AMETRADE INFRASTRUCTURE FINANCE – 2ND QUARTER 2021
In the second quarter (2021) the COVID 19 pandemic continued to have a strong bearing on economic activity in Africa where an even more ominous third wave took root driven by new highly transmissible variants of the virus. Most countries attempted to avoid hard lockdowns to provide room for the fledgling economic recovery to continue to gather pace. Although stronger global economic activity and higher commodity prices have supported economic recovery, the low vaccination rates, as well as the combination of secondary waves and response measures, are still undermining economic growth prospects on the continent. This in part explains why the International Monetary Fund projects that Sub Saharan Africa’s economic growth in 2021 will be the slowest of any region in the world and the continued threat of debt distress as a result of widening budget deficit financing.
According to the World Bank Global Economic Prospects report released in June 2021, foreign direct investments in Sub Saharan Africa have been resilient, recouping some 90% of their pre-pandemic levels. Furthermore low interest rates have seen more African countries returning to the international debt market. While these two conditions may create space for growth in infrastructure investment the World Bank still sees policy uncertainty and the protracted effects of the pandemic as key causes of delays in major infrastructure investments. Green and digital infrastructure continued to grow in importance as a priority during the quarter with several initiatives announced in the build up to the 26th Conference of Parties (COP26) UN Climate Change Summit slated for the UK in November 2021.
Overall, World Bank projections are that higher vaccination coverage, supportive macroeconomic conditions and a rally in commodity prices would strengthen economic recovery on the continent. This would in turn bode well for infrastructure financing and investment prospects going forward.
SECOND QUARTER 2021 INFRASTRUCTURE FINANCE DEVELOPMENTS
Development Finance Institutions Leading the Recovery
The 56th Annual Meetings of the African Development Bank held during the quarter came up with some strong resolutions and plans to support Africa through the COVID-19 pandemic. Key among them was that the bank would serve as a conduit for International Monetary Fund (IMF) Special Drawing Rights for on-lending to African countries. The bank further committed to support essential infrastructure developments within Africa’s healthcare system to bridge for example the 49% of public health facilities that do not have basic water and sanitation as well as the 69% that don’t have access to electricity. Green growth was key on the agenda notably the Africa Adaptation Acceleration Program a joint initiative between the Global Centre on Adaptation and the bank set to mobilise USD25 billion to accelerate climate change adaptation across Africa, part of which will focus on green infrastructure.
At the recent G7 summit the group’s development finance institutions committed to invest USD80 billion in the private sector over the next five years to support sustainable economic recovery and growth in Africa. This is expected to help bridge the USD425 billion in additional financing which the IMF estimates that Sub Saharan Africa will need between now and 2025 in response to the pandemic and to meet development goals including infrastructure development. The G7 DFI group consists of CDC (UK), Proparco (France), JICA and JBIC (Japan), DFC (US), FinDev Canada, DEG (Germany) and CDP (Italy) supported by the IFC, Africa Development Bank, EBRD and the European Investment Bank.
New Infrastructure Financing Vehicles
In June the African Union Commission hosted the third ordinary virtual session of the Specialised Technical Committee on Transport, Transcontinental and Interregional Infrastructures and Energy (STC-TTIIE) which ran under the theme ‘The Role of Infrastructure & Energy in the Post COVID-19 Africa; Towards Sustainable Economic Recovery, Resilience, Jobs, Industrialization & Trade.’ The sessions serve as a platform for cooperation and integration among the AU Member States, RECs, the private sector, and partners to exchange knowledge and experiences to address common challenges in the infrastructure and energy sector.
In his address to the ministerial session, the African Union’s High Representative on Infrastructure Development in Africa, Raila Odinga, highlighted infrastructure’s crucial role in unlocking socio-economic growth in Africa by boosting industrialization and trade in the continent, adding, “the ambitious continental framework for trade within the continent under the African Continental Free Trade Area (AfCFTA) would only be realized through sound infrastructure in transport and energy sectors.” The session also adopted the Programme for Infrastructure Development in Africa Priority Action Plan 2 (PIDA PAP2) Financing Strategy which was developed by the African Development Bank (AfDB). The Financing Strategy calls for reinforcing coordination among stakeholders to ensure that financing of infrastructure is enhanced with new vehicles.
Build up to COP 26 UN Climate Change Summit
The UK will host the 26th Conference of Parties to the UN Climate Change Summit in November 2021 and the lead up to the summit has shone a brighter spotlight on green infrastructure investment and development. The Sustainable Energy Fund for Africa (SEFA) recently extended a USD1 million grant to help accelerate African countries’ transition to cleaner energy sources. The technical assistance grant, provided through the fund’s Rapid Response Facility, will assist five African countries participating in a COP26 Energy Transition Council process to establish potential gaps in policy, regulatory and institutional frameworks; develop approaches to increase the contribution of grid-connected renewable energy generation; as well as identify financing mechanisms.
The United Kingdom established the COP26 Energy Transition Council in September 2020 to promote the shift to clean energy ahead of COP26. Participants include multilateral development banks, international financial institutions, technical cooperation organizations and donor Governments.
ROUND-UP OF SECOND QUARTER 2021 TOP INFRASTRUCTURE AND FINANCE DEALS
Notable Power deals… The World Bank has allocated a total of USD200 million to support the government of Benin in its effort to improve access to electricity in the country; African Development Bank approves loan of €83 million for Egypt’s electricity sector; Rwanda receives an USD84.22 million financing package from the African Development Bank to boost electricity access.
Notable Renewable Energy deals… Africa Renewable Energy Fund II secures €130 million first close with SEFA and CTF investments; South Korea and the African Development Bank to spend USD600 million on energy projects; FSD Africa Investments invests USD4.5 million in Nithio FI to support the scale up of off-grid energy access in African markets; CDC Group commits USD50 million to 100MW Redstone renewable power project in South Africa.
Notable Oil and Gas Infrastructure deals… Angola and Zambia have concluded a Memorandum of Understanding (MOU) for the implementation of the Angola-Zambia Oil Pipeline (AZOP) that will link a refinery in Lobito to a depot in Lusaka. The cost of the project is estimated at USD 5 billion; the governments of Kenya and Tanzania have signed a Memorandum of Understanding (MOU) for the implementation of the 600 kilometre Dar Es Salaam-Mombasa Gas Pipeline. The cost is estimated at USD1,1 billion; The Benin Ministry of Mines and the West African Oil Pipeline Company (WAPCO) Benin have launched construction of the initial 684 kilometres in Benin territory of the 1 980 kilometre Niger-Benin Crude Oil Export Pipeline. The cost is estimated at USD7 billion.
Notable Water and Sanitation deals… The African Development Bank (AfDB) through its Sustainable Energy Fund for Africa (SEFA) has approved a grant of USD1 million towards the development of the Deep Oceans Water Applications Project (DOWA); Eastern Water and Sanitation Company Limited (EWSC) has concluded a Memorandum of Understanding (MOU) with an unnamed financier for the undertaking of a needs assessment for the Rehabilitation Of Water And Sanitation Systems In Eastern Province (Zambia). The cost of the project is estimated at USD300 million. The contract will be undertaken on a Public Private Partnership (PPP) basis; the feasibility study for a new Desalination Plant in the Erongo Region of Namibia has been completed. The government intends attracting the required finance through a Public Private Partnership (PPP) in collaboration with Namwater as the responsible authority.; South Africa’s Trans-Caledon Tunnel Authority (TCTA) has raised just over R15 billion (USD1.05 billion) in capital markets to continue construction of the Lesotho Highlands water project.
Notable Transport deals… Dubai Ports World and the Ethiopian Ministry of Transport have signed a Memorandum of Understanding (MOU) for the development of the Berbera-Ethiopia Logistics and Trade Corridor. DP World will help raise an investment of USD1 billion for the project; The African Development Bank (AfDB) is contributing USD166 million to the realisation of the 1 160 kilometre Libreville-Brazzaville Transport Corridor linking Gabon and the Republic of the Congo.
Notable ICT deals… The Vodafone consortium that won the first private telecommunications operating licence in Ethiopia will invest USD8,5 billion over the next ten years; World Bank grants Tanzania USD150mln to improve broadband connectivity; Africell, a fast-growing mobile network operator in Africa has closed a major commercial loan facility of USD105 million for expansion in Africa. This financing is a syndicate from a leading group of international financial institutions constituting new and existing lenders to Africell.
Other Notable Infrastructure deals… BancABC of the Atlas Mara financial services group has concluded a major USD11 million Housing Deal with the pan African housing agency, Shelter Afrique for the construction of 2 500 housing units for the low and middle income groups.; African Development Bank launches AUD$600 million (USD$463.9 million) Kangaroo Social Bond; CDC Group leads USD36 million investment round into South African affordable housing platform Divercity; PIDG-member InfraCo Africa has signed with Cardano Development a joint development agreement for a credit enhancement facility to support domestic capital investment in Kenya’s infrastructure sector.
The World Bank’s June 2021 report on global economic prospects foresees firmer economic growth and recovery in Sub Saharan Africa driven by strong external demand particularly from the world’s two largest economies the US and China. Growth in 2021 is projected at 2.8% and an even stronger 3.3% in 2022. This will however be dependent on higher commodity prices and better outcomes in the fight to control the COVID 19 pandemic. The later likely being impeded by the current slow vaccination rates.
The report highlights some significant downside risks to continental economic prospects including commodity price drops, higher inflation, natural disasters and conflicts. An abrupt increase in sovereign borrowing costs could result in more acute high debt burdens and fiscal pressures in some countries. However with a faster pace of vaccinations, a sustained commodity up cycle with a consequent rise in consumer and business confidence, Africa could see an even stronger recovery. When these conditions are supported by pro-active and consistent government policy certainty then the infrastructure investments pipeline may also start to flow at levels seen before the pandemic.
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