Africa starting to rely on own financing for infrastructure
Funds of about $150bn are offering co-investment opportunities and guarantees to attract foreign capital
Africa, short of new roads, ports and power stations, is increasingly leaning on its own sovereign investment funds to help fix its infrastructure gap.
The funds, which have about $150bn between them according to research firm Preqin, are offering co-investment opportunities and guarantees to attract foreign capital.
About 600-million Africans, or half the continent’s population, still lack reliable power, according to a panel discussion at last week’s World Economic Forum in Davos.
Consultancy McKinsey has estimated investment in African infrastructure is so poor it needs to double to $150bn a year. But while investors are queuing up to finance overhauls of transport and energy infrastructure in the West, they have largely bypassed Africa, still considered the preserve of development agencies or specialist funds.
Africa is still viewed in some circles as a difficult investment, hampered by corruption, war and political risk.
Now home-grown sovereign wealth funds are seeking to change this perception and kick-start projects themselves.
Morocco’s $1.8bn Ithmar Capital state fund is seeking to raise $1bn-$2bn from infrastructure specialists and other sovereign funds for its Africa green infrastructure fund. It will focus on clean energy and water projects and is cosponsored by the World Bank.
“Energy is probably the biggest impediment to the development of the continent,” said Tarik Senhaji, Ithmar’s CE, said. “The energy cost is so high you can’t develop anything else.
“A lot of the sovereign funds and pension funds we are speaking to are extremely interested in infrastructure — the question is how do you bring the risk perception of Africa down so they can co-invest with us?” Senhaji said. It is early days. In 2016, three Africa-focused infrastructure funds raised $665m, according to Preqin — just 1% of the total $61.2bn raised by 54 infrastructure funds globally. Yet, the 15%-20% returns that are on offer in Africa are higher than the 8%-12% offered in developed markets.
“If people haven’t invested in the region before, they probably perceive more risk than there actually is,” said Adrian Mucalov, a director in the energy business at Actis, an emerging markets investor that has invested over $3.5bn in Africa.
BIGGEST CHALLENGE
Fund managers say the biggest challenge may not in fact be raising capital, but finding investable projects. Publicprivate partnerships (PPPs) between government agencies and private companies are underused, accounting for only 4.5% of African infrastructure projects by value between 2000 and 2014, McKinsey estimates.
That compares with 8.6% for a group of emerging markets.
But there are examples of sovereign funds stepping in. Angola’s sovereign fund, FSDEA, has just committed $180m to a new deep-sea port project using a PPP structure.
“PPPs are very difficult to carry out because you’re talking about two different parties with two different views,” FSDEA chairman Jose Filomeno dos Santos said.
In early 2015, another sovereign fund, Senegal’s Fonsis, partnered with Meridiam, an infrastructure fund manager, to develop a solar farm.
Meridiam, which raised €300m for its Infrastructure Africa Fund in 2015, targets greenfield investments in transport, power generation and public buildings such as hospitals and universities via PPPs.
Meridiam’s West Africa director, Mathieu Peller, said governments needed to focus on a limited number of essential projects. “There is a huge pipeline of projects that are difficult for foreign investors to assess,” he said.
Sovereign funds are also trying to tap local pension fund capital. The long-term nature of infrastructure investments tends to suit pension funds, which need a steady income to fund payments to retirees.
Canada’s pension funds provide a guide, having invested in everything from the Port of Melbourne to British high-speed rail lines. And African pension pools are growing quickly — Nigeria’s local pension market is expanding by $5bn a year — but they can be prevented from investing in domestic infrastructure bonds because of the issuer’s weak credit rating.
To tackle this, Nigeria’s Sovereign Investment Authority, has announced a tie-up with local currency guarantee firm GuarantCo to enhance the credit quality of Nigerian infrastructure bonds.