New dawn for investment in Africa 

Africa is shaking off the shackles of the past and emerging, increasingly, as the proverbial “last frontier” in major infrastructure investment.

 Known for decades as the “dark continent”, and branded by The Economist as recently as 2000 as “the hopeless continent”, today Africa is proving its sceptics wrong and turning Afro-pessimism on its head in a major way.

 Indeed, things are looking up to such a degree that the continent would be justified in borrowing the election rallying cry of United States President Barack Obama and saying, in unison: “Yes, we can!”

 As the deals mount, optimism grows. And optimism is something Africa requires in abundance…

 Investors interested in Africa’s resources, but afraid of its political risks, should consider that recent events in Europe and the US have shown these resources are far from risk free, British fund manager David Murrin recently told Reuters.

 “We need to wipe out that smug Western view of more risk in Africa... As Western belts tighten and we start to deal with fiscal situations, the political risk differential is closing rapidly. People need to wake up to that,” said the chief investment officer at United Kingdom-based Emergent Asset Management Ltd.

 He acknowledged that Africa could be hazardous for investors, but cited by comparison Greece’s debt troubles and the banking crisis in Europe and the US.

 African projects, such as the Shire-Zambezi Waterway project in Malawi and the hydropower project on Lake Kariba, present vast opportunities for investors and companies expanding into Africa, in addition to effecting real change on the continent.

 In the past decade and more, Africa has undergone a tremendous transformation, which has resulted in a large amount of growth and development in its socio-economic and political landscape. This change has opened the business conduits for companies wanting to operate in Africa and be part of the vast opportunities that the continent and its emerging economy offers.

 “We see further growth happening across Africa – mainly due to the focus that is currently placed on banking and infrastructure projects – and we have positioned ourselves to take advantage of these business prospects by assertively expanding into southern and West Africa,” says Guy Jelley, chief executive officer of Post Vision Technology.

 Says Simon Jackson, syndication and co-financing officer for the African Development Bank, Tunisia: “When it comes to investing in African infrastructure, the African Development Bank and the International Finance Corporation have stepped up to the plate – and we are hoping to do much more.”

 James Chakwizira, a senior researcher at the Council for Scientific and Industrial Research, says sub-Saharan Africa’s growth performance has “improved substantially” during the last decade, and he notes that the World Bank attributes activity in the infrastructure sector as having played a significant role in achieving this.

 “Though Africa’s infrastructure still remains grossly inadequate, the upside is that private investment in projects is increasing – particularly in transport, telecommunications and water,” he adds.

 “Trade costs constitute a high percentage of import and export costs in Africa [they are an estimated 30% to 40% higher than in other developing regions], seriously undermining Africa’s investment, growth and development potential.”

 In South Africa, logistics costs have averaged approximately 15% over the past few years, which is almost double the cost of logistics in Europe.

 Chakwizira says infrastructure development critics bemoan the fact that the African infrastructure development agenda suffers from an over-reliance on donor funding and international finance.

 “But the culprit behind the African infrastructure investment and development deficit is the fragmentation challenge on the continent. Despite the existence of regional economic integration blocs, the 48 countries in sub-Saharan Africa remain deeply economically fragmented.”

 This raises the question: What options can Africa adopt to facilitate catching up with the rest of the world?

 The starting point, says Chakwizira, “is realising the vast wealth and enormous resources in terms of raw materials, minerals and human capital that he continent possesses”.

 Growth and development, he says, can be achieved by employing infrastructure as a catalyst and platform for creating socio-economic development.

 In 2008, the World Bank’s Development Research Group estimated that sub-Saharan Africa alone could gain in the region of US$20 billion annually, or US$203bn over 10 years as the result of trade-related infrastructure upgrading projects, to which the Southern African Development Community would be a major contributor.

 Approximately US$1.2bn of funding has already been committed by development partners for upgrading road, rail, ports and energy infrastructure in East and southern Africa (through tolling and weigh-in motion overloading management technology infrastructure investment in countries such as Zambia, Zimbabwe, Tanzania, Cameroon, Benin and South Africa.)

 One challenge that Africa faces regarding infrastructure investment and development is inadequate funding and lack of finance. The private sector seems reluctant to engage in partnership with the public sector, perhaps owing to integrity issues, inappropriate profit-sharing and financing formulas, and governance challenges.

 “Private sector participation is required to address the huge demand for the provision of basic infrastructure across Africa. Governments must quicken the formulation of clear regulations regarding public-private partnerships (PPPs), and have the political will to implement strict infrastructure projects governance systems and procedures that weed out corruption, mistrust and misappropriation of projects funds,” says Chakwizira.

 This, he adds, can take the form of civil society infrastructure reporting cards, toll gate expenditure breakdown billboards, and infrastructure tender project implementation barometer billboards.

 Scaling up project investment and implementation funding through private sector initiatives and PPPs can be institutionalised through the medium of special purpose vehicles (SPVs) that drive the processes. The SPVs allow private sector investors to channel funds into specific investments that will bear a positive return on capital.

 The three financing options available include:

 Grant funds and concessionary loans – For example, a section of road that is vital for the functioning of the overall corridor, but which does not have a high enough rate of return, can be financed through a PPP or the private sector alone, for instance the Cape-Cairo railway and road infrastructure project. Sections of this project can be financed either through an SPV or contributions from the National Road Fund.

PPPs – A SPV is created to finance a bridge on a build-operate-transfer basis, for example, the US$130-million Kazungula rail/road bridge in Botswana and Zambia. A private sector company can finance the building of the bridge, operate under a concession (tolling the bridge) for an agreed period, and make use of an agreed exit strategy such as handing it over to the government. The company would raise money on the capital markets in the normal way, providing opportunities for a number of investors in the SPV.

Private investment – An example is an SPV created to finance a power-generating plant such as Mozambique’s US$30-million Mavuzi and Chicamba project and the Democratic Republic of Congo’s YS$20-million Zongo project. A private sector company arranges finance to build the generating plant and sell electricity to the national and regional grids at the market price on a build-operate-own basis. Public sector intervention is required to ensure regulations do not preclude this type of investment and perhaps to provide assistance in establishing the SPV.

One example of a recent major deal concerns AIM-listed iron ore and base metals miner African Minerals, which entered into a $1.5-billion strategic investment understanding with Chinese steel company Shandong Iron and Steel Group to fund its flagship Tonkolili Iron Ore Project in Sierra Leone.

 African Minerals executive chairperson Frank Timis said it would use the funds for the construction of infrastructure and mine operations at the project, including a shift from a combined haul-road and rail system to an all-rail transport and logistics system.

 In addition to the refurbishment of the existing 74-kilometre Cape gauge rail line between Pepel and Lunsar,
the company now planned the construction of a 122-kilometre rail line and extension rail to the Tonkolili Project.

 The deal highlights the fact that China is emerging as a major financer of infrastructure projects in Africa, as documented in “Building Bridges” – a report released by the World Bank.

 This is a very welcome development because Africa has an infrastructure deficit, and China has both the financial resources and the construction industry capacity to help meet the demands.

 “China’s presence in Africa is becoming more and more market driven; the actors operating there are diverse, there are many models, and the areas they are in are broad,” Commerce Vice Minister Fu Ziying told The Wall Street Journal.

 He spoke in response to news that South African and Chinese companies had reached a deal to build a R1.65-billion ($217-million) cement plant – one of China’s largest investments in the country.

 The deal highlighted China’s growing importance as an investor in Africa. Last year, China became South Africa’s largest trade partner.

 Women Investment Portfolio Holdings Limited (Wiphold), a black women-owned company; and South African limestone mining company Continental Cement, will be the local partners on the cement plant that will initially produce 2 500 tonnes a day, Wiphold said in a statement.

 “This represents a significant foreign direct investment into the South African cement industry, with an inflow of more than R800m foreign direct investment from China,” it added.

 The plant will be China’s largest investment in Africa in two years, the Financial Times reported.

 The $5.5-billion investment by the Industrial and Commercial Bank of China in South Africa’s Standard Bank, agreed in October 2007, remains the largest Chinese investment in the continent to date, the newspaper said. That deal accounts for about a quarter of the funds that Beijing has dedicated to Africa.

 Ziying told The Wall Street Journal that China–Africa trade would exceed $100bn this year, and the growth in investment is likely to enter its fastest period in the next five years.

 Chinese official figures showed trade with Africa was at $91bn last year, down 17.6% from a year ago due to the impact of the global financial crisis.

 The need for infrastructure improvements in Africa is critical. Untold numbers of businesses suffer for lack of reliable power for industrial processes or because it simply costs far too much to get their goods to the market. At the most basic level, millions of lives are threatened every day for lack of clean water or safe sanitation.

 To help address these challenges, the International Finance Corporation (IFC) announced recently that it is investing $100m in the Africa Infrastructure Investment Fund 2 – an equity fund that will promote the development of basic infrastructure in the region.

 The fund plans to raise $600m to $1bn to invest in unlisted equity and equity-like infrastructure investments in sub-Saharan Africa. It will take significant stakes in a range of infrastructure projects including toll roads, wind power farms and other renewable energy projects, ports, water and sewerage utilities, and social infrastructure.

 The IFC says it supports the development of infrastructure in Africa by investing directly in infrastructure projects and pursuing advisory mandates to create commercially viable structures to further develop infrastructure.

 For example, in March, IFC committed $750 000 to Comasel de St Louis, Senegal – a wholly owned subsidiary of Morocco’s electricity utility, the Office National de l’Electricité – for a project that will use a mix of grid connections and individual solar kits to bring power to 20 000 rural households in 300 villages.

 And earlier this fiscal year, IFC completed an advisory mandate for the government of Benin, which led to a 25-year concession agreement with France’s Groupe Bolloré to build and operate the South Wharf Container Terminal at the Port of Cotonou.

 There can be no doubt that Africa is experiencing a wonderful new dawn. As the deals roll in, and the continent reaps increasing major investment, there is reason to believe the sunset will be as grand. 

 

David Capel