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