PRIVATE EQUITY: A panacea for financing African Infrastructure?
What contribution can Private Equity make to the financing of infrastructure in Africa?
The issue was brought into sharp focus at the recent SuperReturn Africa Conference in Cape Town, South Africa, which brought together a number of experts to consider the current challenges and potential solutions.
The scale of the task is immense, with World Bank research from 2017 highlighting that Africa’s urban population - which now estimated at 472 million people - may double over the next 25 years, and that $93bn may be needed to close the infrastructure investment gap. Securing the right infrastructure investment will clearly be vital in translating rapid urbanisation into sustainable economic development on the African continent.
What kind of infrastructure investment is needed in the first place? Energy projects are currently consuming around 60% of African infrastructure investment, and there continues to be significant demand for public and private investment to address the water supply, sanitation and ICT amongst others. It has been estimated by Deloitte that Government and traditional donor financing could at best meet 50% of the requirements of infrastructure financing, and so innovative solutions combining international and domestic and public/private sources will need to be devised and implemented. Private Equity financing is already becoming part of the solution, with the African Private Equity and Venture Capital Association noting that 86 Private Equity infrastructure deals were concluded in Africa between 2011 and 2016, with a total value of $10.6bn, and it is interesting to note that 45% of PE infrastructure investment was in utilities, while only 10% was in energy.
Where is infrastructure financing in Africa currently coming from? In terms of major emerging economies, China is already well ahead of the curve when it comes to funding large African infrastructure projects. In 2017, Chinese president Xi Jinping offered a $60bn loan and aid package to Africa, in the context of the $900bn new Silk Road project that China aims to embark on, which is intended to create numerous new trade routes, as well as build up old trade routes throughout the Middle East and Asia. India is also a player to watch, even if its FDI flows to Africa are concentrated in Mauritius, which accounts for about 19% of Indian FDI flows to the world, and most recently India has offered a financing facility for the Metro Express project in Mauritius. Overall, interest and demand from China and India could be an opportunity rather than a threat to the deal flow pipeline.
“China is already well ahead of the curve when it comes to funding
large African infrastructure projects"
In this context, to what extent can Private Equity be seen as a panacea for African infrastructure funding, or even provide a partial solution? Private Equity players are very much aware of infrastructure opportunities on the African continent, and GPs are already investing from both PE infrastructure-specific and generalist funds. A survey conducted in 2017 by the African Private Equity and Venture Capital Association revealed that African LPs actually identified infrastructure as the most attractive sector for PE investment over the next three years, while non-African LPs saw consumer goods as the most attractive, which suggests an interesting divergence of perspectives.
PE investments in infrastructure projects to date have included Amandi Energy (ARM-Harith Infrastructure Investment Ltd and other investors, 2016) and Sindila Micro-Hydro (Metier Sustainable Capital Practice, 2016) and there have also been a number of successful exits such as Bakwena Platinum Corridor Concessionaire (African Infrastructure Investment Managers, 2016) and HTN Towers (Helios Investment Partners, 2016).
RISKS AND CHALLENGES
If PE infrastructure investment in Africa is to reach its full potential, current challenges and risks will need to be tackled. Deloitte has suggested that raising financing for infrastructure projects and obtaining adequate terms for it are all about getting the right interconnection between liquidity, risks mitigation and structuring, but beyond this political risk is a major factor. How can African governments be persuaded to stand behind a project and remain behind it? Is there a way to insure against government change over a long-term investment horizon, and what of transparency and governance issues which may arise, when international investors are bound to apply international rules and best practice?
At the SuperReturn Africa Conference, experts including Soloman Asamoah, CEO of the Ghana Infrastructure Investment Fund, Jurie Swart, CEO of African Infrastructure Investment Managers, Carole Wainaina, COO of Africa50 Infrastructure Fund and Hubert Danso, CEO and Vice Chairman of Africa Investor and Chairman of the African Sovereign Wealth and Pension Fund Leaders Forum noted that some projects are taking five to eight years from start to completion of just the budding and approval process, before construction has even started. Hubert Danso commented that “our priority goal on the continent must be to build a reputation of transparently fast tracking projects to financial close, if we are to credibly mobilise increased private investment into early stage infrastructure project development.
"Involvement from other major emerging economies such as China and India
may be an opportunity rather than a threat if approached in the right way"
AiAssetX, The Ai African Infrastructure Co-Investment Platform for pension and Sovereign investors, is committed to assisting private sector project developers and African governments accomplish this goal”. Jurie Swart has also highlighted that there could be opportunities to open up investment to institutional asset managers, including pensions, through regulating the infrastructure capital market, and has more broadly noted that African infrastructure projects offer attractive risk premiums compared to those in developed markets, relative to the perceived risks and most certainly relative to the real risks.
Swart’s point about bringing pensions and institutional asset managers into the fold to invest in the sector is one which is worthy of detailed consideration, since these could play a major role in opening up new financing streams. In South Africa, since 2011, pension funds have been permitted to invest up to 10% of their assets in private equity funds (with sub-limits of 2.5% per private equity fund and 5% per fund of funds), further to amendments to the Pension Funds Act 1956.
A set of conditions was added in 2012 which stipulate requirements for a PE fund to qualify for investment by a pension fund, with which PE funds have a strong incentive to comply. This approach could certainly serve as an example for other African countries to follow.
So where do we go from here? One positive development is that many ex-Africa investors are using MIGA (Multilateral Investment Guarantee Agency) insurance backed by the World Bank, which can provide significant comfort to investors. MIGA provides insurance for cross-border investments into developing countries in the form of non-commercial guarantees. The cross-border investments can be either new investments or those associated with the expansion, modernisation or improvement of existing projects, and can cover a range of sectors, such as financial, infrastructure, oil and gas, mining, telecommunications, services, agribusiness, and manufacturing, amongst others.
In terms of the benefits, MIGA's guarantees protect investors against the risks of transfer restriction (including inconvertibility), expropriation, war and civil disturbance, breach of contract, and non-honoring of financial obligations, and the period of the guarantee can range from 3 up to 15 or even 20 years, depending on the nature of the project concerned. What this means in practice is that MIGA provides an AAA wrapper around a project to protect against risks including political risk. This is also transferrable on a sale of an asset and helps provide liquidity in the secondary market. This initiative will help to address the thorny issue of political risk in Africa, and there is room for further innovative solutions to be developed by the market.
Overall, as we discussed at SuperReturn Africa, Private Equity has the potential to play a key role in providing finance to reduce Africa’s infrastructure deficit, even if it may not have all the answers. African infrastructure undoubtedly carries risk, including political, however the return premium significantly exceeds the risks. Involvement from other major emerging economies such as China and India may be an opportunity rather than a threat if approached in the right way. What we need now, if PE is really to thrive, is a forward looking and imaginative approach from regulators to continue to open up infrastructure investing to pensions and other investors searching for yield given the safe and long-term stable return characteristics of the asset class.
Group Fund Solutions Leader
First published in AGF Magazine.