By Neil Munshi
As the developed world emerges from the coronavirus pandemic, investors are hungry for yield — and many are looking at the gains that could be made by filling Africa’s widening infrastructure gap.
The $750m eurobond issued by the Africa Finance Corporation in April was the latest sign of strong international appetite for investing in African energy and construction projects. It was 3.5 times oversubscribed and funds came from more than 200 investors across the UK, Europe, Middle East, Asia and the US.
But Samaila Zubairu, chief executive of the Lagos-based development finance body, says the robust interest belies a big problem in this market: a lack of what backers call “bankable” projects. “The opportunity exists, but the projects are not there,” Zubairu explains.
That is partly because African projects are held to higher standards than those in other parts of the world, he says. “We are still plagued by the prejudice of this blanket risk perception of projects on the continent, even though the evidence speaks to the contrary.”
He adds: “It takes too long to close projects . . . [because] all the risks must be identified upfront and mitigated before any financing can take place.”
Amount in assets that international investors interested in Africa could potentially deploy, according to McKinsey
In many cases, the structure of a deal must mitigate the currency risk that may pertain in many countries, include some kind of sovereign guarantee — whether for the payment or for supply of raw materials such as gas — and harmonise the sometimes short-term political interests of national governments with long-term investment goals.
AFC, like others in the industry, plays the role of project starter. The institution makes the initial investment to get a project off the ground, then seeks additional funding from investors who are at this point reassured they are not gambling on a hypothetical. “Part of how we de-risk opportunities is to mobilise the capital that allows us to get into construction,” Zubairu says.
Chris Chijiutomi, head of infrastructure at CDC, the UK development finance institution, says it and other leading funders — such as the World Bank’s International Finance Corporation — are having “a lot of discussions around project preparation . . . basically it’s the capital and the resource required to get the project in a bankable form for that capital that is then available to invest in it”.
A report last year by consultancy McKinsey found that 80 per cent of African infrastructure projects fail at the feasibility and business plan stage. Less than a 10th reach financial closure. Yet McKinsey estimates that international investors interested in Africa — including government agencies, pension funds and investment firms — have as much as $550bn in assets that they could deploy.
The continent needs that funding. Africa’s infrastructure requirements, from road and rail to ports and power, are immense, and its deficit grows daily — along with a booming population.
The African Development Bank estimated in 2018 that the continent required $130bn-$170bn in infrastructure investment a year, and that there was a financing gap of $68bn-$108bn.
Spending has risen in recent years, to $101bn in 2018, according to a report by the Infrastructure Consortium for Africa. That is a third higher than it was, on average, between 2013 and 2017. AFC estimates spending jumped to $108bn in 2019.
It’s very unfair to belabour us with global standards
Kola Karim, Shoreline Natural Resources
Most of that increase came from African governments — Nigeria in particular has repeatedly tapped international markets — but Chinese investment grew at 10 per cent annually over that period.
African governments now account for 40 per cent of infrastructure spending, development finance institutions about 24 per cent, and China about 20 per cent, according to Africa Finance Corporation. The private sector makes up the rest.
Western development finance institutions have, in recent years, added an additional layer of complexity. And, as part of their governments’ efforts to combat climate change, many have been restricting funding for fossil fuel-burning projects. That has made raising finance for big power projects in Africa — already a hard sell because of decrepit grids and antiquated tariff schemes — even harder.
Given Africa’s vast, untapped gas reserves, and the fact that natural gas is a far cleaner source of energy than oil, it must be in the mix, argues Kola Karim, chair of Shoreline Natural Resources, a Nigerian energy company.
Currently, sub-Saharan Africa is home to nearly two-thirds of the world’s population without access to power, and those 600m people are not going to get on the grid through renewables alone, Karim says.
“It’s very unfair to belabour us with global standards when, over time, you have polluted the environment and your economy has grown and you’ve gone through your first, second and third industrial revolution, and we’re just trying to get our first industrial revolution off the ground,” he suggests.
“And now you’re telling us, even gas is not good enough . . . it’s crazy, and Africa is going to suffer for it.”