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Posted on Monday, 03 November 2014 16:33

Funding: Mind the gap

By Nicholas Norbrook

African governments are crucial in sourcing development finance for infrastructure projects. Photo©Carl de Souza/AFPFinding money for transformative investment has always been a struggle in Africa - but now banks and governments are joining forces to mobilise Africa's own resources, and find long-term funds.

Africa has development challenges that require immediate attention, like roads, housing and agriculture.

It was not that they were 'badly governed', it was that they were 'bad'

Glossy brochures in the reception rooms of upmarket private equity funds in the United States (US) and Great Britain vaunt the upward trajectory of the continent, but these vital sectors do not attract many financiers from outside the continent, except for a few backing self-contained projects such as high-end apartments, plantation agriculture for export and toll roads.

Local banks, despite the recent progress and pauses, often lack the asset bases to do the heavy lifting associated with infrastructure.

They do not have the long-term funds needed to provide housing finance, and they do not trust farmers or utility companies to pay them back. This is changing, and banks in some countries are now large enough to tackle expensive projects.

Wole Tinubu, chief executive of Nigeria's Oando used local banks to finance about 50% of the $1.5bn purchase of ConocoPhillips's Nigerian assets in July.

Oando used FCMB Capital Markets, a local investment bank, as lead arranger. "The Nigerian banking sector has come of age. These deals are not for foreign companies only," Tinubu tells The Africa Report.

But even the optimists admit that change is slow.

A large part of the problem is a mismatch between the short-term funding available and the long-term funding needs.

"So there is a case for building up domestic capabilities for long-term financing," says Donald Kaberuka, president of the African Development Bank, who – like many in their final year in office – is occasionally breaking ranks with orthodoxy.

In the past, development banks provided solutions to this mismatch by subsidising interest rates.

Many African governments set them up in the 1960s and 1970s. With crony capitalism, corruption and poor risk management, many went bankrupt.

In the years of structural adjustment that followed, they did not fit the new mantra of deregulation and liberalisation coming from Washington.

"It was not that they were 'badly governed', it was that they were 'bad'. And so many of them disappeared," says Kaberuka.

African governments and bankers are indeed still hard at work on this problem of sourcing development capital: from using finance to de-risk lending to priority sectors, to drawing Africa's savings pools into infrastructure projects and giving preferential access to finance for exporters.

This trend is helping the continent to mobilise its own resources – Africa investing in Africa – and also creating the conditions to attract global capital.

Government and its affiliated institutions are critical in this struggle to extend the tenor of lending.

Before the Great Depression of the 1930s in the US, the private sector ran housing finance.

Loans with a duration of less than 10 years were standard, as was a significant downpayment of around half the price of the house – something that African mortgage buyers are familiar with.

In response to the depression and over subsequent decades, the US government created various entities that de-risked the sector for lenders and helped to free up money for mortgage finance.

The net effect for the US economy was transformative, and Nigeria's finance minister Ngozi Okonjo-Iweala knows it – hence her championing of the new Nigerian Mortgage Refinancing Company (NMRC).

"The contribution of mortgage financing in Nigeria's GDP [gross domestic product] is close to a negligible 1% of GDP, compared to 77% in the US, 80% in the UK, 32% in Malaysia and 50% in Hong Kong," said Okonjo-Iweala at the NMRC's launch in January.

De-risking is de rigueur

Morocco has had a head start in this field. For Ismaïl Douiri, co-chief executive of Attijariwafa Bank, the country's success in mortgage finance comes from two sources.

The first is the 'maturity transformation', whereby retail deposits – which are by their nature short-term funds – are changed into mortgage and project finance by the work of the central bank, as in many developed countries.

"Source number two is that Morocco – probably even before independence – developed a very efficient asset-gathering capability, with pension funds, with insurance companies and more recently, in the 1990s, with mutual funds," says Douiri.

The use of government balance sheets to de-risk sectors has been taken up in Nigeria's agriculture sector, too. The man to bring the idea to Abuja is Akinwumi Adesina.

For several years prior to his appointment as agriculture minister, Adesina had been creating risk-sharing schemes to convince bankers to lend to companies in the agriculture sector.

While working with the Alliance for a Green Revolution in Africa, Adesina and partners at other institutions worked with Standard Bank on a programme to lend $100m to farmers and agribusinesses in Ghana, Mozambique, Uganda and Tanzania.

"That was at the time the largest facility for lending to small-holder farmers over the continent," recalls Adesina.

Taking this idea to Nigeria was the logical next step, and Nigeria's central bank asked Adesina to run a series of workshops on agricultural insurance before he became minister in 2011.

The result of that cooperation was the Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL), a $350m scheme to pull $3.5 bn of financing into agriculture.

That also required the central bank to reeducate bankers about the sector.

NIRSAL is working. While banks were lending less than 0.7% of their total portfolios to the agriculture sector in 2011 when the scheme started, that figure is expected to be 7.5% in 2014.

"And in the last two years, myself and the [then] central bank governor [Lamido Sanusi] called all the bank managing directors to a meeting and asked them: 'How much money have you lost?' – Consistently bank after bank [said] zero percent!" says Adesina.

And a similar de-risking has taken place in infrastructure, too. Nigeria's power privatisation in early 2013 was successful because of World Bank partial risk guarantees, which reassured the private sector consortiums that took over Nigeria's power stations that their gas supplies will be maintained.

Local banks were also involved in the deals, and these projects are helping to bulk up and give experience to Nigeria's infrastructure finance sector.

Helping hand for SMEs

These are examples of using interventions from governments and international financial institutions to fix market failures – in these cases, the lack of banks available or willing to lend to electricity, housing or agriculture projects.

Another area where banks are chary to commit funds is small and medium-sized enterprises (SMEs).

Perhaps surprisingly, given its historic preference for focusing on state failure rather than market failure, the World Bank is in discussion with the Nigerian government to set up a development bank for SMEs.

This new development bank is set to be run on market principles, with strong governance along lines similar to Kaberuka's suggestions.

At its heart is the subsidising of the interest rate: a 50-50 risk-sharing mechanism between the wholesaling development bank and the commercial banks that will originate the loans.

This should keep them responsive to the dangers inherent in lending to small businesses. "I'm not sure you can call it a subsidy," says Arnaud Dornel, a lead finance sector specialist at the World Bank.

"We will cover you for half of your risk. There is a price attached to that. It is not free."

This 'market discipline' is important, as it points to a way development bankers can avoid the corruption associated with the field, where politicians seek to funnel funds to favoured businesses or to their pockets.

Some governments are looking to develop sectors in a hurry.

Ethiopia's, for example, takes the flow of cash from its telecoms company and invests it in hydroelectric dams.

It also channels money to priority sectors such as export manufacturing, through state ownership of the Commercial Bank of Ethiopia.

The Ethiopia country director of the World Bank, Guang Chen, says that Japan and South Korea have done similar things. He warns, however: "To do this, you need a very strong bureaucracy."

While Ethiopia has made strides on boosting education levels, the skills base in government is still a challenge.

Pension pot of gold

Public-private partnerships (PPPs) are a way to combine state power and market muscle with less risk.

Nonetheless, PPPs have not had a great track record in Africa, here again partly due to governments' skill sets.

"PPPs are very expensive and long," says Emile Du Toit, who runs an infrastructure fund at Harith General Partners, a private equity firm.

"You need high risk-capital at the beginning, and that needs lot of skills, not only on the private-sector side but also expertise on the public-sector side, which in a lot of African countries is not really there yet."

He cites Kenya and South Africa as two countries that are leading the way.

Meanwhile, the market is also catching up with the long-term financing challenges that the continent faces. This is most notable in the pension fund industry.

As a sign of the renewed global interest, there are investors who are not just about the quick buck but are willing to invest over longer time frames.

Stuart Bradley, senior partner at private equity fund Phatisa, says: "Yes, we do want to make money, but it's about doing it with a very keen eye on the development impact we are making with those investments."

Phatisa has raised $246m for an agribusiness fund and also invests in affordable housing. "We are not looking to make Facebook-style money or 150% IRR [internal rate of return]. We are quite happy making 2-2.5 times our money on our fund," Bradley explains. ●



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