Go­ing be­yond the norm

Dar­ing to sell the in­fra­struc­ture de­vel­op­ment con­cept in high-risk en­vi­ron­ments has paid off

Financial Mail - - CORPORATE REPORT -

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.

Sipho Makhubela: Nav­i­gat­ing in­fra­struc­ture de­vel­op­ment in Africa re­quires a bet­ter sense of the con­ti­nent’s di­ver­sity

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