Gate­keeper of note

Suc­cess is due to care­ful nav­i­ga­tion of po­lit­i­cal, cur­rency, op­er­a­tional and fi­nan­cial risks

Financial Mail - - CORPORATE REPORT -

Al­wyn Wes­sels de­scribes his role as Harith’s chief in­vest­ment of­fi­cer as one of qual­ity con­trol. Man­agers of the Pan-africa In­fra­struc­ture De­vel­op­ment Funds 1 and 2, Sipho Makhubela and Emile du Toit, re­port to him, and a “prein­vest­ment com­mit­tee” de­cides whether to pur­sue a par­tic­u­lar project or not.

“We in­vest in eco­nomic in­fra­struc­ture and that is our start­ing point,” says Wes­sels. “Most of the projects we look at do not make it past the pre-in­vest­ment stage, be­cause we look at the risks, whether po­lit­i­cal, cur­rency, op­er­a­tional or fi­nan­cial. We look at the de­mand and sup­ply equa­tion to as­sess whether the project has enough cush­ion to sus­tain the kind of re­turns we need to jus­tify our in­vest­ment.”

One of the first steps in eval­u­at­ing any project in­volves ex­am­in­ing the rev­enue flow. Where in­fra­struc­ture de­vel­op­ment is con­cerned, these are gen­er­ally uni­tary pay­ments or user pays. Each of these has dif­fer­ent risks. “Where eco­nomic in­fra­struc­ture is in­volved, you have lim­ited fi­nan­cial re­turns,” says Wes­sels. “If a power plant is only ca­pa­ble of pro­duc­ing 50 MW, you can­not sell more than that. You can have a power pur­chas­ing agree­ment (PPA) with the buyer, gen­er­ally the state-owned util­ity, which mit­i­gates your fi­nan­cial risk, but then you have to look at op­er­a­tional and po­lit­i­cal risks.”

This is where over­seas in­vestors balk at Africa — of­ten due to mis­guided per­cep­tions of po­lit­i­cal risks. What if there is a change in gov­ern­ment and the pre­vi­ously signed agree­ments are dis­hon- oured? “You can in­sure against this type of risk,” says Wes­sels. But po­lit­i­cal mu­si­cal chairs can stall a project for years.

A case in point is the 2005 Rabai ther­mal power project in Kenya, in which Harith sub­sidiary Al­wych In­ter­na­tional is in­volved. One of the other bid­ders chal­lenged this award with the pro­cure­ment board, which dis­missed the ob­jec­tion. The case was then re­ferred to the Kenyan courts. The case was dropped in Oc­to­ber

2007, only to be fol­lowed by the dis­puted gen­eral elec­tion in Kenya in De­cem­ber 2007 which was fol­lowed by coun­try-wide un­rest. It was only in late 2008 that fi­nanc­ing close-out was achieved. This kind of de­lay is not un­typ­i­cal of ten­ders in Africa, and is be­com­ing more com­mon.

To in­vest in Africa, for­eign in­vestors look for in­ter­nal rates of re­turn of 15%-18%, against sin­gle digit re­turns in the US and Europe. This is the premium they ex­pect for tak­ing on the added risk of in­vest­ing in Africa.

Cur­rency risk is one area of con­cern. In SA, where rev­enues are rand-based, it is also pos­si­ble to raise cap­i­tal in rand — that re­duces the cur­rency risk. Out­side SA, Harith does not get in­volved in in­fra­struc­ture projects where it is ex­posed to cur­rency risk — for ex­am­ple, a toll road in Zam­bia where the rev­enues are kwach­abased. “Your re­turns can get wiped out by cur­rency volatil­ity,” he says. “We deal only with hard cur­ren­cies where our risk can be man­aged.”

New projects are re­ferred to Harith via a net­work of associates in de­vel­op­ment fi­nance in­sti­tu­tions (DFIS) such as African De­vel­op­ment Bank and the De­vel­op­ment Bank of South­ern Africa. A ma­jor con­straint on eco­nomic in­fra­struc­ture is the avail­abil­ity of the kind of eq­uity that Harith pro­vides. Some projects re­quire a 75% eq­uity or quasi-eq­uity par­tic­i­pa­tion be­fore the DFIS will re­lease debt fi­nanc­ing. At his pre­vi­ous job at Absa In­vest­ment Bank, Wes­sels was in­volved in ar­rang­ing fi­nance for the Gau­train, which was widely crit­i­cised as an un­nec­es­sary white ele­phant.

“As orig­i­nally con­ceived, the Gau­train would not re­duce ex­ist­ing traf­fic on the high­ways, and would rely only on new growth. Look at it to­day. The Gau­trains are packed. Mb­haz­ima Shilowa (for­mer Gaut­eng premier) will be a hero 30 years from now for cham­pi­oning this project. Imag­ine if the Gau­train traf­fic were redi­rected to the roads. The macro-eco­nomic ef­fect of these projects is of­ten much greater than orig­i­nally imag­ined.

“Look at the tremen­dous hunger for power in Africa? What is the lost eco­nomic growth due to in­suf­fi­cient power? The most ex­pen­sive power is the power you do not have,” he says.

Wes­sels is an ad­vo­cate of pri­vate sec­tor-funded in­fra­struc­ture, for good rea­son: “Show me a gov­ern­ment in­fra­struc­ture project that is com­pleted on time and un­der bud­get? They don’t ex­ist. All our projects are com­pleted un­der bud­get and on sched­ule. Our Azura power project in Nige­ria is six months ahead of sched­ule. Why?

Al­wyn Wes­sels: Ex­am­in­ing all risks in­volved in in­vest­ing in any project is key to un­lock­ing de­vel­op­ment

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