AMETRADE INFRASTRUCTURE FINANCE – 3RD QUARTER 2021
Despite the breakout of aggressive third and fourth waves of the Covid-19 pandemic in several African countries, in this third quarter, the continent continued to witness a sustained momentum in the direction of economic recovery. This was in the backdrop of a strengthening global economic recovery expected to reach an average 6% according to most institutional estimates. In comparison however the African economy recovery story will possibly be as low as half the global recovery pace and be markedly uneven across the continent. While the African Development Bank earlier in the year projected 2021 growth at 3.4%, a recent Oxford Economics Africa analysis suggests this may pick up to 4.45%. In spite of this, Africa’s economic recovery is lagging global growth and leading to an even larger development divide.
The most significant contributors to this disparity are the unequal access to COVID-19 vaccines and development funding. For example according to Africa CDC, by the middle of the quarter just 2.4% of the African population had been vaccinated with WHO stating that the continent received some 177 million vaccine doses as at the end of this third quarter. The New York Times reports that to date about 77% of vaccine shots have been administered in high and upper middle income countries while only 0.5% of doses have been given in low income countries. On the COVID-19 crisis finance response front a notable example of the stark inequality is in the disbursement of the USD650 billion IMF Special Drawing Rights last August. The allocation mechanism based on shareholding in the fund means that the wealthiest countries received about 58% of funds with some 44% going to just the G7 countries. On the other hand around 70 low income countries including most African countries received just 3.2% from the package.
Infrastructure development will continue to be even more essential for Africa’s economic recovery and growth going forward. The IMF estimates that the continent will need nearly half a trillion US dollars over the next five years to fund mass vaccination programs, public health and critical infrastructure in transport, power, digital and green technology. While African governments continue to operate in very constrained fiscal spaces the push for new sources of financing infrastructure continues to be indispensable to the continent’s sustained recovery prospects. In addition reaching the nominal 60% vaccination coverage, supportive macroeconomic conditions and a sustained rally in commodity prices will also prove vital. Infrastructure finance is therefore both a key enabler and outcome in the virtuous cycle of Africa’s recovery and growth.
THIRD QUARTER 2021 INFRASTRUCTURE FINANCE DEVELOPMENTS
Tackling Risk to Attract Private Sector Investment in Infrastructure
The latest report from the Global Future Council (GFC) on SDG Investments makes a compelling case for a new approach to de-risking in order to scale up investment in SDGs including infrastructure. The GFC is an expert group driving new thought leadership for investment in Sustainable Development Goals. Their report titled “Leveraging the Power of Non-financial De-risking Measures to Attract Private Sector Investment” proposes non-financial de-risking measures that unlike financial de-risking measures look to address underlying factors in the investment environment that make investments less attractive. Such innovative solutions are needed now more than ever in the course of Africa and the world’s recovery from the COIVD-19 pandemic by opening up private investment in areas critical for the achievement of the Sustainable Development Goals including infrastructure development.
The report details how non-financial de-risking measures seek to eliminate the root causes of financial risks that manifest in specific transactions. The approach focusses more broadly on the macro level seeking to address systemic effects within the investment environment. Traditionally financial de-risking measures tend to add to the cost of transactions and ultimately lead to a higher solution cost to users whereas non-financial measures ideally are not factored into specific projects. While financial de-risking measures have an almost immediate impact the non-financial measures on the other hand have a longer time horizon needing consistent implementation before desired results become evident. Importantly, the proactive tack of non-financial de-risking measures ultimately reduces the costs of financial de-risking interventions by creating a more favourable investment environment.
The report goes further to demonstrate the positive impact of non-financial de-risking measures citing the example of South Africa’s Renewable Energy Independent Power Producers Procurement Programme (REIPPPP). The ambitious program seeks to substantially increase the share of renewables in the country’s energy mix with an additional nearly 18 GW from the 2010 baseline by 2030. The enhanced standards in technical evaluations introduced through the contributions of external advisors helped increase confidence in their integrity. Other accompanying non-financial de-risking measures included visible political will, refined procurement processes as well as policy and regulatory clarity, all leading to a notable decrease in investor risk perception.
New Infrastructure Financing Prospects
Fuelling the continent’s economic recovery and the accompanying infrastructure development will require an ever growing amount of financial resources. UNCTAD estimated that the post-COVID-19 recovery in Africa would cost more than USD150 billion in addition to an already existing USD200 billion annual gap in SDG financing. The USD93 billion infrastructure gap is arguably much larger now driven by a new urgency for resilient infrastructure including digital and climate related needs. In that context African governments have far less room to invest in these, with public debt levels expected to surge well past 60% of GDP this year. The heightened risk of over indebtedness and the monetary stimulus scale back by inflation cautious central banks means an increased reliance on donor initiatives and private investment.
The USD650 billion Special Drawing Rights allocation may well serve as an important source of funding for infrastructure development. This is especially the case for the much anticipated USD100 billion in SDRs that developed nations are expected to redirect to developing countries. These are expected to be disbursed in the form of low interest loans as well as grants targeting priority areas such as climate resilience. The SDRs would therefore be an ideal source of infrastructure funding to help create attractive conditions to crowd-in private sector investment without adding to the public debt burden.
Many of Africa’s own domestic financial institutions continued to collaborate with their international partners over the quarter to mobilise more resources for infrastructure development. For example Africa Finance Corporation announced the creation of an independent asset management arm called AFC Capital Partners that will raise a debut USD500 million Infrastructure Climate Resilient Fund as part of a multibillion dollar fundraising effort over the next three years. The fund is expected to invest directly as well as jointly with partners to improve the quality of African clean energy, communications and transport infrastructure. Africa50 also announced the creation of a new Fund to be called the Africa50 Infrastructure Acceleration Fund, which is aimed at catalysing further investment flows into African infrastructure by raising USD500 million in multiple closings, for investment across the continent. In the interest of deepening the role of Islamic finance as a key source of infrastructure financing, the Islamic Development Bank and the World Bank launched a special report during the quarter. Entitled “Reference Guide: Islamic Finance for Infrastructure PPP Projects,” the report highlights the Islamic finance alternatives that can help address the public infrastructure financing gap as well as relevant structures for infrastructure PPP projects.
Build up to COP 26 UN Climate Change Summit
As the 26th Conference of Parties to the UN Climate Change Summit draws ever closer, stakeholders continue to issue position papers as part of the build up to the exchanges at the summit. One recent notable white paper was released by the World Economic Forum in partnership with Deloitte. Entitled “Financing the Future of Energy”, the report outlines existing viable financing options for clean energy sustainability and equitable recovery for the whole continent. Premised on “the 3Ds” of Decarbonisation, Decentralisation and Digitalisation, the journey towards a net zero power grid will require that Africa leverages existing financial solutions while creating an attractive landscape for private players through a renewable energy investment facility.
The report suggests that new partnerships with a broad cross section of players including NGOs and developed nations will be necessary to help coordinate and empower countries to successfully navigate the just energy transition. This is especially so where there is need to overtake existing technologies and infrastructure through the effective deployment of “digitally smarter utility platforms and sustainable development programmes” among other necessary innovations. With up to half of the continent lacking adequate access to electricity that energy gap must be met through clean energy solutions backed by innovative sustainable financing mechanisms.
As part of the continued pre-summit build up the UN hosted the Africa Climate Week this September focusing on integrating ambitious action in key economic sectors into national planning, adapting to climate risks and building resilience as well as seizing transformational opportunities to put the region on a low-emission and highly resilient development pathway. According to the United Nations Environment Programme, the annual adaptation costs in developing countries, currently estimated at USD70 billion, will rise to USD300 billion by 2030. The summit will therefore need to ensure to mobilize sufficient climate finance resources to African countries.
ROUND-UP OF THIRD QUARTER 2021 TOP INFRASTRUCTURE AND FINANCE DEALS
Notable Power deals… The governments of Egypt and Saudi Arabia signed the project agreements for the USD1.8 billion, 900km-long interconnector; The Nigerian government announced the approval of the 220 kilometre Calabar-Ikom 132 Double Cable Transmission Line in south-eastern Nigeria at a cost estimated at USD40 million.
Notable Renewable Energy deals… The German government will contribute USD134.5 million to the African Development Bank’s Sustainable Energy Fund for Africa (SEFA); NEoT Offgrid Africa and Winch Energy Limited invested USD12 million in solar mini-grid projects in Uganda and Sierra Leone to improve energy access for all; HDF Energy reached financial close on the USD200 million world’s first base load renewable energy power plant using hydrogen technology; IFC, Ninety One’s EAIF, the African Development Bank (AfDB) and the Development Bank of South Africa provided EUR178m (~USD211m) in financing to develop the Kinguélé Aval hydroelectric dam in Gabon.; Ninety One’s EAIF agreed to provide EUR25m (~USD29.5m) in financing to Ivoire Hydro Energy to build a 44MW hydro electricity generation plant in Côte d’Ivoire; The board of the Green Climate Fund (GCF) approved USD170.9 million in financing for the African Development Bank’s (AfDB) Leveraging Energy Access Finance Framework (LEAF) programme; The African Development Bank reached a financial close on a USD20 million concessional investment from the Sustainable Energy Fund for Africa (SEFA) for the COVID-19 Off-Grid Recovery Platform (CRP); UK Climate Investments invested USD34 million into Africa’s first dedicated renewable energy yieldco managed by Revego Fund Managers; Gridworks and New GX have announced a USD40 million investment into Sustainable Power Solution Investments; The Ultra Green Corporation will construct the 200MW Serenje PV Solar Power Plant for a total investment of USD336 million.; The Private Investment Development Group (PIDG) will provide USD29 million towards the 44MW Singrobo-Ahouaty Hydro Power Plant in southern Côte d’Ivoire.
Notable Oil and Gas Infrastructure deals… The Nigerian National Petroleum Corporation, the Gas Aggregation Company of Nigeria and the Kano State Government signed an MOU for the 614 kilometre NNPC-AKK Gas Pipeline Project. The project is being implemented on a Build Own Operate Transfer (BOOT) Public Private Partnership (PPP) basis at an estimated cost of USD2.8 billion.
Notable Water and Sanitation deals… The European Investment Bank (EIB) and KfW of Germany look set to provide 135 million Euros (about USD158.5 million) for the Lusaka Sanitation Project; The Bita Water Supply Project in Luanda costing an estimated USD1.09 billion will receive funding from Standard Chartered Bank of the UK, BNP Paribas of France, Société Générale of France, Crédit Suisse and Crédit Agricole Corporate and Investment Bank. The project is partially guaranteed by the World Bank Multilateral Investment Guarantee Agency (MIGA) and the Africa Trade Insurance Agency (ATI) is providing support.
Notable Transport deals… the African Development Fund approved a loan of around USD116 million to the Tanzanian government to upgrade a 160-km Mnivata-Newala-Masasi road corridor in the southern part of the country; The Ivorian government will spend CFA308 billion (USD550 million) to rehabilitate the “Coastal Road” which links Abidjan to San Pedro; The EBRD is considering a €250 million loan to the government of Egypt for the €1.6 billion Alexandria Metro project; The EIB is taking stock of a potential €113 million loan for the €275 million rehabilitation of the 596km road from Chad’s capital city N’Djamena to the Cameroon border; The Passenger Rail Agency of South Africa (PRASA) announced restoration of the Cape Town Central Rail Line at an estimated R3 billion or about USD211 million.; The Senegalese government announced the rehabilitation of the 1230 kilometre Dakar-Bamako Rail Line at an estimated cost of USD2 billion.; SAPRO Mayoko concluded an agreement with Thelo DB partnership for the construction of the 410 kilometre Pointe Noire-Mayoko Station Rail Line in south-western Republic of the Congo for 600 billion CFA or about USD1 billion; The African Development Bank (AfDB) announced its approval of a loan of 219 billion CFA or about USD392 million for the development of the Kribi Deep Sea Port and Industrial Complex on the coast of south western Cameroon.
Notable ICT deals… CDC Group announced the investment of USD50.9 million in the digital and ICT sectors in sub-Saharan Africa; Benin and China signed close to USD40 million concessional loan agreement for the implementation of the broadband internet project PDRHD; Convergence Partners reached a USD120 million first close for its Convergence Partners Digital Infrastructure Fund to invest in the digital infrastructure ecosystem in Africa, specifically in fiber, wireless, data centres and towers, as well as 5G, cloud, IoT, AI, fintech and network virtualization; A consortium led by Metier and including CDC Group, DEG and Proparco invested USD36 million in Africa Mobile Networks, a developer and operator of mobile network base stations in Sub-Saharan Africa; Teraco Data Environments is planning investments totalling R6 billion (about USD411 million) for new and expanded Vendor-Neutral Data Centres in South Africa.
Other Notable Infrastructure deals… Sanlam Investments reached a ZAR500m (~USD34.5 million) first close for its Sustainable Infrastructure Fund. The vehicle will mostly provide debt financing for projects in the renewable energy, conventional energy, housing, transportation, communication, health, water and waste sectors in South Africa; The EBRD has approved a USD29.6 million loan for an Elsewedy-led consortium to develop the DP6 in the Giza Governorate, Egypt; Pan-African infra investment platform Africa50 has created the Africa50 Infrastructure Acceleration Fund, aiming to raise USD500 million in multiple closings; The Africa Finance Corporation is creating an independent asset management arm, AFC Capital Partners, which will debut with a USD500million Infrastructure Climate Resilient Fund (ICRF).; The Somaliland government and DP World have announced a second phase expansion of Berbera Port at a cost of USD 442 million.; The Banque Arabe pour le Développement en Afrique (BADEA) has concluded a loan agreement of 25 billion CFA (USD45 million) with the Ivorian government for the Abobo University Teaching Hospital in Abidjan.
The global economic recovery from the COVID-19 pandemic remains strong, albeit uneven. Increasing economic tensions fuelled by deepening inequality could undermine the recovery if not well managed by policymakers. Price rises and stretched supply chains as economies re-open rapidly are pushing up inflation everywhere although this is expected to be temporary. The OECD recently proposed the following urgent policy actions to strengthen the recovery; step up international efforts to provide low income countries with the resources needed to vaccinate their populations; remain vigilant for signs of more persistent inflation; maintain government support to people and businesses hit hard by the pandemic; clearly set out fiscal and monetary policy plans for the recovery; target in particular the young, the low-skilled and other vulnerable groups with help, education and training to get jobs; and increase public investment for the future, in health, digital and energy infrastructure. Growth in African infrastructure finance will fundamentally rely on a well-coordinated global and local policy environment.
AMETrade continues to provide platforms for engagement among all stakeholders to deepen the necessary dialogue and cooperation through its hybrid events, digital events and information.