Africa investor forums: key takeaways
An energy and infrastructure boom across Africa has given rise to a motley group of mega-projects on the continent that is attracting investors (particularly from China) and boosting economic growth.
Low interest rates in the United States and other western countries are contributing to interest in African projects among institutional investors.
Investors should prepare for the long haul and manage expectations accordingly. Africa is still not an easy place to invest.
Norton Rose Fulbright hosted several Africa forums in New York in mid-September on the sidelines of the 72nd meeting of the United Nations general assembly. The forums included an investor roundtable with Ugandan President Yoweri Museveni and senior ministers in the Ugandan government, including the finance minister, Matia Kassaija, the foreign affairs minister, Sam Kutesa, and the Ugandan UN ambassador, Adonia Ayebare.
They also included the fourth annual “Africa Alternative Investment Intensive” that Norton Rose Fulbright hosted in partnership with Africonomie, an institutional investment communications firm, that examined the complexities of investing in Africa—particularly what works and what does not—and drew an audience of developers and US-based institutional investors, fund managers and other industry stakeholders. The discussions featured Obie McKenzie, a managing director of BlackRock, Paul Hinks, founder and chief executive officer of Symbion Power LLC, Lynn Nguyen, acting vice president of investment funds at the US Overseas Private Investment Corporation, Kerry Adler, CEO of SkyPower, Ikenna Emehelu, a Norton Rose Fulbright partner, and Donna Sims Wilson, chair-elect of NASP and president of Smith Graham & Co., among other notable speakers.
Here are key takeaways from the forums.
There is continued interest and growth in energy and infrastructure. Nearly 54 percent of the 154 guests who attended the roundtable with President Museveni focus on energy and infrastructure. President Museveni said Uganda will offer incentives to attract investments with a catalytic impact on the economy in the manufacturing, energy and infrastructure sectors.
Museveni also said that infrastructure development has to take priority because it is the best way to reduce the cost of doing business in developing countries. “In order for the private sector to make profits, they need to lower costs of doing business, lower costs of electricity, transport and labor.”
Financing remains a huge challenge. The 2008 global financial collapse and recent economic turmoil in China have not spared Africa. African governments have had to be creative in financing a growing infrastructure deficit and are interested in re-engaging traditional African allies in the West to diversify and increase foreign direct investment in the continent.
The Ugandan government, through the Uganda National Roads Authority (UNRA), is preparing to invite bids from the private sector to design, build, finance, operate and transfer a limited access tolled expressway between Kampala and Jinja. This would relieve the current congestion on the existing Kampala-Jinja highway and create future growth. The project—known as the Kampala-Jinja Expressway PPP—is strongly supported by development partners, including the International Finance Corporation, European Union, Agence Française de Développement and the African Development Bank. The project is expected to cost US$1.1 billion and is one of Uganda’s top priorities for investment.
Uganda and Tanzania signed an agreement in May to construct a crude oil pipeline, originating in Kabaale, Uganda and terminating in the Tanzanian port of Tanga. The project is estimated to be worth US$3.55 billion. French oil company Total, in partnership with China’s CNOOC and Britain’s Tullow Oil, will fund construction. Upon completion in 2020, the pipeline will transport 216,000 barrels of oil daily.
The Norwegian power company W. Giertsen Energy Solutions struck an agreement in February with Uganda Electricity Generation Company Limited (UEGCL) to begin constructing solar power plants, solar water pumping stations and hydro-solar hybrid power plants. The projects are supposed to service rural areas in Uganda.
In other African countries, developments in the energy and infrastructure sectors remain vibrant.
Kenya is in the process of constructing Konza Technology City: its very own Silicon Valley just outside Nairobi. An entire government department has been created for the endeavor (Konza Technopolis Development Authority).
In July, Nigeria, in partnership with the China Civil Engineering Construction Company, began constructing a coastal railway between Lagos and Calabar. The railway is due to be completed in 2018.
The Grand Ethiopian Renaissance dam project is expected to generate 15 million megawatts hours of electricity a year once it is built. There has been political resistance because the project will displace 20,000 people who live near the project site. However, Salini Impregilo (the Italian construction firm awarded the contract) and Ethiopia have agreed to move forward.
The fact that Africa has one of the youngest and fastest-growing populations in the world and incomes and markets are growing is drawing attention from foreign investors. Many governments are implementing reforms across different sectors and removing bureaucratic barriers that delay investments.
Regional trade blocs are helping reduce barriers. The East African Community (EAC) market has about 146 million consumers, while the Common Market for Eastern and Southern Africa (COMESA) has 20 member states with a population of more than 460 million. The Southern African Development Community (SADC), established in 1992, now has 15 member states. (There are 54 countries in total in Africa.)
At the roundtable, President Museveni pointed out to a packed room of investors that Africa is four times the size of the United States, with a population of 1.3 billion that is expected to grow to 2.5 billion by 2050.
Chinese investor activity surpasses Western involvement. US investment in particular still lags behind China by a considerable margin. President Museveni said, “Chinese companies are more adventurous than you [American] people.” There are many reasons.
One reason is political. Presidents George W. Bush and Barack Obama both implemented new programs to help Africa. Bush created the Millennium Challenge Corporation that gives development aid in the form of grants to developing countries that adopt economic and political reforms and has made trips to Africa since leaving the White House to promote aid to the region. Obama created a Power Africa Initiative and pushed an Electrify Africa Act through Congress, but the amount of resources devoted were not enough to shift the needle. President Trump has left the post of assistant secretary of State for African affairs vacant, and has been advocating an “American first” approach to engaging with the rest of the world.
Another reason for lagging US investment in Africa may be legal. For example, the Foreign Corrupt Practices Act may make US companies uneasy about investing in regions where bribery is a tacitly understood manner of conducting business. The Foreign Corrupt Practices Act makes it a crime to offer anything of value to an official of a foreign government or international public organization in an effort to win business or secure an improper advantage. The statute has extra-territorial reach. Foreign companies raising capital in the United States may also be prosecuted.
The US Agency for International Development (USAID) launched a new program recently whose aim is to expose US institutional investors to co-investment opportunities with African counterparts in sub-Saharan African infrastructure. The program is called MiDA (Mobilizing Institutional Investors to Develop Africa’s Infrastructure) and is a partnership with the National Association of Securities Professionals (NASP). Donna Sims Wilson, chair-elect of NASP, and Aymeric Saha, managing director of MiDA, said at one of the forums that MiDA organized meetings recently between local African fund managers and US pension funds, money managers and asset consultants representing $7.7 trillion in assets.
Sims said a big gap remains between real versus perceived risks of investing in Africa and mentioned that US investors have been surprised by the level of development in some parts of the continent, like South Africa.
An informal poll of investors at the forum showed that in the short to medium term, US institutional investments in Africa will be primarily through private equity investments in development companies rather than direct investments in projects.
There are many challenges when investing in Africa, and participants in the roundtable and the forum focused on three: renegotiation of contracts, non-cost-reflective tariffs and the policy environment.
In the power sector, the need for balanced and clear contracts is particularly crucial since the agreements can cover decades-long projects that involve multiple developers, financiers and buyers. Many investors attending the forums complained of a continued fear of governments in Africa re-negotiating tariffs long after execution of power purchase agreements with national utilities. Panelists actively investing in Africa pointed out that when selecting a country to invest in, three main considerations are contractual frameworks within that state, the country’s hunger to close deals and, most importantly, the country’s track record for renegotiating contracts. When there is consistency and transparency in contract negotiations (including equal treatment of all investors), this mitigates, but does not eliminate, fear that there may be a future renegotiation.
South Africa cancelled many of its existing bilateral investment treaties with European nations in October 2012, chilling investor activity within the country. Last December, Dangote Cement threatened to close its new cement plant in Mtwara, Tanzania after a new government attempted to withdraw promised investment incentives.
Developers should be cautious and consider the sustainability of investment incentives and the potential impacts on the project should the incentives be withdrawn at any stage.
There is also a concern that governments often dictate extreme terms based on empty threats. The likelihood of closed deals (and continued good relations with investors) increases when governments accept market-return expectations from investors. Just as investors are pragmatists, governments are expected to be the same.
Power prices in many African countries are currently incoherent and do not cover project costs. Retail electricity prices are a sensitive political issue, seemingly more so than failure to deliver power. The current price of electricity is 9¢ a KWh in Ethiopia after the Ethiopian government throws in a subsidy of 3¢. In Uganda, the average tariff to consumers is 17¢ a KWh (11¢ a KWh for industrial users), with the first 15 units of electricity consumed subsidized by the government. The estimated average tariff in Rwanda is at 22¢ per KWh. Given that significant infrastructure upgrades and new construction are required for new generation and transmission lines, there is a growing concern among many developers about the necessity for tariffs to be cost reflective.
What makes a country attractive to investors is the strong support of the government to implement projects and technical capacity, both within the government and in the private sector. When these factors are missing, the transaction cost of developing projects is higher. Investors need a good understanding of the regulatory framework and policies of countries of interest.
Many countries offer special incentives. For example, in Kenya and Cameroon, governments provide tax breaks for companies that list on their stock exchanges. Kenya established special economic zones, creating incentives for varying industry sectors to complete tasks in designated zones in the country. Rwanda published a new investment code with incentives for foreign and local investors. Nigeria, South Africa and Tunisia all offer cash grants as incentives for investment activity.
Despite the challenges, there is a silver lining. With more governments in Africa unwilling to provide guarantees or take on currency risks traditionally covered by government guarantees, many factories that currently self-generate are finding renewable energy an attractive option. Self-generation of power is hugely popular for industrial facilities across Africa. For example, in South Africa, Solea Renewables constructed the first off-grid, utility-scale photovoltaic solar power plant in Southern Africa at a chrome mine; the plant is near Thabazimbi. IAMGOLD Corporation is setting up a 15-megawatt solar power plant for its Essakane mine in Burkina Faso.
Fundraising for investments in Africa is increasingly difficult without evidence of local offices or partnerships. To address this challenge, many development finance institutions (DFIs) now have offices across the continent.
African pension funds, which currently hold approximately US$334 billion in assets, are beginning to invest in large infrastructure projects across Africa. By forging relationships with US institutional investors, African asset owners and fund managers could attract co-investments from US asset owners. For both African and non–African investors, co-investing is a preferred strategy. Falling currency values across the continent in 2016 chilled big buyouts, but did not dent interests in smaller private equity deals. Many deals that were too small for global funds remained attractive to investors.
Multilateral banks and institutions have too often focused on supporting the big economic players and only recently started working with private-sector actors in order to strengthen development of small- and medium-sized companies. Platforms such as Venture Capital for Africa have created places to connect entrepreneurs with investors, both institutional and individual. This platform showcases startups in varying industries. One investment opportunity, Powah Limited (based in Kampala), offers off-grid solar solutions. Another, BeepTool (already being used across Africa), is a mobile application that allows for communication, digital pay and money transfers. These companies are a few success stories among thousands of microfinance opportunities on the continent.