Now more than ever, export credit agencies are needed to support infrastructure development in Sub-Saharan Africa, argues Sarah Rundell.
Africa’s infrastructure requirements read like a long shopping list: Nigeria’s power sector, Liberia’s airport, war-ravaged Côte d’Ivoire’s destroyed roads, power and water infrastructure, Senegal’s electricity sector, Ghana’s developing oil and gas industry, South Africa’s wind and solar ambitions and Egypt’s need for close to US$50bn of investment in its transport, power generation and utilities.
In fact, when it comes to project finance in Africa, the opportunity stretches the length and breadth of the continent itself. This, coupled with the increasing allure of Africa’s urbanising economies, growing faster than any other region in the world and buoyed by massive population growth, should mean a boom in African infrastructure finance as banks squabble to gain exposure to the surge, lending to telecoms, roads or power projects.
It should also mean a boom in export finance as exporters in developed economies jostle to supply new and growing African markets with everything from wind turbines to buses.
Yet despite the compelling arguments urging banks to expand their project and export finance offering in Africa, borrowers say accessing finance is almost as tough as it was two years ago.
The European banking crisis is the culprit, forcing many European lenders which have dominated this market for years to shrink their balance sheets and pull back from lending to projects characterised by their size, long tenor and dollar denominated loans. New Basel regulations are also making it harder for banks to hold large, long-term loans. It’s opened up a gap in the market for new players to muscle in, none more so than African banks.
The Nigerian market
In Nigeria, local banks are increasingly lending to infrastructure. Local bank appetite to finance the developers bidding to operate in the privatised power sector encapsulates the new competition. In a process that promises the first steady deal flow of 2012, the government is about to award private operators the chance to take over 11 distribution firms and six power stations that it is offering up for sale through the privatisation agency, the Bureau of Public Enterprises.
Transmission will remain in the government’s hands although the grid’s management will also be privatised. A recent swathe of reforms aims to make it easier for local banks to lend to project developers, including the Central Bank’s US$3bn (N500bn) Power and Aviation Infrastructure Fund.
The idea here is that the fund allows banks to tap long-term money by offering 15-year local currency loans priced at 7%, thereby easing the difficulties banks have historically faced matching short-term assets with any long-term liabilities.
In another step to assuage lender concerns and draw them to the sector, the Nigerian government has created the so-called Bulk Trader, a state company that promises to guarantee payments from Nigeria’s distribution firms for the power they buy
off new private operators.
In Nigeria’s oil and gas sector, local banks are also muscling in on project finance. In the first financing of an upstream operation by local banks, First City Monument Bank and Stanbic IBTC financed and structured Nigerian oil group First Hydrocarbon Nigeria’s (FHN) purchase of an oil block off Total, Eni and Shell with a US$280mn loan in early December 2011.
FHN plans to operate the block with the producing arm of state-owned NNPC which holds the majority stake.
“This is the first time two local banks have been able to wholly finance Nigeria’s upstream oil sector,” says Wale Shonibare, managing director at UBA Capital in Lagos. In another recent example, local banks are set to finance a US$450mn tranche of oil giant Exxon Mobil’s US$1.4bn reserve-based financing facility to boost production at its various Nigerian oil wells.
Nigeria’s central bank governor has ruled that banks have to separate their investment banking business from their retail arms by May. Rather than view the latest reform from the CBN to withdraw universal banking licences as a brake on growth, bankers hope it will spur project finance even further.
“It will free us up to do more; we can raise money independently and pursue ventures that our retail arms wouldn’t have sanctioned. We’ll also have a free hand to attract talent; commercial banks don’t understand how investment bankers are rewarded,” says Shonibare.
Talent and capacity is the area holding most local African banks back. Most still lack the skills to take on the more lucrative advisory or structuring roles, limited instead to just coming in on syndication.
South African trends
As in Nigeria, so in South Africa. Here, conservative local banks have shaken off their reservations to lend to new, green technologies. They dominate the financing of a swathe of renewable energy projects just given the go-ahead by the government. Set to close by the middle of 2012, 28 new solar and wind developments valued at R50bn will supply 1,416MW of clean energy to South Africa’s power-starved grid.
It’s the first step of a grand plan to generate 3,625MW of clean energy in South Africa. Experts predict a broader involvement from local banks beyond the usual players as more developments get the green light.
“We are used to seeing single projects but this is multiple projects involving teams of advisors and a massive learning curve and importantly all the deals have been banked by South African banks,” says Mike Peo, head of infrastructure, energy and telecoms at Nedbank Capital, which is lending up to 40% of the total energy capacity slated for the first round.
Like in Nigeria, South Africa’s government has put in place assurances to encourage local bank lending, including guaranteeing power purchase agreements between state utility Eskom and the private operators. “The framework and tariff certainty the government has put in place has created the capacity for banks and DFIs to fund these projects,” says Peo.
Export finance potential
Like project finance, the ground around export finance is also shifting. On one hand export credit agencies (ECAs) are determinedly boosting their role to help recession-hit exporters back home. Michael Creighton, head of Italian ECA Sace in Sub-Saharan Africa says Sace is now deliberately “more aggressive” on behalf
of Italian exporters.
The Export-Import Bank of the United States (US Exim) and Nigeria’s ministry of power recently signed a memorandum of understanding aimed at securing up to US$1.5bn of US exports of goods and services to Nigeria’s power sector including US-made technology and machinery.
US Exim puts Nigeria’s total infrastructure needs at over US$220bn between 2012 and 2016. And demand for ECA cover as a risk mitigant has spiked amid market volatility and uncertainty.
“European exporters are relying on their national ECAs. They are all looking for hand holding to walk them into Africa,” says Humphrey Mwangi, a senior underwriter at the Nairobi-based African Trade and Insurance Agency (ATI).
But despite the promise of action deals with ECA cover are taking a long time to close. It’s a slow process since lenders and importers are often negotiating financial contracts for the first time. Now the financial crisis is drawing it out even more. Before the crisis one bank would fund a whole transaction, now due to liquidity constraints more banks are coming in on deals delaying closure.
“Transactions that started last year have ended up in difficulty because of new dynamics in the market and pricing has changed. It’s leading to some lengthy discussions,” says Sace’s Creighton. And although ECA cover is easy to come by for the continent’s biggest names, ECAs are more selective on the types of project they support. New borrowers without a track record or key relationships will find it increasingly tough to get ECA backing.
The costs have also rocketed. Sovereign downgrades in countries like Italy, Spain and the US mean lenders to projects with cover from these national ECAs no longer discount the pricing as much. Banks look through to the government rating behind the ECA and tailor prices accordingly, with some borrowers seeing the margins they pay trebling.
“Demand for ECA finance is strong but borrowers have to take on board that financing costs have gone up and that they are paying more for ECA cover than in the past. If they want long-term financing they have to pay more for it,” says Piers Constable, director of Deutsche Bank’s structured trade & export finance (STEF) team which specialises in medium and long-term lending to projects underwritten by ECAs or private insurers. Nairobi-based ATI has seen income from premiums jump from US$1.1mn in 2007 to US$4.8mn in 2010.
The prospect of local lenders filling the gulf is rising here too. Pan-African lenders Standard Bank and EcoBank Transnational are already dominant players. Now small banks are also muscling in with letters of credit for local clients.
Most local African banks can’t fund long-term or in foreign currency and ECAs require structures
and due diligence that they struggle to meet. “It’s very clear that global banks that have had an active role are now taking a back seat,” says Mwangi at ATI.
“Africa’s regional banks and DFIs are interested but most local banks lack the proper understanding or mitigation to come forward.”
However there have been some encouraging signs of innovation. Fourteen Nigerian banks financed MTN Nigeria’s US$2.15bn five-year commercial bank loan in 2010.
It was the largest syndicated facility denominated in naira to date and the first time MTN Nigeria had secured Swedish ECA EKN cover for any of its transactions.
“We are open to different approaches although local banks will have the same pricing issues as other banks – they borrow from international banks so will end up paying more too,” says Creighton. He believes that given dollar scarcity one solution could be more local currency funding.
“Historically we have shown a strong willingness to support transactions in South African rand, however we may have to consider supporting transactions in local currency outside of South Africa. It poses complications with lesser-known and volatile currencies but we may have to be more flexible here too,” he adds.
Ways to speed up arranging financing, bogged down with due diligence and red tape, are also under discussion.
The opportunity in African export and project finance is as extensive as the continent itself. African infrastructure deals fell from a peak of US$8.8bn in 2007 to US$2.7bn in 2010 in the downturn and now a raft of previously postponed projects will get underway again. It’s an opportunity African lenders are set to seize. GTR