sector lenders and development finance institutions have stepped in to help close the gap. Tshepo Mahloele, CEO of Harith Fund Managers in Johannesburg, which is the general partner of the $625 million Pan-African Infrastructure Development Fund, says: “Some countries have seen robust government activity to combat the crisis, and the DFIs have increased their African project finance exposure to compensate for some of the private sector withdrawal.”
Recent examples of DFI support of African infrastructure projects include an announcement in July that the European Investment Bank will lend €120 million to the South African National Roads. The African Development Bank has increased its lending programme, as has the World Bank, which in August announced that capital commitments to Africa from its subsidiary the International Finance Corporation had grown from $445 million in 2005 to $1.82 billion this year.
In other words, from a financing point of view it’s almost business as usual in the region. Projects are still difficult to get off the ground, and often more difficult still to see through to fruition. Capital is just one constraint; other, non-financial obstacles are both plentiful and common.
Jonathan Berman is a managing director at Fieldstone, an emerging markets-focused advisory firm that co-manages a $100 million equity fund investing in African energy infrastructure projects. Speaking at the PEI Africa Forum in London in June, Berman told delegates: “I don’t think the credit crunch is the biggest problem in the energy space at the moment. We’re still dealing with the traditional problem of slow-moving governments taking their time to commit to private sector participation in projects.”
Ngugi Kiuna, a director at Kenyan investment company Transcentury, which has invested in power and rail transportation and is building a pan-African investment portfolio with exposure to markets in Kenya, Tanzania, Zambia and South Africa, has a similar view: “Demand of African infrastructure is so huge that not even this crisis is really affecting it. There is still unprecedented interest in infrastructure in Africa. The issue is, we’re not seeing that interest translate into a greater realisation of projects.”
The key question facing anyone looking to deploy capital, technical expertise and project management experience in an African country is this: how serious is the government about making a partnership with the private sector work?
Ambitious countries such as Nigeria, which has Africa’s second largest economy behind South Africa, are trying to build out the requisite foundations. The Nigerian government is in the process of introducing legislation to facilitate private investment in infrastructure. It is also working on new rules attempting to stamp out corruption, still one of the biggest factors scaring investors away from African opportunities. In addition, the country is planning a host of PPP initiatives, including a series of federal road concessions covering a large portion of the nation’s highway network. Nigeria’s Federal Housing Authority is also actively exploring PPPs to handle its chronic shortage of affordable accommodation.
Sceptics believe that shoring up private sector confidence in Nigeria’s stance on PPP will take a lot of work. For energy-specialist Berman at Fieldstone, given the size of the “demand pool” for projects, Nigeria has been among the “most frustrating” countries to do business in. He says: “Policy papers can be written, speeches can be made, but when documents aren’t signed deals don’t happen. In Nigeria we are seeing industrial-scale, 50 to 100 megawatt generators being built by private companies and sometimes even municipalities – but unfortunately the 1000s if not tens of 1000s of megawatt that should be done at the national level with government just aren’t going to happen.”
Practitioners lament a similar lack of commitment to PPP on the part of the government of South Africa, despite the fact that some high profile success stories exist. As the country prepares for next year’s Fifa World Cup, several infrastructure projects have been pushed, including the recent $3.2 billion Gautrain commuter rail link. Some $400 million of funding for the project came from the private sector.
It’s not just political will that can be wanting. What infrastructure-focused governments in Africa also require is a better understanding of how private sector partners operate, and how interests can be best aligned across the divide. According to Kiuna at Transcentury, there is often little experience among public officials in private sector interests. Alongside corruption, this is yet another reason why projects often take a long time to succeed, he argues.
Sulanji Siwale is CEO of the Gauteng Fund Management Company, which is investing the ZAR 7 billion ($870 million) Gauteng Fund, to help improve the infrastructure of South Africa’s Gauteng Province. Siwale argues the fund is an example of a pragmatic governmental approach to harnessing private sector prowess in infrastructure development.
Not only has the Gauteng provincial government contributed some $60 million to the fund. It has also established the Gauteng Fund Project Office, a dedicated agency staffed with a mix of public and private sector project management specialists, including a former World Bank official. The Office has exclusive access to the deal flow coming out of all governmental departments, and selects projects it considers commercially viable for investment by the fund. “As a result there is no ambiguity over deal flow, which can be a challenge for many funds where government is involved,” Siwale says. Equally importantly, having a dedicated and well-staffed entity in place also means there are fewer problems with the government’s capacity to move projects forward.
Whatever the unresolved difficulties of public and private sector partners working together, investors agree that Africa has no shortage of investment opportunities worthy of consideration. Of the energy sector, Berman says: “In most African countries, the supply and demand story is absolutely wonderful: huge shortages will remain for years because the actual deal flow is just too slow.”
Mahloele at Harith says his fund, which closed in October 2007, is also tapping a full pipeline and will be at more than 60 percent committed by the middle of 2010.
One important strategic choice sponsors must make is whether to focus on single-country projects or to pursue cross-border and regional opportunities. The latter obviously exist, not least because of Africa’s complicated geopolitical make-up. However, cross-border investment by definition means dealings with more than one government, which in turn means more risk and greater emphasis on risk management.
Berman for one is optimistic about the feasibility of successful cross-border infrastructure transactions. He recently advised Namibian utility NamPower on its Caprivi Link project, an electricity transmission facility linking Namibia’s power grid to neighbouring Zambia and Zimbabwe. “This has been one of the most successful commercial power deals in the region in the past couple of years, and it was done during the worst period of the Zimbabwean crisis. If that can happen, I see no reason why we shouldn’t see more of the same.”
But the challenges remain formidable. Patience and persistence will be valuable traits for anyone seeking to help make Berman’s prediction come true.