Analysis

ROUNDTABLE

SPONSOR AFRICA50

Dispelling Africa’s infrastructure myths

Overcoming misconceptions about risk is essential to attracting more private capital to Africa, four specialists tell Amy Carroll and Kalliope Gourntis

he pre-pandemic infra- Africa is lagging other emerging structure funding gap in economies when it comes to private Africa fell somewhere sector investments in infrastructure. between $68 billion and An average of $6 billion was deployed $108 billion a year, ac- $6bn on the continent from 2013 to 2018, cording to the African Average annual private sector according to Alain Ebobissé, chief ex- TDevelopment Bank. That figure ig- investment across Africa, 2013-18 ecutive at Africa50, compared with nores the $10 billion a year needed $34 billion in Latin America. “Increas- to fund broadband rollout across the ing that figure is crucial to closing the continent and pre-dates vulnerabili- funding gap, and it is possible. We need ties exposed by covid-19. The chasm is to do everything we can to make that clearly widening. happen,” he says. “Covid has shown us that Africa The growth characteristics that ended up at the bottom of the queue 600m define the market should be drawing of global pharmaceutical supply chains Number of people across Africa who international investors in their droves. still lack access to electricity during the pandemic,” says Solomon “Africa is the world’s most underserved Quaynor, vice-president of private sec- market from an infrastructure perspec- tor, infrastructure and industrialisation tive. The three mega-trends that are at the . relative to its resources to address this driving the global infrastructure invest- “Pharmaceutical manufacturing, gap, and at the moment African gov- ment opportunity, namely digitisation, while not infrastructure in itself, does ernments do not have the fiscal space urbanisation and the energy transition, require the storage and logistics in- to pursue a primarily public sector are particularly pronounced in Africa,” frastructure which has been a key part infrastructure programme, so there says Olusola Lawson, managing direc- of the challenge in Africa’s readiness is a need to attract the private sector tor and co-head of AIIM. to deploy vaccines. Overall, the infra- through PPPs and private sector pro- “Data usage per subscriber in Africa structure funding gap in Africa is huge jects to close the gap.” is set to grow eightfold over the next

18 Infrastructure Investor • June 2021 Analysis

Alain Ebobissé

Chief executive, Africa50

Alain Ebobissé became chief executive of Africa50 in 2016. Prior to this, he served as global head for the World Bank’s global infrastructure project development fund, IFC InfraVentures. He has also served as chief investment officer in the IFC’s global infrastructure and natural resources department. Prior to joining the IFC in 1998, he held several positions in the financial services industry in France, including at Caisse des dépôts et consignations.

Amani Abou-Zeid

Commissioner for infrastructure and energy, African Union

Prior to joining the African Union Commission, Amani Abou-Zeid held a number of leadership roles at international organisations including the African Development Bank, United Nations Development Programme and the US Agency for International Development, with a focus on infrastructure and energy programmes. She is also a trained telecommunications engineer.

Olusola Lawson

Co-managing director, AIIM

Having founded the Nigerian office of AIIM over a decade ago, Olusola Lawson has originated, executed and managed more than $500 million of equity investment Solomon Quaynor in the digital infrastructure, power, renewables, midstream and Vice-president private sector, infrastructure and transportation sectors across Africa. industrialisation, African Development Bank He was previously an investment manager in Macquarie Group’s Solomon Quaynor joined the African Development Bank in European infrastructure funds team May last year. Since 2018, he has served as senior advisor and also worked at PwC in London. for Rothschild Global Advisory for Africa. He was also senior advisor to Danish development financial institution IFU, served on the investment committee of a West African private equity fund and has been a board member of several African corporates and international corporates seeking to gain entry to Africa. Prior to 2018, Quaynor served at the International Finance Corporation for almost 20 years.

May 2021 • Infrastructure Investor 19 Analysis

five years. Two-thirds of the world’s examples. “We have the opportunity to transport networks, as well as digital population without access to electricity build the communications backbone networks,” she says. live in Africa – around 600 million peo- of Africa, without having to rely on “The will of our governments is ple. And 24 million people are moving pre-prepared projects from govern- there. I don’t think there has been a from rural locations to cities every year, ment. The same is true of power. We speech by an African leader that hasn’t twice the rate of either China or India. can undercut the self-provision of die- mentioned the importance of encour- These global themes are magnified in sel generators with rooftop solar and aging the private sector, but we have to this market.” battery services to the private sector.” tackle the concerns that investors have, And there is no doubt that the pri- But Amani Abou-Zeid, commis- head on.” vate sector has a critical role to play and sioner for infrastructure and energy at The biggest inhibitor to private the political will to make that happen is the African Union, counters that while capital investment is undoubtedly there. Debt to gross domestic product digital infrastructure is vitally impor- perception around risk, which market in Africa has increased from 28 percent tant, it is not the only infrastructure participants are adamant is wildly over- to 61 percent, on average, over the past Africa needs. “We need to find ways inflated. “We have to dispel the myth decade, and is expected to increase to attract private capital to help build that the continent is too risky. We to about 75 percent this year, which means governments that could once afford to fund public sector projects now have no choice but to look to pri- vate sector and PPP projects, explains Quaynor. “Closing the funding gap is even more crucial now as we need to re- cover from the pandemic and build “All I ever hear about back more resilient societies,” adds Ebobissé. “Infrastructure needs to be a strong component of any government’s are the risks associated post-pandemic stimulus plans. But the private sector also has a very important role to play. It is vital we increase the with investing in volume of private capital coming to the continent.” African infrastructure. Bankability So, what is preventing private capi- tal inflow into African infrastructure? But we have the proof According to Ebobissé, one of the key constraints is that there are insufficient early-stage project resources to create to show that these enough bankable deals to close the gap. “We not only need money, we need expertise in project preparation, everything required to bring projects perceptions simply to the bankability stage. We also need to speed up and scale up the develop- ment of these projects. It takes far too aren’t true” long, and it doesn’t have to,” he says. Lawson, however, says that infra- AMANI ABOU-ZEID African Union structure investors could create their own opportunities in the private sector. “We don’t have to sit and wait for gov- ernments to deliver projects,” he says, citing towers, fibre and data centres as

20 Infrastructure Investor • June 2021 Analysis

“When local players are involved in projects, governments are more likely to listen if policy decisions will negatively affect them”

ALAIN EBOBISSÉ Africa50

should emphasise that investment risks According to Lawson, there are three yield? In the more mature markets such in Africa are not significantly different key perceived risks that deter investors as South Africa there definitely is. In from other continents and focus on the from investing in African infrastructure. other parts of Africa, investors are still success stories,” implores Ebobissé, cit- largely seeking growth. Those are the ing the Benban solar park in , a Myth-busting things that keep international equity 1.5GW portfolio of utility-scale solar The first is currency. This manifests in investors up at night,” Lawson says. power plants. multiple forms. “There is convertibility But for each of those perceived “There are also some great wind risk: if I put my money into a certain ju- risks, there are mitigants. For exam- projects in . South Africa has risdiction can I get it back out? There is ple, with currency, you can try to get as raised several billion dollars for its re- liquidity risk: if I put my money into a much borrowing in the local currency newables programme. Even a smaller jurisdiction where the asset is generat- as possible, so while the equity may be country like has over 22 per- ing cashflows in a local currency, can I exposed, the larger part of the capital cent of its power coming from renewa- get the hard currency liquidity in mar- structure is protected. ble projects, most of which are funded ket I need to service my debt and meet “You can also mitigate currency with private capital. We need to share other hard currency obligations? And risk through contract. For example, those stories. Success breeds success.” then there is the volatility of the cur- the capital and fuel charge in a power Abou-Zeid wholeheartedly agrees. rency: if I put my money in at 10:1, am tariff are often linked to a foreign cur- “We need to think about the image that I going to get it out at 30:1? In which rency,” says Lawson. “There was one we are exporting to the world. All I ever case I have lost two-thirds of my capital particular power asset that we sold at hear about are the risks associated with before I have even started.” a strong mark-up in US dollar terms, investing in African infrastructure. But The second perceived risk, Lawson even though the local currency had we have the proof to show that these says, is contractual sanctity. “If I enter halved over our holding period. This perceptions simply aren’t true. That is into a long-term agreement – a conces- is an illustration of how infrastructure not a political statement. It’s a fact. We sion or a PPA for example – is that con- affords currency protection in emerg- have to do a much better job at com- tract going to be respected?” ing markets in a way that many other municating that.” The third is a relatively less liquid private equity opportunities potentially Overcoming misconceptions around exit market. “How will I get my mon- do not.” risk is therefore key. But first those ey back? Are there sufficiently deep With regards to sanctity of con- misconceptions must be identified. pools of long-term local capital seeking tract, you can get guarantees from the

June 2021 • Growth Markets 21 Analysis

“We have the opportunity to build the communications backbone of Africa, without having to rely on pre- prepared projects from government”

OLUSOLA LAWSON AIIM

government sitting behind that con- guarantee to make PPA payments for tract. “Typically, we will reinsure that two payment periods and then use the guarantee with an entity like Multi- might of our programmes as leverage lateral Investment Guarantee Agency, for governments to resolve payment while still earning our target equity re- matters within six months to a year.” turns despite the AAA commercial and government treasuries, which a lot of political guarantee,” Lawson adds. Local support the time are funding recurring expens- “Finally, when it comes to exit, we Ebobissé, meanwhile, believes that es and not capital projects. are starting to see a proliferation of the participation of local investors and “Multilaterals should credit enhance IPOs and strategic sales in addition to lenders is another important risk miti- infrastructure and corporate bonds financial buyers. Recent examples in- gant. “It is not a guarantee, but when to crowd-in this African institutional clude the IPO of Helios Towers Africa, local players are involved in projects, money into infrastructure. The invest- or American Towers which came in to governments are more likely to listen ment guidelines for these institutions buy Eaton Towers.” if policy decisions will negatively affect will need to concurrently change to There are also financial mitigants them,” he says. give them access to the infrastructure from a lending perspective on infra- Quaynor agrees: “Global inves- market.” structure projects. Multilaterals can tors are not comfortable investing in Changes are already underway credit enhance debt financing by taking countries where local investors are that could unleash this local firepow- a first loss piece, that will help attract themselves not investing, or global in- er. Regulation 28, which governs how more investment into debt, and assure vestors are more likely to invest in sec- much money managers can invest equity investors they will achieve finan- tors where they see experienced local in certain asset classes, is under dis- cial close, says Quaynor. investors investing. We therefore need cussion in South Africa. This would “Then there are other financial mit- to harness the African sovereign wealth affect the largest pool of domestic in- igants such as partial risk guarantees funds, pension funds and life insurance stitutional capital on the continent at that effectively counter-guarantee a investment funds that are sitting on as more than $200 billion, according to government’s ongoing payment obli- much as $2 trillion. Lawson. gation on offtake agreements, which “This is African money that should “Discussions are ongoing regarding can be an even more powerful role by be prudently investing in African infra- increasing the limit that can be invest- multilaterals in ensuring bankabili- structure, but 80-90 percent in most ed in infrastructure to up to 45 percent. ty of projects. For example, we could countries continues to be invested in That is happening because President

22 Infrastructure Investor • June 2021 Analysis

“African governments do not have the fiscal space to pursue a primarily Free trade needs infrastructure The African Continental Free Trade Agreement came into effect in January and, in theory, represents a huge public opportunity to stimulate private sector investment in African infrastructure. sector “We are now one big single market of over 1.3 billion people,” says Alain Ebobissé of Africa50. “One of the challenges we have historically faced is that individual markets can be too small for big-ticket investment. Now infrastructure investors can access regional projects that enable them to put more money to work.” It is these regional infrastructure projects that will prove vital to the success of the free trade agreement. “How is a free trade agreement programme” going to work without transport infrastructure?” asks Amani Abou-Zeid, commissioner at the African Union. “We need to find a way to bring SOLOMON QUAYNOR private sector expertise and investments into these regional projects at African Development Bank scale. Without that, the free trade agreement is just a slogan.” However, financing regional projects through PPPs is significantly more challenging than at a national level, according to Ebobissé. “But it’s not impossible,” he adds, citing the Landmark Bridge project linking the capitals of the Democratic Republic of Congo and the Republic of Congo, Kinshasa and . “We have to focus on transformative infrastructure that will catalyse Ramaphosa is putting infrastructure at the economic recovery post-pandemic. And that means expanding the top of the country’s build back bet- beyond national to regional infrastructure,” agrees Solomon Quaynor ter agenda. Other countries can look to of the African Development Bank. “We cannot focus only on the what South Africa is doing, to make it infrastructure needs within 54 individual countries. We need to also focus easier for domestic capital to support on infrastructure that connects these markets – whether that’s roads or African infrastructure. And where do- broadband connectivity, for example, in order to harness the potential of mestic capital goes, international capi- the African Continental Free Trade Area.” tal will follow.” n

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