Fertile ground for first movers and innovative investors

15 Jun Fertile ground for first movers and innovative investors

Alain Ebobissé, Chief Executive Officer of Africa50, on opportunities associated with closing the infrastructure gap

On April 7, 2016, you were appointed CEO of Africa50. This institution was established to help bridge Africa’s infrastructure funding gap by facilitating project development. Taking into account that the year 2020 was a challenging one for everyone, what is your summary of your first four years in office?

I can say that I’m very satisfied with Africa50’s progress to date—in fewer than five years since my appointment we have built a fully operational and very credible infrastructure investment platform. We have invested in 11 projects across the continent, with one exit. We invested in four key areas of focus, which are: energy, midstream gas, transport and information and communications technology (ICT).

So far, most of our investments have been in power generation; energy is arguably Africa’s most pressing need. We have invested in six solar plants in Egypt, among them the 1.5-gigawatt Benban Solar Park, one of the largest in the world currently in operation and connected to the grid; we have also invested in two hydropower projects that are still under construction—the 420-megawatt Nachtigal plant in Cameroon, and the 120-megawatt Volobe plant in Madagascar. These investments are part of our commitment to contributing to Africa’s energy transition. In fact, over 50% of our current portfolio of investments is in renewables: we take renewables investment very seriously.

However, we also invest in midstream gas and natural gas infrastructure, because natural gas is a cleaner fuel than coal and oil, and we believe that it can be used as a bridge fuel to help Africa as a continent to meet its energy needs as it transitions to 100% renewables in the long run. To this end, we have invested in Nigeria’s first independent power company, Azura-Edo, which operates natural gas-fired plants; in Senegal, we are developing the 120-megawatt Malicounda power plant, which will be converted to natural gas when it becomes available from domestic fields.

Energy transmission is another key sub-sector we are starting to focus on, and we have agreed with the government of Kenya that Africa50 will develop transmission lines under the first major public-private partnership transmission project in Africa—quite an exciting opportunity. In the transport sector, we have invested in the expansion and upgrade of the Gbessia Conakry International Airport, Guinea. We are also looking at a very important project, which is  “The Bridge Linking Kinshasa and Brazzaville project”. This would be the first bridge to link the capitals of the Democratic Republic of Congo and the Republic of Congo. These two cities are separated by a river, so this bridge will be able to connect two cities with about 12 million people in Kinshasa and 4 million in Brazzaville—this is an important project that will also boost regional integration; it is a really strategic link to the transport corridor in that region.

ICT is a very important sector; we have seen that ICT has helped a lot during the pandemic. Right now, we’re talking through Zoom because there is broadband connection, and we need to make sure that we bring ICT broadband across Africa. We at Africa50 have invested in the Kigali Innovation City, a pan-African technology hub in Rwanda, which is still in development. I would also like to mention a very innovative transaction that we did a couple of years ago called Room to Run—a Risk Protection Agreement related to $1 billion of pan-African loans held by the African Development Bank (AfDB), which was structured as a synthetic securitization; Africa50 invested in Room2Run alongside Mariner Investment Group, a US investment firm.

I will finish by saying that, despite the pandemic, we continue to build a strong pipeline of projects that will bring infrastructure development needs in Africa forward. I should also say that over the last five years, we’ve made some progress in terms of our shareholder base: today, we have 28 African countries as shareholders; the African Development Bank (AfDB) is one of our shareholders, and we have two African Central Banks as shareholders, the Central Bank of West African States and Bank Al-Maghrib.

Finally, one of the things that I am most proud about is that we brought together a team of world-class, experienced project developers and financiers. Together, we have managed to build an organization that is bringing into play innovative market-driven investment approaches, in addition to supporting the preparation of bankable infrastructure projects. We have shown our ability to leverage our strong relationship with African governments and development finance institutions, our solid expertise and our capital, to drive greater private sector investments into African infrastructure. We are very happy with what we have achieved so far, in less than five years of operations.

You are a respected expert on infrastructure development and projects. One of the questions that we would like to ask is if you think that African Banks and financial institutions have the expertise, the instruments, the capacity and the will to play their part, in accelerating the development of infrastructure and key projects on a continental level?

In terms of pre-Covid-19 numbers, the AfDB estimated the overall infrastructure funding needs at $130-170 billion a year, leaving a financing gap of $64-108 billion a year. Closing this gap was important pre-Covid-19, and is even more crucial now, as we need to recover from this pandemic and build back more resilient societies. This will require massive investment in infrastructure and, given the limited resources of governments, attracting private capital is key to closing the gap. There is a global consensus: attracting private capital will be very, very important. This is Africa50’s mandate, and we believe that raising domestic resources within Africa will be essential to mitigating the impact of the capital flight that we typically see during a crisis. So, beyond banks and financial institutions, we are also looking more broadly at private investors and the investment community in Africa, such as private equity funds and institutional investors.

When it comes to African banks and financial institutions, I think they have the capacity to do more, and are increasingly contributing to infrastructure; the AfDB, as the continent’s foremost development finance institution, is at the forefront of this. Of course, Africa50 is a key institution tackling infrastructure. And there are a few other institutions and banks that are specifically focused on infrastructure, while we see some commercial banks looking at participating in the funding of infrastructure projects. Clearly, there is momentum, but we need to see more participation—the emergence of pan-African banking groups and new technologies such as mobile banking are strengthening competition, deepening financial markets and improving access to finance, including for larger projects. We are seeing more pan-African banks becoming the lead arrangers of syndicated loans for infrastructure, and this trend should continue. As an example, we recently secured a €75 million bridge loan for the completion of one of our projects, the Malicounda power plant, that we are developing in Senegal. This was a local currency facility arranged by a pan-African group called Orabank through a syndication comprising a banking pool of several regional banks. So you see, many banks are finding opportunities in places where European and American banks have pulled out. They are using their local knowledge and relationships.

Having said that, we would very much welcome the participation of global banks in the financing of African infrastructure. We believe that we have attractive opportunities here, and having African banks participating will show the way to global banks. However, beyond the banks and financial institutions, we must also attract more long-term finance from institutional investors, such as African pension funds and sovereign wealth funds. According to the AfDB, pre-Covid-19, the assets under management by African institutional investors alone were expected to rise to $1.8 trillion in 2020, so we need to find ways to channel more of these domestic funds to help close the infrastructure gap. Here, again, we would love to attract more global investors. One way to do that, which we have been promoting at Africa50, is asset recycling. By offering revenue-generating assets such as toll roads, power plants, airports or telecom networks to private investors under concession schemes, governments can unlock the capital they invested in them, which can then be used to fund new infrastructure, or for economic stimulus during the pandemic. Generally, infrastructure is a good investment asset class for institutional investors, since it provides steady, counter-cyclical, long-term cash flows, which is what such investors are looking for. What we’re noticing is that home-grown institutional investors—whose holdings are expanding into stocks and bonds, real estate, infrastructure and private equity—are helping deepen local capital markets. Even pre-Covid-19, the pressure to expand local debt and bond markets was growing, and this should now accelerate. I think it’s very important for us to develop those global capital markets, and we really need to raise more local currency financing and local capital to fund Africa’s infrastructure needs, in partnership with global capital.

You said that in order to create long-term resilience through investments, and considering the effects of Covid-19, while Africa50 still focuses on traditional sectors such as transport and power generation, it is also looking for opportunities in health and sanitation, and redoubling its efforts in ICT. Is this a long-term strategic change? Could you give us some examples?

Africa50 was founded in response to the continent’s most pressing infrastructure needs, especially those where leveraging our capital can speed up development. ICT, along with energy and transport, has always been part of that. Health infrastructure and healthcare have taken on additional importance as a result of COVID, and we’re looking for opportunities where our funding and project development expertise can make a difference. Health infrastructure has historically suffered from constrained public sector budgets and under-funding. Since those who can afford modern care go overseas and returns were low for mass provision, the sector did not attract many private investors. However, with the growth of Africa’s middle class, the growing purchasing power that we have observed in Africa, an increase in employer-provided health insurance and rising health awareness, it is becoming more attractive to invest in healthcare and health infrastructure. I believe that, with help from public funding and impact investors, this can spill over into the mass market. In addition, several countries are instituting universal health coverage, and there are trends—such as the consolidation of health care providers and the arrival of large private equity investors—that should help.

With regard to ICT, Africa is among the fastest-growing markets in the mobile sector and, more broadly, in the telecommunications sector. And given the continent’s favorable demographic trends, investments in digital infrastructure have the potential to create significant commercial value, while also leaving a lasting social impact. One of the areas we are looking into quite actively is broadband connectivity. Indeed, to achieve universal and affordable access to quality broadband by 2030, African countries will need to connect about a billion new users. This will require additional investments of about $100 billion over the next decade, the deployment of nearly 250,000 new 4G base stations and at least 250,000 kilometers of fiber optic cable. At Africa50, we have a number of those projects in our pipeline. We are also interested in new, disruptive and innovative solutions that can help leapfrog some of the constraints and reach more people, in the same way mobile money solutions, which were pioneered in Africa, helped address specific local needs. Beyond that, we believe Africa can pioneer new technologies with great commercial value and export them globally; we have seen recently the appetite of large tech companies such as Microsoft, Facebook and others, who have collaborated with or invested in African start-ups to create new services and technologies.

In addition, we are also looking at a number of investment opportunities in data centers. With the growing population and increased demand for digital infrastructure, the continent’s data centers’ capacity requirements are enormous. According to a recent report from the African Data Centers Association, Africa needs about 1000 megawatts and 700 data center facilities to meet the continent’s growing demands. We believe this is a big opportunity for investors. Finally, building innovative ecosystems such as tech hubs and innovation cities where skills can be developed, and new technology or knowledge shared, will be key. As I mentioned earlier, Africa50 is developing the Kigali Innovation City in Rwanda, which will help develop and produce innovative technologies.

The African Continental Free Trade Area (AfCFTA), could be a “game changer” for the African continent, boosting industrialization and trade, and mobilizing resources in order to improve logistics, transports, communications and much more. Is Africa50 involved in any specific project that is directly linked to the AfCFTA? More generally, what role will Africa50 play?

The AfCFTA is a great opportunity to redirect Africa away from over-reliance on donors, foreign creditors and commodities, and towards cooperation, integration and industrialization, and thus towards sustainable economic growth. Infrastructure demand and opportunities will grow following the implementation of the AfCFTA. In fact, without regional infrastructure links, it will be very difficult to implement AfCFTA, so this is urgent. The Infrastructure Consortium for Africa (ICA) estimated that in 2018 only 2% of the overall $100 billion invested in African infrastructure was for regional projects. We can and we must increase this. The World Bank estimated that full implementation of the AfCFTA could boost Africa’s income by $450 billion by 2035, which would be a gain of 7%, so this could indeed be a game-changer. Many of our projects will contribute to increasing the regional links the continent needs. Among the most relevant projects that we are doing are the expansion of the International Airport in Guinea and the bridge linking Brazzaville and Kinshasa, which I mentioned before. In power, we are also one of the partners who will join the AfDB initiative called Desert to Power, which aims to develop a solar power plant in the Sahel region to provide clean energy to up to 250 million people. Moreover, with 28 countries involved—over half of all African countries—we are in good position to bring stakeholders together to forge regional links, facilitate government relations and structure bankable regional deals, in order to attract private capital.

How much was invested last year in Africa in infrastructure projects, and how much will be invested in the next five years? Who is behind the financing and how much of these investments are you managing from Africa50?

The ICA’s yearly report is the most often cited, but the last complete year goes back to 2018. We can extrapolate, however, that, once the pandemic ends, the trends outlined in that report will continue.

Back in 2018, the ICA reported total commitment for African infrastructure amounting to just over $100 billion, an increase of 24% over 2017, and an increase of 33% over the 2015-17 average. African governments continue to be the largest source of funding, with $37 billion, followed by China, with $25 billion. ICA members which include the G8 countries, the World Bank Group, the AfDB, EU institutions and the Development Bank of Southern Africa financed about $20 billion. The private sector contribution was $12 billion. Africa50’s committed capital is $878 million as of February 2021, and this is growing. In fact, our mandate is to act as the strategic minority partner and to leverage our equity capital to bring in additional private capital and debt financing—we are not necessarily the principal investor. This means that with our limited capital we act as a catalyst for all the investors, from development finance institutions and the private sector, to contribute financing to the project. We play a key role in project development, in the early stages of the project when it is being put together, and we are one of the few players that have a great focus on that. Indeed, a key priority for Africa is to speed up, and scale up, its infrastructure projects to meet its development needs, and the key to increasing the number of bankable deals and ensuring more projects are reaching financial close is project preparation. If we speed up the development of well-prepared projects and get these projects ready for investments, more investors will come, and we can close the funding gap. That is why, at Africa50, we have a dedicated project development arm, and through our strong local knowledge, networks and relationships with African countries, we can help private investors mitigate the risks of early-stage project finance. With our top-notch team and expertise in the African infrastructure space, our presence in the project gives all the investors the confidence to proceed.

How can the perception of risk be addressed for infrastructure projects in Africa?

This is a subject very dear to my heart. It is a challenge, but let me emphasize that investment risks in Africa are not significantly different from those in other continents, and they depend on which country you are talking about; one should not lump all countries together. In general, I think Africa’s risks are exaggerated, and the negative perception is often based on the past, rather than looking towards the future. In 2020 Moody’s found that Africa’s cumulative 10-year infrastructure debt default rate of 1.9 percent was the second-lowest worldwide, after the Middle East, and that it had a 100 percent infrastructure debt recovery rate. Aside from that, the rate of return on infrastructure in Africa is good—better than what we generally see in other emerging regions—which means the higher perceived risks are exaggerated. We must dispel the myth that our continent is “too risky” by focusing on opportunities in infrastructure and success stories, while also supporting efforts to create the enabling environment investors seek.

An important aspect of successful projects is the allocation of risks, which must be consistent with the development stage of the country and the sector in which the project is being implemented. The private sector usually takes on financial, technical, construction and operational risks; government should handle regulatory, macro-economic and political risk, for example. Development Finance Institutions can play an important role in mitigating risks. For risks that the private sector is not ready to take, instruments exist to cover or mitigate these risks. These instruments are generally provided by multilateral institutions such as the AfDB, the Multilateral Investment Guarantee Agency, the International Finance Corporation, the World Bank, etc. These instruments are rarely involved, but their existence gives the private sector more confidence to proceed. In addition, the mere presence of certain institutions like Africa50 can provide de facto risk mitigation.

Can you name the two single biggest projects that have been completed and the three most important that are under way and that should be completed in the coming 12 to 24 months? How much has been invested and what is the expected impact and outcome?

Let me start by focusing on some of the projects that we have done: the Benban Solar Park in Egypt has been in operation since 2019, and consists of a 400-megawatt portfolio of six utility-scale power plants that we invested in, alongside our partners Scatec Solar and Norfund. The six plants are part of the 1.5-gigawatt solar park, one of the largest in the world. Financial close was reached in just six months—quite quickly, in other words. The project was structured in a very novel way and attracted several international partners. It proves that, with the right regulatory regime and cost structure, the private sector, supported by institutions and regional partners, can make solar power an attractive investment opportunity in Africa. In terms of impact, the project provides clean energy to 420,000 households in Egypt and is also expected to contribute to reducing the country’s dependence on imported oil and gas. Some 1000 jobs were created during the construction phase; the production of 870 gigawatt hours of power per year of clean energy is expected to avoid 350,000 tons of CO₂ emissions, helping Egypt meet its climate commitment.

Another project we financed is the 120-megawatt Malicounda power plant, a thermal power plant under construction in Senegal, designed to produce at least 956 gigawatt hours per year. When converted to gas, the plant will form part of the shift of Senegal’s energy mix to renewables and natural gas from diesel. In terms of impact, the plant is expected to increase generation capacity in Senegal by about 17 percent while reducing generation costs by about 14 percent. If the savings are passed on to the consumer, this could contribute to a 1-3 percent rise in the country’s gross domestic product. Another project we’ve invested in is the 461-megawatt Azura-Edo power plant in Nigeria, which provides power to an estimated 14 million people. I can also mention the 115-megawatt Tobene power plant in Senegal, which provides flexible baseload generation capacity at competitive tariffs, and is helping close the electricity supply gap in the country.

Another project under construction which we have financed is the 420-megawatt Nachtigal hydropower plant in Cameroon. Africa50 acquired 15% of the equity stake in it, and the project’s total project cost is about €1.2 billion. It is the largest hydro plant in Africa that is primarily funded with private capital. Our equity partners are EDF, IFC, the Republic of Cameroon and STOA. The plant is expected to increase Cameroon’s generation capacity by more than 25 percent, improving access to electricity for consumers. The lower prices from hydropower are expected to improve the long-term financial sustainability of the sector, making electricity more accessible. The project is expected to create up to 1,500 direct jobs during construction, mostly sourced locally, and many permanent jobs upon completion. The plant is expected to help raise the share of renewables to 75 percent by 2022 and avoid 1 million tons of CO₂ per year.

We have other projects. Let me mention two: first, the expansion of Gbessia Conakry International Airport. The project consists of the construction and operation of a new terminal for international and domestic passengers and related infrastructure, including a cargo terminal, aprons and taxiways. The new terminal will have a capacity of 1.5 million passengers a year, about twice its current capacity. Phase 1 of the project, estimated at €120 million, began this year. Project partners are the Government of Guinea and Aéroports de Paris. The modernization of the airport should have a significant development impact, providing higher levels of service and safety for passengers, and an expansion of economic activity. International Civil Aviation Organization certification is expected to be obtained after completion of the airport.

Secondly, there is Kigali Innovation City. I mentioned the project before; it is a $400-million flagship project of the Government of Rwanda, which includes a technopark and commercial and residential spaces. It is expected to house international universities, technology companies, biotech firms, commercial, retail and real estate on 70 acres of land. In terms of impact, it is expected to generate $150 million of ICT export annually, over $300 million in foreign direct investments. It will be built using some of the latest green construction technology and is projected to create over 50,000 jobs upon completion. Over 2,600 students are expected to graduate from its universities each year for 30 years, adding to Rwanda’s and Africa’s pool of tech-savvy entrepreneurs.

What is your final message to the readers of Newsweek, to explain why they should choose Africa to invest, and why with Africa50?

I think people should consider Africa for investment because there are a lot of opportunities. Pre-Covid-19, Africa had seven of the ten fastest-growing economies in the world. This has obviously taken a hit, but the continent will recover and the fundamentals of Africa still remain sound in the medium to long term, because the continent has tremendous natural and human resources. It is the youngest continent from a demographic perspective. Growing middle classes and urbanization are creating new markets, where creative, determined investors and first movers will find fertile ground. And all this will now get another boost with the ongoing implementation of the AfCFTA.

Think of it: it will be a market of 1.3 billion people where goods can flow freely, with a young, growing population, and a growing middle class: this is a sizeable market to develop industries, manufacturing, healthcare infrastructure, cross-border transport and logistics infrastructure, regional energy pools, e-commerce and fintech services, etc.

More investors will want to take advantage of these opportunities and Africa50 is a partner of choice who understands the infrastructure investment landscape on the continent. In addition, we have a dual mandate of delivering a decent return on investment while making a positive impact on the lives of people. We believe this speaks to many investors and we stand ready to help them in this endeavor.