Admassu Tadesse: Blend, build, profit and repeat
Africa needs money like the desert needs the rain. Everywhere you look there are parched financial landscapes: continental infrastructure deficits of hundreds of billions of dollars, and governments, farmers, businesses, families and individuals all thirsty for cash. “So it is very clear that without leverage, without crowding in, the agenda [for financing Africa’s development] will simply fail,” is the stark view from Admassu Tadesse, chief executive of the Trade and Development Bank (TDB), the development finance institution formerly known as PTA Bank. “This is really where this whole blending initiative is coming from, to try to get that catalytic effect.”
‘Blended finance’ is the latest thinking in how to fund poorer countries. It brings together different flows of money – from capital markets, commercial banks, institutional investors like pension funds, and governments. Their complementarity allows them to create an impact greater than the sum of their parts.
The TDB is the financial arm of the Common Market for Eastern and Southern Africa (COMESA), though membership is not restricted to COMESA member states. Now it has built this hybrid model into its DNA, with institutional investors in its capital structure. The bank started inviting in African pension funds in 2013, “and of course we had to introduce a number of complimentary reforms to enable those types of investors to develop the comfort to come in. So we were quite thoughtful about the whole process, and then we began the outreach and the campaigning and one by one they came in: Mauritius, Seychelles, Rwanda, Uganda. And there are several others now in the pipeline,” Tadesse says. The TDB has issued around $100m in dividend-paying shares over the past five years.
Many African economists argue that Africa’s long-term investments should be redirected to the continent rather than parked in low-interest US treasury bills. But this is more often than not proving easier said than done.
Discipline is key
Pension funds have needs and, so far, the TDB has delivered. “We’ve managed to deliver a return on equity of roughly 12%, that’s been the average over the past almost 5 years, and the dividend yield has been between 4-5%.”
That is the warhorse the bank wants to ride out of Africa. “We now feel that with the demonstration effect of the smart and informed institutional investors on the ground, we have a strong case to make to pension funds outside of the continent,” says Tadesse.
Much of that will depend on educating investors about the TDB business model. “Development finance is an industry that is not known typically to deliver this type of return and dividends,” says Tadesse. He argues that discipline is key. But while providing a steady dividend is proof that the machine is turning over smoothly, pension funds typically want more.
Liquidity, for example. “They see themselves as long-term investors,” says Tadesse, “but are always wanting a window into liquidity, a window into exit. So we gave them some assurances that there were mechanisms in place to allow them to head out if they wish to.”
Next, pension funds have an eye to risk management: “Now almost 40% of our loan assets are insured with A-rated or above counter parties. We went even further to show that the bank had backup liquidity – that’s quite unique in our industry, where there’s always this question that, should [a call on capital] be made, not all would have the same capacity to fulfil.”
That is important because of the risk-reward tension in development finance. “Sometimes you have to take more risks in order to achieve higher levels of development impact, but those risks have to be managed very carefully so that you have that sustainability and you don’t cause a contingent liability on your shareholders,” says Tadesse.
“Development finance is not known typically to deliver this type of return and dividends”
And the TDB has also been at the forefront of a deeper drive to improve discipline: by helping create the Association of African Development Finance Institutions, a community of development finance institutions that holds itself to account.
“Our association has a mechanism where we ensure that even those entities not rated formally by a Fitch or Moody’s have the discipline of being reviewed against standards which in many cases echo and mirror what ratings agencies want,” explains Tadesse.
This is important, given how often there are problems in development finance of ‘related-party risks’ – institutions where shareholders are also the beneficiaries of projects and who could put pressure on management to skew investments. For example, if the Kenyan government, a TDB shareholder, pushed for the TDB to invest in a particular Kenyan railway project despite concerns over viability.
“So what happens is we try to orchestrate a rigorous engagement that can actually reflect an African agenda of high standards to these institutions, their governance structures. So it makes it easier for management also to say: ‘This is what the industry standard is. It’s not the African standard. It’s not imposed on us.’ These are Africans holding themselves to higher standards and we are now being assessed by our own African peers and this is now the outcome, so this is how we look amongst our own community.” And that helps create very healthy pressure to uphold certain levels of discipline, says Tadesse.
And the markets are responding to the initiative – with the TDB, in any case. Last October, Moody’s raised the TDB’s rating to Baa3 from Ba1.
This article first appeared in the September 2018 print edition of The Africa Report magazine