Panel summary:
There is a general perception among investors that infrastructure projects in Africa are somewhat riskier than their international counterparts. This, however, is not necessarily the case. In fact, according to Asanda Tsotsi, Head of Project & Export Finance at Standard Bank, Africa’s default rate is very similar to what we see in other regions, and in some cases, even better.
Speaking at the 2023 Ninety One In Perspective Infrastructure Forum, Asanda attributes Africa’s better-than-expected default rate, in part, to how well structured these projects are. And indeed, for an infrastructure project to be effective and meaningful, there are a number of intricate components that need to come together.
The Kigali water project in Rwanda offers a prime example, as explained by Philippe Valahu, CEO of the Private Infrastructure Development Group (PIDG). For the project to have succeeded, it needed to have a willing government and willing regulatory bodies working in sync. It also required a proper tender process and to be able to attract a concessionaire, which is where Ninety One was able to assist through the Emerging Africa Infrastructure Fund (EAIF), a company within the PIDG which Ninety One manages.
The EAIF was established more than 20 years ago to help fund infrastructure projects across the African continent. At the time, it was a pilot of around US$150 million; today it is worth around US$1.3 billion, with exposure in 20 countries. This exponential growth not only demonstrates the need for infrastructural development across Africa but also the opportunity set that exists.
According to Valahu, one of the roles that the PIDG plays is to develop local capital markets in Africa. InfraCredit Nigeria provides the case in point. Four years ago, the PIDG worked with Nigerian regulators, the NSIA (Nigeria’s sovereign wealth fund), the central bank and other entities to set up InfraCredit Nigeria – a Nigeria-based, Nigeria-owned firm that provides comprehensive guarantees or credit enhancements on bond issuance in naira, to finance infrastructure assets.
Valahu explains that the company’s first bond issuance was small by international standards (the equivalent of US$40 million in naira), and had 13 pension funds, with three insurance companies taking a small ticket (as a first exploratory step in the asset class), with a 100% comprehensive guarantee. Four years later, these companies are now doing 30% and 40% guarantees, largely due to infrastructure now being considered a significantly more resilient and stable asset class.
That is not to say that infrastructure does not come with its own set of challenges. According to Tsotsi, one of the biggest issues they face is that many of these projects are funded in hard currency but generate local currency revenues. This makes it especially important to ensure that issues do not arise when currencies fluctuate, making political risk insurance and hedging critical elements to help de-risk these positions.
Sovereign risk is also a concern but can be mitigated, he explains. It is important to support projects within the country that are critical for the government and a service delivery perspective. These projects also need to pay their fair share in taxes and royalties. Communities are also important, in that these projects must win the hearts and minds of the people within the local communities.
Investing in infrastructure has grown in importance over the years, especially in Africa and other emerging markets. While challenges remain, the benefit for those who need it most is undeniable. Fortunately, there are companies that are doing phenomenal work within this space, such as the PIDG and its subsidiary company, the EAIF, managed by Ninety One. To find out more about the EAIF and the various projects that the company supports, please visit https://www.eaif.com/.
