For many years, Africa was often set aside by all but the bravest investors, usually dumped in the ‘too difficult’ box as they pursued strong pipelines in the likes of Western Europe, Australia and North America.
But as those markets have slowed, and the need for investors – particularly pension funds and insurance firms – to find a good home for their cash has increased, many have started to take another look at Africa, with a number of countries starting to put together projects, programmes and pipelines.
Nowhere was this more obvious than at this year’s 8th Africa PPP conference, held in London in October. Over the course of two days, several officials from authorities across the continent laid out their plans for new investment, listing long pipelines and a host of new projects that they hope will entice investors to their markets.
Kenya, for example, revealed plans to issue requests for qualifications for up to five road projects in the country, with the first due to come out before the end of the year. Stanley Kamau, director within the Kenya finance ministry’s PPP unit, has long touted the country’s roads programme, and had announced plans for the initiative at the same event last year. Now, things appear to be coming to fruition, with Kamau listing a housing project that is also due to come to market before the end of the year.
Similarly, South Africa’s pipeline is looking promising. Having delivered a number of deals – most notably the Gautrain project that is still considered a shining example of what PPPs can deliver in Africa – the country is now looking to open up the project bonds market. James Aiello, senior project adviser at the South African Treasury’s PPP unit, also spoke of a pipeline comprising around 50 opportunities – although he admitted that only around one in six or eight of those are likely to come to fruition.
And this, perhaps, is where we get to the nub of the issue for Africa. While politicians and governments as a whole may often have grand plans, putting them into practice has often proved a long and arduous process; often one that many politicians do not have the patience to stick with.
“There are a multitude of issues that need to be considered,” says Christopher Healy, partner at law firm Hogan Lovells. “Money alone is not the answer, although a number of governments need financial assistance to engage experienced consultants to help them with their programmes. Governments also need to ensure the process for delivering a pipeline is not interfered with for political reasons.
“Anecdotally, we understand in some cases, large amounts of money have been given to some jurisdictions without the anticipated outcomes being achieved. So there appears to be a risk of governments accepting assistance but not making best use of that to progress their pipelines.”
The African Development Bank (AfDB) has recognised this issue. “In the past, we have handed over money, but now we have promised we will bring to bear our expertise to give more confidence to take decisions that need to be made that will transcend politics and elections,” explains Angela Nalikka, manager of the infrastructure finance and PPP division at the bank.
“The AfDB has always been the honest broker and we are now doing that more in helping to benefit countries.”
One of the key ways in which the bank is doing this, she explains, is through its ‘Light up and power Africa’ programme – the first strand of its ‘High Five’ initiative to target different areas of need within the continent.
She explains that much of the work around this is to do with creating an enabling environment so that countries do not simply do one round of investment and then stop while they prepare for the next wave. The focus on energy is also part of the AfDB’s plan to ensure a more holistic approach to investment, so that energy demands do not prevent projects from going ahead in future.
“You have to have an enabling environment,” Nalikka explains. “Energy is the catalyst for everything else.”
Today, that environment is facing a strong challenge from the economic fundamentals across the African continent. Whereas a year ago, Africa was still powering ahead in terms of growth, that has stalled somewhat today.
“Sub-Saharan growth is to drop to its lowest level for 20 years in 2016,” Mahad Ahmed, founder and managing director of AME Trade, told the conference. “Economic growth for the continent this year is expected to be 1.5%. To put that in context, it was 3% last year.”
“The economic situation has worsened,” agrees Nalikka. “That is partly due to low commodity prices. Inevitably some transactions will be delayed.”
However, she and others suggest that the economic situation should be viewed as an opportunity. “We must avoid swinging from the optimism of recent years to excessive pessimism,” Ahmed added.
“Infrastructure development needs a long lead time,” Nalikka continues. “A project may be delayed but it is never off the table.”
What is desperately needed here is stability – not just of the economic variety, but also politically. “People recognise that Africa is promising, but they need the right conditions to enter,” says Anas Charafi, investment officer at Africa 50.
“They need a clear and stable framework. We see situations where the policy is good, but then that is challenged and potentially completely overhauled after just a few years.”
This, of course, is not simply a problem for African countries. But given the region’s historic difficulties in attracting investment, stability is an even bigger priority for investors than in some other parts of the world.
The current situation in the UK is perhaps a good counterpoint here: despite the concerns over the vote to leave the European Union, companies have not turned the taps off when looking at UK investments because of the country’s long history of stability. Most African countries do not have this to fall back on.
But as Healy points out, it can be easy to forget that the UK and other European countries made plenty of mistakes on the way to creating a sustainable pipeline. “[European countries] have grappled with all those issues and projects now are being implemented without even thinking about a lot of this. The enabling environment when those processes were set up was very different, plus Western Europe has a very different financial background to Africa, so the answer is not as easy as just looking at what was done in Europe (for example) and expecting those solutions to work.”
Healy also points to Australia – widely regarded as one of the most mature PPP markets in the world. “A number of the country’s toll roads have not been successful (which is also the case in a number of other countries which have sought to develop road PPP projects), which goes to demonstrate that even with a well-planned programme and enabling environment, mistakes can be made.”
One exception, perhaps, is South Africa. The country has been effective in keeping a stable environment for investors in part due to the fact that its PPP framework is embedded in legislation, and it has an active PPP unit housed within the national treasury.
Aiello points out that the organisation was created 15 years ago and has been an operating entity since 2005. “So we have had 11 years of working in that regulatory framework. Clear policy delineation is one reason why we have been so successful.”
He points to the government’s PPP Manual, which provides “step-by-step guidance to departments on the process to get approvals”.
This sort of institutionalised framework is what more African countries need if the private sector is to tap into the PPP potential that so many offer.
“There is a need for an institutionalised framework for the delivery of PPPs,” says Sheila Galloway, group chief executive of Utho Capital. “Those countries that have a coordinating unit have been very successful. Being able to coordinate and facilitate is why we have more projects that are making their way to financial close across Africa and creating a cycle.”
PPP units also need to be empowered to carry out the early work of projects, before they reach the tender stage, so that bankable projects can be brought to market.
“Project preparation work is the meat in the sandwich of a successful project,” says John Seed, head of infrastructure finance for Europe, Russia and Africa at engineer Mott MacDonald.
“If you get the feasibility and other studies right, you will get lots of investors coming in wanting to invest in the project. If you don’t do things properly at the business case stage, it will come back to bite you.”
But doing this up-front work can be expensive and there often won’t be private investors around at this stage to support those costs.
This is where multilaterals such as the AfDB come into play. Rather than simply investing in a tendered project, there is a growing role for it to work alongside governments and PPP units in developing a scheme from scratch – or helping the public sector find the experts who can do that.
“We are going to offer advisory services in a simpler manner, for example creating tender document toolkits,” says Nalikka. “Governments should have just as strong – if not stronger – advisers as the private sector.”
This may be the case, but not everyone is convinced this is happening yet. “It is not clear what countries are doing to ensure financially viable projects are being brought to market,” says Healy. “Many countries are engaging industry experts to assist with their respective programmes, but there is no clear sense of what is being done right now to implement these projects.
“We are still waiting for evidence that the approaches currently being taken will have a positive impact.”