Going beyond the norm
Daring to sell the infrastructure development concept in high-risk environments has paid off
Sipho Makhubela, head of Harith’s US$630M Pan-african Infrastructure Fund 1 (PAIDF 1), has spent the past decade trawling the continent as an ambassador for private sector participation in infrastructure development.
Though based in Johannesburg, he has spent much of this time outside SA building the foundations for private sector equity investment in African infrastructure. Ten years ago, there were three flights a week from Johannesburg to Nigeria, and no direct flights to Ghana. “When you arrived in these countries, you had to have three phones to communicate locally and with SA,” says Makhubela. “The logistics of travelling and operating in Africa have improved tremendously since then, but that was only part of the problem.”
Makhubela explains how governments had to be weaned away from the belief that infrastructure development was a state responsibility, which is why African infrastructure development has been so painfully slow. He has no doubt that Harith — and other private sector fund managers who will no doubt come after it — will accelerate the rate of progress in rail, telecommunications, power generation and inter-africa trade.
“When I started at Harith, we took the private equity model, which is based on a five or sevenyear investment, followed by an exit. When it comes to infrastructure, the time horizons are much longer because of the time it takes from project conception to financial close. With some projects, it can take eight years before the project starts generating cash, so it makes no sense to exit after seven or eight years. PAIDF 1 is a 15-year fund, and we had to convince investors to lock in their capital for this length of time,” he says.
One of the biggest problems facing anyone tapping international capital is the ignorance of a continent with nearly 1bn people and 54 countries, each with its own laws and regulatory requirements.
Ten years ago, Rwanda was just emerging from a terrible tribal genocide which spilled into neighbouring Democratic Republic of Congo, and Côte d’ivoire was still roiling from the 1999 coup (though it held quasi-free elections the following year). Sudan, Liberia and Sierra Leone were also drenched in conflict, and Zimbabwe was falling apart. Trying to sell Africa to investors was no easy task.
“African investors have a better sense of the diversity of the continent, and hence are more receptive to the opportunities that exist. But when we talk to overseas investors we have to spend a lot of time explaining that though there are parts of the continent that are off-limits, most of Africa is open for business.
“Another trend which you cannot miss is the vast improvement in governance on the continent. Look at the successful elections in Nigeria and Ghana, and the recent court case in Kenya overturning the presidential election result. These are signs of immense progress,” says Makhubela.
In the early years, much of Makhubela’s time was spent lobbying governments to implement investor-friendly regulatory regimes. Given the continent-wide hunger for power and telecommunications, governments were receptive to the message, but in their rush to attract capital, mistakes were made.
Some of the early power purchasing agreements (PPAS) in West Africa were heavily weighted in favour of the investors, with generous power tariffs being awarded to early investors that were unsustainable. Harith — and others, such as African Development Bank and USAID — urged caution.
“We advised governments to build capacity and raise their level of competence before rushing to establish a regulatory regime that would prejudice them for a generation,” says Makhubela. “We felt we had to get the foundations right in order to build a sustainable regulatory environment for growth.”
Today, a different set of problems confronts investors venturing into African infrastructure development. Countries such as SA, Ghana and Botswana have warmed to infrastructure development, where the annuity nature of the cash returns better match their longterm liability profiles than investments in the stock or money markets.
Still, problems remain, of which currency convertibility is one. Tariffs for power generation are generally priced in US dollars, though purchasers of power are billed in local currencies.
This can pose a problem in countries with hard currency restrictions, such as Nigeria and Angola — both of which have been hit by falling oil prices. Makhubela says this risk can be managed by taking on board strong local partners that can ensure foreign investors are at the front of the queue in times of US dollar scarcity.
Another problem is the length of time it takes to get projects off the ground. Makhubela tells of one investor who sank roughly US$100M in a West African power project on preliminary feasibilities — without laying a single brick in actual infrastructure — due to time delays.