Investment in Africa is investment in the world

23 Jun Investment in Africa is investment in the world

Samaila Zubairu, President and CEO, Africa Finance Corporation, outlines Africa’s infrastructure needs and opportunities the continent has to achieve economic success and independance

What is required for Africa to meet its industrial and economic potential?

The world needs an engine of growth, and Africa is this engine. We have gone through a massive pandemic that has affected economies, lives and livelihoods. The lessons we have learned during the pandemic have helped us focus on energy transition, digital infrastructure, the internet of things and artificial intelligence. We have also seen the importance of upscaling infrastructure globally, including healthcare. Governments have responded proactively with fiscal stimuli. However, fiscal stimuli are band aids; they are not a real solution.

Infrastructure requirements on the African continent sit at around $170 billion per year and this is increasing as demand rises. Transport and logistics sectors require more than $47 billion, information-and-communications-technology infrastructure requires more than $7 billion. We need more than $60 billion in water sanitization and about $50 billion in the energy sector. We have an energy deficit on the continent. Two thirds of the people around the world without access to energy live in Africa – around 600 million people.

We also need to look at roads and rails to link various countries. There is an initiative to create a road from Lagos to Abidjan that needs to be given priority. We need to see how that can be extended from Abidjan to Dakar. We should link Lagos to Kigali, and Kigali to Mombasa. These projects will provide better access for trade.

Africa is endowed with many resources. We have large arable land that can be used to feed the world. We have large resources of water. We have more than 90 percent of the world’s platinum, which is used for all kinds of applications in the industrialized world. We have cobalt that is required for the world’s energy transition. We have gold, manganese, uranium, phosphates and significant hydro resources that can be used to reduce Africa’s energy deficit. More than 70 percent of the world’s cocoa is in West Africa, and the value chain for cocoa is about $100 billion. However, our value capture is less than 8 percent because we are only producing the beans. Our share in overall world trade is less than 1 percent.

What misconceptions stand in the way of attracting foreign direct investment into Africa?

The perception of risk in Africa is overstated. There is a commitment to repay debt that has grown significantly. Apart from recently in Zambia, there are hardly any defaults on the continent. According to a study by Moody’s, the only region with a lower risk profile than Africa is the Middle East. For example, the Multilateral Investment Guarantee Agency has not paid any political risk claim in Africa. The project finance default rate in Africa is about the same as Western Europe, and far lower than North America, Asia, Latin America and the rest of the globe.

Another challenge Africa faces is the perception of debt. Africa’s debt to gross domestic product is one of the lowest ratios in the world. Necessary investments to grow our economies will come through debt. Premiums in Africa are high for both insurance and the amount we are charged for financing on the continent. These premiums need to be reconsidered. The lower the default rates or claims, the lower the premium should be.

What impact will the African Continental Free Trade Area have on African economies and communities?

The upcoming African Continental Free Trade Area will significantly boost inter-African trade. Part of boosting this trade is making available locally made products. If we focus on producing chocolates and cocoa drinks, for example, within the African Continental Free Trade Area, we will boost our economies and attract producers to set up operations here. It is projected that up to 81 percent of Africa’s growth will come from intercontinental exports and 19 percent from exports outside the continent.

The African Continental Free Trade Area will boost incomes by 7 percent up to $450 billion. Around 30 million citizens will be lifted out of poverty by 2025 through this initiative. We expect around 10 percent growth for unskilled labor and about 9 percent growth for skilled workers. We also expect to see exports grow by about $560 billion from manufacturing and intercontinental exports.

What needs to be done to lower carbon emissions and foster sustainable industry in Africa and the world?

Although Africa is the lowest contributor to greenhouse gas and carbon dioxide emissions, we are the most impacted. We are keen to provide solutions such as engaging in sustainable mining and development. Energy transition to lower carbon emissions requires a lot of minerals and metals. For example, a basic car requires a significant amount of metals and minerals, but an electric one requires six times more. A wind turbine requires up to nine times more minerals and metals than a gas turbine. A lot of these rare earth minerals and metals are in Africa. However, investment in infrastructure is needed to access them.

There is a lot of marine pollution that comes from the way the world currently trades. Studies indicate that emissions from sea trade are higher than those of Germany. For example, we have mines in Africa that produce manganese, which is required for batteries and electric vehicles. This manganese is shipped 3,000 miles to China and again 600 miles from Shenzhen to the hinterland where it is processed in coal-fired plants and then shipped to various parts of the world. There are massive amounts of carbon emissions involved in this chain. If we could process manganese on the continent, we will likely use renewable hydropower, lower carbon emissions worldwide, create jobs in Africa and keep African workers from trying to look elsewhere for employment.

Africa requires partnerships. We need to keep in mind the needs of the continent and the needs of the world are the same. For example, the world needs Africa’s forest as a carbon shield because it absorbs carbon dioxide, but these forests are shrinking because people are using forests as firewood to cook even though wood can easily be replaced by liquified petroleum gas. The world needs to consider Africa’s position within the global energy mix and its potential.

Can you give us an overview of your company’s operations and its role in the African continent?

The largest contributions to infrastructure in Africa have traditionally come from African governments. Due to the pandemic governments are currently increasing spend on saving lives and livelihoods and health and social infrastructure. There is a need for private sector investments, and AFC is leading that charge. Our mandate is to provide solutions to Africa’s growing infrastructure deficit and challenging operating environment by developing and financing infrastructure, natural resources and industrial assets to enhance productivity and economic growth. Our company is a sign that Africans are taking ownership of the opportunities and challenges that we face on our continent. We have demonstrated that it is possible to invest in Africa and to do so profitably.

AFC has mobilized investments of about $9 billion for the private sector and government assistance programs focused on energy, transport logistics, heavy industries, natural resources and telecommunications. There is a lot of risk perception around the continent. We de-risk opportunities and transform them into bankable projects by putting our skills and experience to work. We have 31 member states that give us privileges to operate within their jurisdictions. We focus on early completion by creating finance frameworks or equity bridges to reduce construction risks for projects. It is important that we create an enabling environment for people to do business in Africa. We provide a one-stop shop for all projects within the economy.

In 2018, AFC had a balance sheet of $4.1 billion and was aiming at $10 billion. We are now at about $8 billion. In just three years we have doubled the balance sheet and will meet our $10-billion deadline as planned. We have an investment grade rating by Moody’s that gives us access to financial markets. We recently did a eurobond for $750 million at less than 3 percent with a coupon of 2.875 percent. We also issued a Eurobond last year for $700 million. We have issued eurobonds at least once every year for the last three years. In 2019, we went to the market twice. We issued a green bond last year in the Swiss bond market.

Our medium-term plan has a $5 billion requirement, and we are working towards that. We plan to expand along two tracks. First, we will increase our balance sheet as AFC. Second, we have launched AFC Capital Partners, an investment fund that is focused on providing equity for resilient infrastructure. AFC Capital Partners will allow investors an opportunity to exit investments through our platform companies and investment funds. For example, most construction companies will make an initial contribution towards a projects’ development, but investment is not their business. We want to be able to take them out profitably after they have provided funds to de-risk the project. This requires significant capital.

One of our key challenges is to create jobs. Africa’s population is predicted to grow significantly. We now have 1.2 billion people, with 60 percent of the population under 25. There is a huge pressure to create employment. Instead of just exporting raw materials, we want to embark on import substitution to ensure we have the stock of goods required for trade.

What is AFC doing to meet Africa’s electrification deficit?

We have embarked on several energy projects. One of our first projects was a wind farm in Cabeólica, Cape Verde, that provides the island with 25 percent of its energy demand and replaces heavy oil fuels and diesel generators. We are also working on a 300-MW gas power plant in Cap des Biches, Senegal, that replaces oil, diesel and coal-fired power production plants. It will reduce carbon dioxide emissions by 30 percent, nitrogen oxide and sulfur oxide emissions by 100 percent and the electricity tariff by more than 20 percent.

We are also building a 60-MW wind farm in Djibouti called the Red Sea project that is going to provide 75 percent of the energy requirements of the country. While energy consumption in the country has increased over the last decade by up to 70 percent, only 50 MW of its power generation sector is operational, with a capacity of only 80 MW. About 70 MW is imported from Ethiopia. We will produce energy at about 7-8 cents per kilowatt hour, which is a massive improvement from the current 22 cents per kilowatt hour. We are providing all required construction finances. We created a green bond to finance the project.

What projects has AFC done to promote local production and trade?

We have successfully built special economic zones that use local resources to enhance the value of production. We started with a partnership with Gabon and Olam International to transform the economy of the country from hydrocarbons to forestry, agriculture and mining. We invested in rail tracks and logistics to export goods and open the economy. We built three ports and an industrial park that houses 150 companies. As a result, the country has gone from exporting raw logs of wood, a resource that earned around $35-60 per cubic meter, to $180-215 per cubic meter. In some cases, the country earns up to $48,000 per cubic meter because they have rare pieces of wood only available within the nation’s geography. Gabon is now one of the largest exporters of veneer globally. Exports have grown four times and gross domestic product has grown three times. We created around 6,000 jobs.

We want to replicate this success in Togo, Benin and Côte d’Ivoire. We also have prospects in Nigeria, Chad and other parts of the continent. We recently launched an industrial zone in Togo called Adétikopé Industrial Platform. We are going to produce electric bikes as part of our initiatives to reduce carbon dioxide emissions.

We are financing Dangote Industries’ massive fertilizer and petrochemical refinery complex in Nigeria. We invested $300 million in the project. It is expected to provide up to 80 percent of the country’s fuel consumption, 50 percent of the nation’s fertilizer requirements and create 100,000 jobs. Additionally, we are working on a hydro dam project in Côte d’Ivoire that will increase capacity and reduce the cost of energy.

We are working in partnership with the Central Bank of Nigeria and the Nigerian Sovereign Investment Authority to create the Infrastructure Corporation of Nigeria. We are starting the fund with $2.5 billion and plan on scaling it up significantly. Nigeria is easily a $1-trillion economy, but inadequate infrastructure and a challenging operating environment has kept it at about $500 billion. With the right focus on energy and digital infrastructure, we can create jobs, reduce waste and promote connectivity and e-commerce in Nigeria and elsewhere.