South Africa’s largest pharmaceutical manufacturer, Aspen Pharmacare, may have announced a relatively tepid set of annual results for the year ended 30 June 2019, but the anticipation of a reduced debt load freeing up cash flows pushed its share price up 12% the day after its results announcement.
‘We can de-risk a country’: Arunma Oteh, World Bank vice-president
Arunma Oteh, the World Bank treasurer, champions a new approach in which the Bank doesn't just lend money, it backs private investment in sustainable development projects.
Money is needed – and it is no trifling sum. The funding gap for the Sustainable Development Goals (SDGs) – 17 global targets set by the United Nations with a deadline of 2030 – is estimated at $1.4trn. The ability of African countries to raise their shares of these sums is limited.
The continent’s frontline ‘cheap money’ institution, the African Development Bank (AfDB), lent $7.4bn in 2017, a record for the Bank. But that is a drop in the ocean of the continent’s needs. Meeting Africa’s demand for roads, railways, power stations, water and sanitation, schools, hospitals and other infrastructure requires spending of $120bn a year, according to the AfDB.
There is, however, money out there. This includes, “$26trn of assets under management that is invested in low or negative yielding securities,” says Arunma Oteh, treasurer and a vice-president of the World Bank. Oteh has championed a financial engineering approach to the funding gap: this means taking the World Bank’s concessional finance arm for the poorest countries – known as the International Development Association (IDA) – and using its funds as collateral to raise money on international markets.
The former regulator of Nigeria’s stock exchange is a no-nonsense advocate for bringing fresh capital to bear on the world’s problems. Wielding the cut-glass English accent of Nigeria’s elite, she unpacks the World Bank’s current opportunities. The basic equation is that the IDA is respected, and a growing class of investor wants more than just financial returns – so why not launch a bond that will go a little further in meeting the global funding gap for development? The result, the first paper issued by the IDA, was a $1.5bn benchmark bond launched in April of this year.
Low, low risk
It was successful because the IDA is seen as a sure bet. When Oteh took the idea to the ratings agencies, they were “fascinated by the repayment history”, she says. Because the IDA has ‘favoured creditor’ status as part of the World Bank Group, debtor countries make sure to repay their loans. “If you don’t pay back the IDA, it’s unlikely that anybody else will want to lend,” says Oteh. There are of course exceptions to this rule of thumb, notably Zimbabwe, which owes the World Bank $1.1bn.
The IDA also has $160bn in equity it has built up since it was established in 1960, which represents a sizeable balance sheet to lend against. And the same teams that manage the World Bank’s non-concessional lending, known as the International Bank for Reconstruction and Development, also manage the IDA, helping to earn it the coveted AAA status, the top tier of low risk lending, which helps an institution borrow money at cheaper rates. In addition, because it lends all over the world, the IDA spreads its risk all over the world, another comfort for investors. The IDA also, “applied to the Bank for International Settlements to get a 0% risk weighting, which means that bank treasuries can hold the bond without having to set aside capital,” says Oteh.
There is also a growing class of investors who seek social and environmental impact, not just financial returns. “In the last five years, we’ve been able to immunise 250 million children. We’ve been able to give health services to 600 million people,” says Oteh. This trend was first driven by Nordic countries that wanted to invest in projects that focused on the environment. That led to the first ‘green bonds’ being launched by the World Bank in November 2008. “I don’t know whether everybody has more millennials [working for them], but there’s just a greater interest in impact, […] people really wanting to connect with things that have meaning,” says Oteh.
And she says that words like ‘sustainability’ are not just sentimental. Instead, a company that focuses on sustainability has to get creative about how to be productive. “You are basically revisiting your own business model”, says Oteh – which can drive both innovation and the bottom line.
“We can de-risk your project. We can de-risk a country. We’re a partner, we have experience”
Certainly $1.5bn is an impressive debut. The original sum, mooted almost two years ago when the process began, was $1bn, but the issuance was 4.6 times oversubscribed. The investors were pension funds, central banks and insurance funds from across Europe, the Americas and Asia.
For Oteh, the reason for the success is simple: “You make a good enough yield, but it’s also safe.” With interest rates driven to historic lows by quantitative easing – the bond-purchasing programmes of central banks worldwide – the IDA bond yield of 19.6 basis points above five-year US treasury bills make it attractive.
Still, $1.5bn remains a matchstick where a tree is needed. It represents just 0.1% of the $1.4trn needed for countries to meet the SDGs. But attracting private capital to developing economies should be the new development finance mantra, Oteh says: “We can de-risk your project. We can de-risk a country. We can make you feel comfortable because we’re a partner. We have experience.”
African capital markets
Recent big wins in this field have been in the Nigerian power sector, which has seen multibillion-dollar investments in recent years. The World Bank in 2014 approved $670m in partial risk guarantees to help catalyse private investors, with some success – though many power plants have since faced difficulties because of problems with payments and the national grid, among other things. This February, the World Bank invested $486m from the IDA to upgrade Nigeria’s transmission network, perhaps to fix that hiccup.
But the real change, argues Oteh, will come when African countries start using their own resources more effectively. “The big one is really better public financial management,” she says. “If you’re not even raising the revenue, how can you provide the basic services?”
She wants to see African countries develop their capital markets. with a role for the digital revolution. “Kenya has been a great example of issuing retail bonds via mobile phones,” she says. “The first transaction was $100m.” Issuing retail-focused bonds is more expensive than institutional-focused bonds because individual investors have small budgets and are more geographically diverse. Oteh says this is the sort of innovation needed for African governments to raise more funds to finance their countries’ development.