AMETRADE INFRASTRUCTURE FINANCE – 1ST QUARTER 2021
In the year to date, the COVID 19 global pandemic continued to loom large on lives and livelihoods. The constantly shifting dynamics of the pandemic’s impact and the responses to it have resulted in a widening divide in regional circumstances ranging from steady reopening in Europe to a devastating third wave in India. Optimism for a faster recovery which was founded on the prospects for a swift vaccination rollout has receded somewhat as supply issues have hampered progress. The pandemic continues to expose variances in the sustainability and resilience of different infrastructure assets. Demand for transport infrastructure has correlated with restriction cycles with marked drops in traffic which adversely affected debt arrangements and equity valuations but utilities on the other hand proved to be very resilient. While the pandemic is still clearly a challenge that the WHO predicts is on course for its deadliest year in 2021, there is an increasing focus on the economic recovery which bodes well for African economies and investment in infrastructure.
INFRASTRUCTURE AND FINANCE – YEAR TO DATE
Africa’s Debt Concerns
The 4th Pension Funds and Alternative Investments Africa conference reflected on the impact of the pandemic particularly on the continent’s debt outlook and the implications for economic recovery. African economies have been hit hard especially tourism-dependent economies, oil-exporting economies, and other resource-intensive economies. The outbreak brought to the fore the deepening inequality across the continent. Government spending in response to the pandemic skyrocketed and had a direct negative impact on budgetary balances and debt burdens. Consequently, the average debt-to-GDP ratio for Africa is expected to climb by 10 to 15 percentage points in the short to medium term. According to the African Development Bank’s Africa Economic Outlook report 2021 which puts a spotlight on the impact of COVID-19 and government debt, recent debt restructuring experiences in Africa have been costly and lengthy because of information asymmetries, creditor coordination problems, and the use of more complicated debt instruments.
French President Emmanuel Macron hosted a summit in Paris on Africa financing mid-May which agreed to work towards persuading rich nations by October to reallocate USD100 billion in IMF special drawing rights monetary reserves to African states. This will be part of a proposed financial package needed to provide post-pandemic economic stimulus for the continent to help cover a spending shortfall of some USD285 billion over the next two years. The summit set out a two-pronged approach to support sustainable, green recovery and the underpinning of private-sector-driven growth. Among the goals outlined were doubling COVID-19 vaccination targets for Africa by the end of 2021 under the COVAX vaccine-sharing scheme and giving Africa the ability to produce and distribute vaccines domestically.
Deal Activity and Notable Initiatives
In April global law firm Baker McKenzie published a report, New Dynamics: Shifting Patterns in Africa’s Infrastructure Funding which reflects the state of African infrastructure and how major global players’ approach to infrastructure lending on the continent is changing. The report shows a decline in the value of infrastructure lending with bilateral and multilateral lending into Africa dropping to USD31 billion in 2020 from USD55 billion in 2019. This was attributed in part to the COVID-19 pandemic. However, market fundamentals show a region with underlying resilience, and as the global economy recovers so too should infrastructure investment. This view was also shared by several speakers at the recent Pension Funds and Alternative Investments Africa 2021 Virtual conference. The view is that the long-term nature of infrastructure projects means that international partners are unlikely to withdraw their commitment due to the immediate pressure on national finances.
The report highlights infrastructure gaps in energy, internet access and transport that require new sources and finance outside that from traditional lenders and international partners. Development Finance Institutions (DFIs) are increasingly forming the backbone of infrastructure finance in Africa as they have a better appetite for political risk and access government projects in ways that other banks may not while having a specialised capacity for facilitating long-term lending. According to the World Bank private participation in infrastructure investment fell in all regions except sub-Saharan Africa and the Middle East and North Africa, where development finance institutions played a strong role.
As the drive to build back better gains further traction on the continent the African Development Bank has partnered with the Climate Investment Funds to release a scoping report highlighting the impact of combining green banks and national climate funds to accelerate green financing. The two sectors identified as key priorities to boost climate mitigation include renewable energy and climate-smart agriculture followed by green cities infrastructure. The continent’s most advanced pension fund industry in South Africa looks set to contribute more to infrastructure development. The draft Amendments to Regulation 28 of the Pension Funds Act published by the National Treasury will seek to allow retirement funds to invest up to 45% of their assets in infrastructure opening a potential source of funding for domestic infrastructure projects. Furthermore, the South African government committed to a R791.2 billion (about USD56.5 billion) infrastructure investment drive. “We are already partnering with the private sector and other players to rollout infrastructure through initiatives such as the blended finance Infrastructure Fund” said the Minister of Finance recently. To improve access to African markets, the country’s six busiest border posts will be upgraded and expanded using the PPP model.
ROUND-UP OF YEAR-TO-DATE TOP INFRASTRUCTURE AND FINANCE DEALS
Notable Power deals… The national power utility of Mozambique, Electricidade de Mocambique (EDM) received funding of USD250 million for the Temane Gas Power Plant project from the United States International Development Finance Corporation and OPEC; The Nigerian government announced that USD1.6 billion was secured for the National Power Transmission Network Rehabilitation and Extension Programme; AfDB approved USD530 million for Angola’s Central-South Transmission Line that will connect the northern and southern region grids; Africa50 and Oragroup agreed on a bridging loan of about USD80 million for the Malicounda Power Plant situated some 70 kilometres from Dakar; Togo officially launched the Project For Reform And Investment In The Energy Sector Of Togo (PRISET) supported by the World Bank to the tune of about USD35,3 million; The World Bank approved $250 million to improve the operational performance of the electricity sector utilities and increase electricity access in selected cities of Angola; The European Bank for Reconstruction and Development (EBRD) provided USD361 million in financing to support the stability of Tunisia’s electricity provider Société Tunisienne de l’Electricité et du Gaz (STEG); The World Bank approved a USD50 million grant from the International Development Association (IDA) to improve access to electricity in Sierra Leone; JICA signed with Egypt a USD237 million loan for a power sector reform programme.
Notable Renewable Energy deals… The European Bank for Reconstruction and Development (EBRD), the OPEC Fund for International Development (the OPEC Fund), the African Development Bank (AfDB), the Green Climate Fund (GCF) and Arab Bank signed a USD114 million financing package with ACWA Power for the construction of the Kom Ombo solar plant in Egypt; The Trade and Development Bank launched a USD75 million TDB SME Off-Grid Facility, which will facilitate access to debt financing for SMEs; The Multilateral Investment Guarantee Agency (MIGA) issued guarantees of up to USD25.6 million to Escotel Mauritius covering its investments in solar power generation in Liberia and Sierra Leone for a period of up to ten years; AfDB approved USD15 million from the Sustainable Energy Fund for Africa (SEFA) and USD10 million from the Clean Technology Fund (CTF) to advance African Renewable Energy Fund (AREF) II’s projects to boost low-carbon energy generation in sub-Saharan Africa; MIGA issued guarantees of up to USD37.1 million to the African Infrastructure Investment Fund 3 (AIIF3); The International Finance Corporation (IFC) announced a loan of up to USD150 million to ABSA Bank to create Africa’s first certified green loan; ACWA Power announced the commencement of construction on the 100MW Redstone project following achievement of financial close; SunFunder reached a USD70 million final close for its Solar Energy Transformation (SET) Fund, a blended finance vehicle focused on distributed solar and storage investments in Africa and Asia; Ninety One’s EAIF agreed to provide approximately USD34.6 million in financing to Urbasolar, the developer of a 30MW solar plant in Burkina Faso.
Notable Oil and Gas Infrastructure deals… Mozambican government announced the approval by Sasol of the Final Investment Decision (FID) of the Inhassoro Gas Fields valued at USD755 million. The development includes a 450 MW gas-fired power plant, a liquefied petroleum gas facility and infrastructure for light oil exports; On 11 April 2021, Total of France and the China National Offshore Oil Corporation (CNOOC) concluded a Final Investment Decision (FID) with the governments of Uganda and Tanzania for the implementation of the East Africa Oil Project. The project includes an oil refinery in the Hoima area of Uganda drawing oil from Lake Albert and a 1 440-kilometre pipeline transporting the Lake Albert crude production to the port of Tanga in Tanzania. It is estimated that the project will attract some USD10 billion in investments; The Senegalese petroleum distribution company, the Elton Group has announced that it will be investing USD121 million in the Dakar Gas Terminal at the port of Dakar.
Notable Water and Sanitation deals… The Japan International Cooperation Agency (JICA) and the Mozambican government concluded a USD18.5 million grant agreement for the development of a Rural Water Supply Facility in Niassa Province, northern Mozambique; The U.S. investment fund Water Equity Global Access Fund secured the first USD25 million of a USD100 million credit line from the U.S. International Development Finance Corporation (DFC). The facility will be on-lent to financial institutions in emerging markets that will finance, through microcredit, projects that will provide at least 5 million people in Africa, South America and Asia, with access to clean water; The African Development Bank Group will loan Egypt USD129,8 million to improve sanitation infrastructure and services to rural communities in Luxor Governorate in Egypt’s Upper Nile region; The European Investment Bank (EIB) will provide USD138,39 million in financial support to improve the drinking water supply and promote integrated solid waste management in Senegal.
Notable Transport deals… Uganda obtained a USD57 million loan from the European Union (EU) for the Tororo-Gulu railway line linking the country with South Sudan; The African Development Bank (AfDB) will be funding phase 1 of the 85-kilometre Kampala-Jinja Expressway to the tune of USD229 million. The project is a Public Private Partnership (PPP); The Gabonese government approved the construction of the Owendo Port-Rn1 Link Road as a Public Private Partnership (PPP) between the government and the Société d’Aménagement du Grand Libreville (Greater Libreville Planning Company, SAGL).
Notable ICT deals… The African Development Bank (AfDB) through its specialised fund, the Africa Digital Financial Inclusion Facility (ADFI) approved a grant of USD2,3 million towards the cost for the Modernisation Of Banking Pay Systems for the EthSwitch Share Company; Africa Infrastructure Investment Managers (AIIM) acquired a majority share in Ngoya Etix Ghana Limited for the acquisition and further development of the country’s largest carrier neutral Onix Accra 1 Data Centre Platform situated in the great Accra area. The funding is drawn from AIIM’s Africa Infrastructure Investment Fund (AIIF) 3; Ninety One’s EAIF agreed to purchase up to USD50 million of a bond issued by fibre network company Liquid Telecommunications; Meridiam agreed to invest USD48 million in pan-African data centre developer Raxio Group as part of a partnership that will help develop a network of data centres in Africa.
The African Development Bank in its 2021 African Economic Outlook report expects the continent to weather the challenge of a global pandemic and external economic shocks to recover from its worst recession in 50 years and reach 3.4% economic growth in 2021. Presenting the report during a virtual launch ceremony, AfDB Vice President and Chief Economist Rabah Arezki cautioned that Africa’s predicted growth could be subject to major downside risks arising from both external and domestic factors. Despite the projected growth, an estimated 39 million Africans could possibly slip into extreme poverty this year, following about 30 million who were pushed into extreme poverty in 2020 as a result of the pandemic. The report adds that those with lower levels of education, few assets and working in informal jobs are the most affected and need to be protected.
The report made important recommendations for a multi-pronged policy approach to addressing the pandemic including supporting the health sector with resources for health care systems to cope with the virus and other preventable diseases; monetary and fiscal support to underpin economic recovery; expanding social safety nets and making growth more equitable; and minimising the long-term implications of the pandemic on human capital accumulation by opening schools and scaling up active labour market policies to retool the labour force for the future of work through digitalisation, industrialisations and diversification.
The continental push for a green recovery and growth also continues to strengthen. While speaking at the European Union-Africa Green Investment Forum, AfDB President Dr Akinwumi Adesina touted Africa’s enormous green growth opportunities. “Africa is a huge market offering incredible opportunities. The recovery pathway offers enormous opportunities. Recovery must be green and build climate resilience. Recovery must boost green investments,” Dr Adesina said. He identified energy, agriculture and infrastructure as vital areas of investment for a post-COVID-19 recovery in Africa. Citing the continent’s abundant solar, wind, hydro and geothermal energy resources, Africa’s energy transition alone presents a USD100 billion per year investment opportunity, he added. Climate-resilient infrastructure offers investment potential of between USD130 billion and USD170 billion. Dr Adesina urged investors to seize the opportunities presented by climate change which would be worth USD3 trillion by 2030 with over 70% of the financing needed expected to come from the private sector to complement public investments.
The outlook for the next quarter will continue to track the progress of the Covid vaccination rollouts which are still comparatively low in Africa with an average coverage rate still in the single digit percentage range. Furthermore, markets will look at the strength of the ongoing economy recovery and the prospects for improved infrastructure financing and investment. According to the recent Pension Funds and Alternative Investments Africa conference, project bankability and risk mitigation will continue to be key determinants for stronger infrastructure investments hence the need to prioritise de-risking mechanisms that will open further the space for private investment in infrastructure. The recent Paris summit on finance is one such key initiative and implementation details and proposals may become clearer in the coming quarter.
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