IFLR Africa forum 2017: key takeaways

Author: Amélie Labbé | Published: 25 May 2017
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Navigating risk and regulation

  • Issues to think about when carrying out a transaction in Africa include human risk (Do you have people on the ground that know the market?), economic/credit risk of other parties, portfolio risk, political risk, anti-bribery and corruption (ABC risk), and type of exit strategy;
  • Buyers need to understand their market, and also bear in mind that Africa is not a uniform market: there are 54 different countries with different economic and legal systems;
  • One panellist noted that they used London as the standard benchmark when carrying out a transaction, and applied it to all the jurisdictions they worked in;
  • The problem of resource nationalism can arise later on when the transaction is executed: this can happen via unilateral changes to applicable rules and codes, tax claims, equity stakes etc. Stability provisions in the contract can help mitigate these but compensation-based claims are becoming more common;
  • The private insurance market has stepped as an alternative third-party to have a recourse against if things go wrong – 10 years ago, the range and depth of products available was narrow but now consistent due diligence carried out has brought to light new risks that need to be covered and the market has adapted;
  • At what level does the insurer step in? It won’t cover the lack of performance of a business after it’s acquired for instance, but only the initial transactional risk.


Infrastructure to support growth

  • Africa accounts for 2% of world trade despite being larger in land mass than China, Europe, the US and India combined – if power, transport and telecoms infrastructure was better, this would translate into three to five percent more GDP growth;
  • East and West Africa are the biggest growth drivers when considering GDP growth, especially those areas where there is some form of regional integration (Senegal for example sits in such an area from a power standpoint);
  • Around $95 billion is required to spearhead growth on the continent – about half of that has been invested so far, and more is needed to plug the viability funding gap;
  • The energy and power sectors have attracted the most financing interest as they provide the most opportunities for private sector, but it is expected that roads and airports could attract more financing;
  • There is a lot of money chasing only a handful of projects – why? Barriers to investment include the project development timeline (one of the longest in the world) and a well-structured transaction;
  • Getting sufficient collateral to support a transaction can also be problematic – there are sometimes sovereign guarantees but with these come IMF considerations and political risks;
  • One obstacle can be the requirement to seek out local funding or coverage – in some instances, especially in francophone countries which have adopted the Conférence Interafricaine des Marchés d'Assurances (Cima) code, there is a requirement to have 50% of the insurance cover onshore.

Financing options for projects

  • A lot of infrastructure projects go unsponsored because there is not enough appetite for them which means finance has had to diversify to meet needs – as an investor, if you’re looking at the $100-$200 million project space, you will have to look in oil & gas and mining projects, not in other sectors that can be dominated by SMEs;
  • Sovereigns are key bond issuers in the region, with also large conglomerates and multinationals going down that route. The best product for SMEs is a hybrid between debt and equity;
  • Bond issuances have overtaken loans but there is still a place for loans – these can be more flexible in emerging markets and the lenders have more involvement in the facility going forward;
  • Domestic capital markets have not yet taken off because investors have less appetite when it comes to localised risk. This despite raising money in the local currency being a natural hedge in the transaction;
  • Islamic finance options are also emerging – South Africa and Senegal have issued sukuk – and sovereign wealth funds in the Middle East have a lot of capital they want to channel into Shariah-compliant investments;
  • When it comes to private equity, some $30 billion is expected to be investment this way by 2030, three times the current level. Returns in the rest of the world are weak but investors want returns in the teens, which can be difficult;
  • One important factor to consider is the shortage of US dollars/fiscal deficit on the continent because revenues from oil and natural resources projects have not been as good as expected.

FOCUS – energy projects in 2017 and beyond

  • Larger projects in Africa all tend to be bespoke and need a specific approach. The renewables sector is a natural fit for smaller projects because smaller facilities are usually needed so there is little need for sovereign guarantees;
  • Small-scale projects are the key to bring electricity to the 640 million Africans who don’t have access to reliable electricity (two-thirds of the population);
  • The Offshore Cape Three Points project in Ghana and the Azura-Edo IPP project in Nigeria are two examples of projects that needed tailored funding and contracts to eliminate risk – in the former for instance, risks associated to the credit quality of the offtakers and the multiplicity of parties involved had to be accounted for;
  • One key issue to work on is to narrow down the time to close the project – the Azura project took eight years to finish for example. Things that can help in that area include minimising the number of participants and the amount of new structural complexities in the deal.