This article is written by Patrick Deasy (partner) and Mariam Akanbi (associate).
The potential for investment in infrastructure in Africa has become a much discussed topic, from varying view points, including the actual financing needs, how investment can be increased, the risks, what structures may be used for investment and the potential returns.
In terms of the actual financing needs, according to the African Development Bank (the ‘AfDB’) addressing Africa’s infrastructure deficit would require investment of almost US$100 billion every year for the next decade and the current shortfall in investment is more than half the required amount.
The macro-economic shift across a number of African countries has resulted in a positive view of the investment landscape in Africa in general and an emerging middle class with an increased spending power and demand has contributed towards GDP growth, most notably in the consumer goods, telecommunications and financial services sectors. Notably, such growth requires investment in infrastructure.
Although a continent made up of countries with very different economies, cultures and needs and despite recent market disruptions, where risks, political and market volatility previously impeded viable infrastructure investment, the outlook is now more optimistic and international infrastructure investors are recognizing the potential in Africa.
An enabling environment
Certain catalysts can be used to explain the shift in investor perception, which include:
- better political stability in a number of countries including certain major economies (Nigeria being a recent example of a relatively smooth change in power);
- cooperation and endeavours of national governments, supranational bodies and development agencies to initiate infrastructure projects;
- the creation of legislative and regulatory frameworks aimed at supporting infrastructure initiatives; and
- an increase in capacity in the sector both within government bodies and within professional service providers.
Focusing on viable cooperation initiatives, a high profile example includes the AfDB’s ‘Africa 50’, with the aim of raising US$ 3 billion for infrastructure projects. The goal of the initiative is to mobilize ‘private financing to accelerate the speed of infrastructure delivery in Africa, thereby creating a new platform for Africa’s growth’ with a focus on high-impact national and regional projects in the energy, transport, ICT and water sectors.
The initiative will have two business lines: project development with the objective of increasing the number of bankable infrastructure projects by providing early stage capital and legal, technical and financial expertise; and project finance which will provide financial instruments needed to attract additional infrastructure financing to the continent such as bridge equity, senior secured loans and credit enhancement.
The AfDB’s Africa50 is in response to the ‘Program for Infrastructure Development in Africa (PIDA)’ approved by African Heads of State and Government in 2012. PIDA provides a framework for regional and continental infrastructure development consisting of 51 cross border programmes in the energy, transport and ICT sectors and also trans-boundary water management. The AfDB acts as an executing agency with a responsibility for contractual, financial, technical and administrative management of the framework as well as having a responsibility for procurement procedures.
Also notable is the US presidential initiative ‘Power Africa’, launched in 2013 with the objective of adding 30,000 megawatts (MW) of new, cleaner electricity generation capacity across sub-Saharan Africa. However, tangible investment borne out of this initiative remains to be seen. Better regulation, another factor that could impede investment when it is lacking, is also assisting the infrastructure investment climate.
For example, Uganda, has been able to unbundle its electricity industry and increase private investment. The Ugandan government began this process by passing its Electricity Act, removing an existing monopoly. Three new electricity companies were created for generation, transmission and distribution and also an electricity regulatory authority was created.
These enabling factors have assisted in creating some level of certainty amongst developers, lenders and investors. Although still burgeoning, international commitment to infrastructure projects in Africa are increasing.
The Investment Landscape
Amidst the general increase in fundraising for Africa investment, there has also been a marked increase in institutional capital fundraising by infrastructure fund managers seeking to invest in Africa.
As well as establish fund players like AIIM (the Old Mutual-Macquarie joint venture), ECP, Qalaa (previously Citadel), Denham Capital and Harith’s various infrastructure funds, new pools of capital continue to be established focussing on new regions, such as the ARM-Harith Infrastructure Fund which announced a first closing of in February of this year and which according to the CEO of Armhill, is the first of a series of planned infrastructure funds, which is intended to provide ‘much needed long-term equity capital for funding infrastructure in Nigeria and West Africa’.
Some of the larger established fund managers are also seeking to deploy money in African infrastructure projects by establishing teams that will focus on Africa and previously European focused players such as Meridiam have recently established and successfully closing funds focused on investment in Africa.
There are also other state-backed investment funds such as the Africa Finance Corporation (AFC) based in Lagos that have capital to deploy and also seek to take development risk by backing developers. Whilst data on the exact extent of Chinese investment in African infrastructure varies, it cannot be left unsaid that Chinese investment in the landscape is high, notably seen in greenfield, physical infrastructure type projects. Chinese contractors, whose motivations could be more than purely commercial, are also able to outbid western bidders for concessions awarded by public bodies.
There is also a perception that Chinese investors are more able to withstand the risks associated with African infrastructure investment and when not involved a common occurrence is the existence of the larger development finance institutions (‘DFIs') to provide credit support to a project in order to make it bankable, an example is the IFC’s plan to launch infrastructure debt managed accounts that will be bolstered by credit enhancement mechanisms, including IFC’s provision as to first-loss capital so as to provide an investment-grade profile (announced in November 2015, PEI Infrastructure Investor).
The establishment of the Blackstone-led BlackRhino project development company focused on the development and acquisitions of energy and infrastructure projects across Africa using project finance structures is also notable. It has announced a 550 km “Horn of Africa" fuel pipeline as its maiden project. This may be of the first major US-private equity led platforms for infrastructure investment in Africa.
Infrastructure Fund Structures
Whilst the need is clearly apparent, investors and those who look to raise capital for investment must also consider what types of structures are more appropriate for such projects.
A large number of the infrastructure opportunities are greenfield meaning that the returns that would otherwise be available on infrastructure assets in more developed markets (i.e. yield) are not, for now, the same. In addition, the risks associated with African infrastructure investment are generally greater, although potentially meaning higher returns, investors will seek to look at structures that will allow them to mitigate such risks.
Infrastructure funds are therefore a viable option. As with Infrastructure funds in developed markets, the general theme is to establish private equity type structures, however given the nature of the asset class (again as with developed markets) the fund life may be required to be longer than the typical 10 year term, particularly with greenfield assets.
Another consideration is the establishment of longer term vehicles such as permanent capital vehicles (’PCVs’) (discussed in this edition) or for hybrid vehicles. As the market and asset class matures PCVs may become more common place to support yield type returns.
As mentioned DFIs are common investors, in accommodating this type of investor fund managers will also need to consider specific environmental, social and governance requirements. These requirements are often embedded into fund documentation and can also extend to the procurement of adherence to certain standards at project/portfolio level.
The enabling environment being created by (relative) political stability, governmental cooperation, initiatives by supranational bodies and development agencies and legal and regulatory reforms, certainly make for an increasingly attractive investment opportunity.
What is now taking shape within the industry is how best to tailor investment opportunities in order to deal with risk profile, to accommodate specific concerns of investors and the nature of returns being made.