While appetite for doing business in West Africa is growing, financiers, insurers and development finance institutions are faced with new challenges to make projects bankable and meet the increased demand for their support. On the sidelines of GTR West Africa 2019 in April, GTR and Texel Finance brought together some of the region’s leading organisations to discuss opportunities, obstacles and recent trends in their business.
Genevieve Ahinful, regional underwriter, West Africa, African Trade Insurance Agency (ATI)
Seyi Akinwale, senior vice-president, treasury capital markets, Sub-Saharan Africa, GE Capital
Wola Asase, senior vice-president, head of syndications and trade finance, Africa Finance Corporation (AFC)
James Gearing, broker, Texel Finance
Minos Gerakaris, head of trade finance, Rand Merchant Bank (RMB)
Heidi Ijomah, investment officer, African infrastructure, International Finance Corporation (IFC)
Abdoulaye Kone, regional chief operating officer, Anglophone West Africa, African Export-Import Bank (Afreximbank)
Waldo de Vleeschauwer, managing director, trade finance, Africa Merchant Capital
Olufemi Williams-Oyetayo, relationship manager, Anglophone West Africa, global trade finance, SMBC Europe
Sanne Wass, senior reporter, Global Trade Review (GTR) (chair)
GTR: What are the biggest trade and infrastructure opportunities in West Africa at present?
Kone: I cover the anglophone West Africa region including Nigeria, Ghana, Sierra Leone, São Tomé and Cape Verde. From our perspective, the infrastructure projects are mostly coming from Nigeria, because of the size of the economy. In terms of sector, we see most of these projects related to road and railway infrastructure, as well as port infrastructure and airport projects, coming from Nigeria and Ghana mainly. We also have large infrastructure projects on roads, special economic zones and power connections projects in Côte d’Ivoire.
Gearing: Texel can only respond to what its clients’ opportunities are. Two years ago, the AFC had its 10-year anniversary in Abuja, and a number of the member countries were invited to pitch their infrastructure requirements. There is no shortage of transactions.
Let’s start with infrastructure. If you look at the size of transactions and tickets that Afreximbank is able to mobilise, capital doesn’t seem to be the issue. The issue is effectively the red tape that exists that doesn’t allow even institutions like Afreximbank or AFC to fund and make a deal bankable. And if a project can’t satisfy their criteria, there is no way that it would be able to satisfy commercial banks.
Kone: What you are saying is quite interesting. When governments come to us with their infrastructure projects, one of the challenges is that we don’t do budgetary support. We can support sovereigns, but it has to be trade-related. And we have to find a way to make the infrastructure bankable and be able to generate enough resources or cash flow to repay the loan.
We are also open to public-private partnership (PPP) structures. We are especially considering that in Nigeria. Yes, sometimes it becomes difficult for them to meet our criteria. We often receive requests that are not properly packaged and bankable. That is why we went ahead to set up what we call the project reparation facility. That facility helps fund the preliminary feasibility study, which is often weak or not funded, including all the research and due diligence of the project. When the project is eventually financed and succeeds, the amount disbursed for the preparation is added to the quoted cost and then amortised according to the terms agreed. If it does not succeed, Afreximbank will share an agreed split of the cost of the preparation with the relevant government.
de Vleeschauwer: Focusing on the SMEs, there are a lot of smaller infrastructure deals which are banked by alternative finance players, including Africa Merchant Capital, such as solar projects that are private and off-grid. These projects range between US$2-5mn projects, so they are not that small, but they are not in the tens of millions of dollars level.
Interestingly, development finance institutions (DFIs) are quite active in that space. For example, given comfort can be obtained on the counterparty and underlying risk, DFIs are able to take in-country credit risk. We would finance the import of solar panels into Nigeria, and once the product is onshore in the country, and the panels are installed and start producing electricity, a DFI would typically refinance us. This a very good example of DFIs and alternative financiers complementing each other’s mandate and sharing the risk at different stages of the deal lifecycle. It’s not unusual for an export credit agency, such as UK Export Finance, to provide a guarantee for these types of smaller private infrastructure deals, subject to meeting its criteria, of course. This smaller SME infrastructure business is a good story from a DFI perspective and something they love to be involved in.
Ijomah: There is a big push in Africa to see how we can develop renewable projects that are scalable and also bankable. We see some deal advice coming in, but right now, those projects in Nigeria tend to be smaller, and this isn’t sufficient to get us the scale that we need.
For most of the countries in West Africa, the themes are always the same: they need infrastructure, such as power, logistics and good transport. These are the main enabling factors for other industries. When you talk to manufacturers, 40% of their cost is power. So this infrastructure has to be a put in place for a country to be competitive.
One of the things that we look at is the ideological framework for governments to deliver this infrastructure. PPP is a shared approach to risk. The private sector and lenders to the private sector cannot assume certain risks, for example regulatory, which best sits with the government. So there has to be an ideological change in governments’ mindsets for PPP, which may mean introducing policies that are not popular. This could be tolls on roads or cost reflective tariffs for the power sector.
There also needs to be a change in the perception of guarantees, which should be considered as a necessary tool to develop a nascent sector. Over time, once there is a track record for timely payments, the need for these guarantees will diminish.
Gerakaris: The area you have touched on with regard to partnership is key. The expectation that governments are looking for private finance to come in and take all the risk is a mismatch from reality. Private finance and banks need to also realise that DFIs are not going to do all the work for them. It really does need to be a partnership, and finding that balance between a commercially viable project that is bankable, in that it’s got its own payback and is feasible as a long-term project, and meets DFI and sovereign requirements, but is providing growth in the economy.
The days of purely financing on the back of a security structure without looking at the project’s independent ability to service that debt, and lending against the guarantee or lending against the insurance policy or similar, are gone. It needs that independent evaluation, often with the support of the DFI to make that project bankable. Then the banks are certainly willing to get involved and step up, and as part of the shared value proposition jointly partner with the DFIs and government to make these projects better.
Ahinful: There’s an argument for DFIs and ECAs to provide technical assistance to governments, perhaps as part of a package when they get involved in these large infrastructure deals, to help governments understand the concept of PPP. On the face of it, governments are saying they understand it, but as was mentioned, a lot of them expect the private market to come in with all the funding. There is also a need to give them the tools to understand the implications, the repayment profiles, and that there are some things they need to contribute.
Asase: To the point about PPPs, the question is really more about the capacity of the governments. The governments need to be willing to put the right people in the right places who have the experience to engage with the private sector. If you as a private sector investor are trying to do something with your government counterpart and they don’t understand how to raise the bonds for the project finance transaction, you’re not having a constructive dialogue. We find that in certain countries, such as Rwanda, there’s the right expertise.
One thing that the IFC, for example, has been doing through its treasury is to engage with regulators on the capital markets side, bringing them into Washington DC, where it has a programme with a university. Because the philosophy is, if you’re coming to a country to develop the capital markets but the regulators are an impediment to this, then every dime and effort is wasted. So it’s not about liquidity; it’s about the capacity gaps and how we bridge those to make sure that the liquidity can flow into the market.
Akinwale: At GE we have invested in various markets to help facilitate the growth of the power sector. Clearly, the regulatory framework is very important. There is a need for government to be aware of what is required to get a deal done. Education of the local stakeholders and development of local capacity is also important. In some instances, a more informed local partner or project sponsor has been crucial in getting a deal over the line.
People talk about the need for DFIs. It’s one thing to ask the DFI to come and support economic growth in the country, but you also need to include the local stakeholders. We often try to see how we can match the DFIs with the local fund providers, because if the local financial players are not vested in the project, you often don’t get the mileage you need.
de Vleeschauwer: At the end of the day, most of the money provided to projects are dollar and/or euro-based. And in order to successfully get your money back, you’re going to have to take some sort of local currency hedging. That’s where I fully agree with you that there needs to be more support from local investors. You need to get naira investors supporting such a project in Nigeria.
Ijomah: I agree that there’s a place for local currency financing – especially if we’re looking at the pension funds. But the pension funds themselves don’t necessarily have the underwriting capacity or the ability to structure and monitor investments. New regulation in Nigeria supports employers and employees in making contributions, so the pensions sector is set to grow and there is a large pool of financing that is currently available and is growing at a rapid rate. But most of this pension fund money is currently being invested in government securities.
GTR: Is the appetite for doing business in West Africa growing, from the perspective of international banks, insurers and the different businesses that you represent?
Williams-Oyetayo: It’s growing. Obviously you saw over the past few years with the challenges in the market that the appetite declined in respect to the deals that are being done, and in line with what the international banks were doing. You typically see this when there is some form of change in policy of the government or there is an upcoming election or political type of risk that people are not entirely sure of.
One example is the FX issues in Nigeria. That’s when we saw a lot of the business appetite for the country declining as people stepped back while they were trying to understand what was going on. Some insurers ride on the back of the international banks and have appetite as long as we provide them with the right information. So if they were a bit cautious on certain markets, they would ask questions and if we were able to provide the explanation and make them comfortable with us given our track record, they would underwrite the specific risk.
It’s the same thing with Ghana. Ghana is fairly stable from a political standpoint, but the reforms in the financial sector have contributed to international banks and lenders, and even the insurers, being cautious. When you speak to the insurance market today, some have returned to the market – although maybe they have cut back in terms of their capacity within the market – and then you have others that are still cautious and still believe Ghana has certain instabilities because of structural issues. So the appetite varies.
Gearing: Capacity is a huge concern from our perspective in West Africa. Four or five years ago, the issue in the insurance market was around new opportunities and getting away from the pure short-term commodity trade finance-type transactions and effectively broadening what a credit guarantee could offer from an AA-, A+ rated entity. This was a bridge to project finance, margin lending, asset-backed finance, the full suite of banking products. It has brought infrastructure deals as well, for example reserve base lending transactions. There was one in Ghana recently that was eight years long.
So there’s been a shift from relatively short-term to medium and long-term transactions. This really locks up capacity, particularly when grace periods are included. As a result, all the insurers are running limits on countries and sectors, and now the key question for them is about how they can start allocating that capacity or get more insurance in order to cover these bigger and longer deals.
Gerakaris: The perception is that insurers are often the first to go when there is stress in the market. We saw a market like Nigeria close in the short-term trade space following notable issues with the Nigerian National Petroleum Corporation and others, and it’s taken a long time for that to reopen. When it did reopen, everyone reopened on the same five names, and the depth isn’t necessarily there. It is useful having both commercial and DFI insurers as well as multilateral agencies and banks supporting a broader breadth of financial institutions in the market and having staying power to go through a cycle, realising that oil will go up and down in a five or seven-year cycle and needing to be there in the market through that time.
Williams-Oyetayo: From our side, we are seeing capacity mostly on the shorter-term transactions. In the medium and long-term transactions, you see appetite on transactions that have multilateral-type guarantees, because insurers like sovereign transactions, but elsewhere we have definitely seen a shift towards the shorter term.
Kone: There is appetite for West Africa, despite some of the challenges raised here relating to political stability. As a multilateral with these countries as members, we have preferred creditor status. We continue to do business, although we carefully manage those risks. When the transactions are bankable, we are able to succeed. And not only that; we also try to create appetite for other investors, DFIs or foreign partners to come in. For instance, the Afreximbank guarantee programme provides political risk guarantees for investors, and we also work with a large number of ECAs to fund long to medium-term projects in Africa.
Another thing we are doing to create appetite is to address the issue around compliance, which is a challenge to bring investors and financial partners into our member countries. When they come, the cost of their intervention is not competitive or bearable for the project and the sovereign in Africa. So we have put in place a solution, the Mansa platform, where financial institutions, SMEs and corporates will subscribe to feed in information that will be accessible online to everybody in the world. So a company sitting in, say, the US can check a partner it is discussing with and get all the compliance information, which is verified by the central bank so there is reliability of the information. We are now at the level of registering companies and banks. The transparency should contribute to bringing the cost of investing down.
Akinwale: From our perspective, we are seeing that there is appetite for investing in infrastructure projects in West Africa, subject to the right risk allocation framework and right credit enhancement framework within the various countries. Of course Nigeria provides a compelling market primarily because of its size, and Ghana too because of its robust and well-organised regulatory framework. But what we have often said to government is that it has to create a platform for the economic growth it wants to experience. Hence it needs to provide payment assurances or payment mechanisms and use DFIs in providing the comfort that investors and developers need.
de Vleeschauwer: We are a substantial financier of agri exports. We do a lot of cocoa, in Nigeria in particular. For us as a private boutique merchant bank, we have a lot of other institutions, specifically impact funds, that participate in our portfolio and the deals we write. One of the questions we are frequently asked by investors is around trust in the legal system. How clear are the legal processes? It is not unusual to talk to multiple lawyers, only to receive a different set of views each time.
Ahinful: A comment was made that insurers tend to run away when times get hard. For those of us that have the government as shareholders, we don’t have that luxury, because our mandate is to support. It doesn’t mean we are not cautious. As a classic example, Tanzania is making life difficult at the moment for a number of investors. Have we closed on Tanzania? No. We are just more choosy. The country is a shareholder in our organisation but it will still be difficult, even for us. What we tend to do to build capacity is try to encourage or give comfort to the insurance market that we might not get a resolution to a potential loss or an overdue in 30 or 60 days, but through the mechanisms that we have under our preferential creditor status, we will get a resolution. It’s not going to happen even in a year, but it will happen, and in the London market it tends to give comfort when you have the likes of Afreximbank or ATI involved.
Gearing: On appetite, again, it comes down to the underwriting capacity not being there on some short-term deals. Nigeria as an example is a victim of its own recent success. When you could do an oil transaction for eight years with some great sponsors involved, where you get 4.5-5% per annum, why would you look at doing a short-term trade deal for 30, 60, 90 days where you take a lot of incumbent legal risk? The risk/reward is just not there, and so you prefer to be in these high-profile deals. So out of the 10 Nigerian large-scale oil transactions, the private market has supported them all. It doesn’t leave a huge amount more capacity when you go down the food chain in terms of the corporate risk that insurers are prepared to take.
Gerakaris: In the past, banks wanted to lead and arrange and do their own deals exclusively on the balance sheet. The individual use of insurance coverage was quite aggressive, with people taking it up to 70, 80 or 90% cover and writing a lot of transactions.
The reduction in capacity – all that capacity being locked up on long-term infrastructure deals – has seen banks more aggressively reach out to other banks in the market to partner. Syndications, even on short-term trade, are now far more the norm than the exception. Through a mechanism like the secondary risk participation market, or jointly on a club basis, clubbing together is the way appetite is continually created.
Asase: I don’t think there is a lack of appetite in West Africa. In fact, every institution has country limits, and we begin to hit those limits in West African countries like Nigeria and Côte d’Ivoire, and we actually want to do more outside of these jurisdictions. So it is not a lack of us wanting to do more, it is just that the limits begin to kick in. Obviously as we grow our balance sheet on the equity side, we begin to do more in those countries.
de Vleeschauwer: On the appetite side, West Africa is probably the most interesting region. Southern Africa is pretty well banked, so is East Africa. So as an alternative finance player, where do you search for new opportunities? It is most definitely West Africa.
Gerakaris: But we need to start thinking beyond West Africa being Nigeria and Ghana.
Ahinful: The others are coming along. Benin has just a month ago issued its first bond. Historically this has been done only in Nigeria, Ghana and Côte d’Ivoire. We have seen so many infrastructure deals in Côte d’Ivoire, literally at least three enquiries a week and they are all backed by a guarantee. It is only a matter of time until there is oversaturation and nobody will have capacity, but there are a huge amount of deals coming out of Côte d’Ivoire at the moment.
Akinwale: The reason there may have been a concentration in the bigger markets is that there has always been a correlation between the sovereign credit rating of the country and its investment flows. In a smaller market, investors’ perception of the country’s rating is the main driver of the volume of its investment flows. But we are paying attention to those smaller markets, because we find that they are growing right now. Even though they are not the deal size of the bigger West African markets, there are spots of economic growth, and it is important to help further drive that growth.
As an original equipment manufacturer, we have always seen a need to not only present technical solutions to our customers but facilitate financing solutions that will aid the sale of our equipment and services. More manufacturers are now thinking this way, entering partnerships with financial providers, developers and insurers to ensure they present a holistic solution. So the market in West Africa has evolved.
Kone: Looking at countries like Sierra Leone, Gambia or Liberia, where we are trying to do transactions with the government, we face problems due to IMF or World Bank requirements, which according to their restructuring programmes do not allow the governments to issue guarantees or take some commitment vis-a-vis lenders. That continues to be a problem. But we are still able to go around those challenges by structuring transactions in such a way that we don’t require a direct guarantee from the government.
GTR: What new financing trends are you seeing in this market?
Gearing: The trend of partial payment guarantees is something that is going to be more in vogue. We worked on a Benin deal with ATI last year where the International Development Association, part of the World Bank, came in and effectively leveraged the resource that it was affording Benin 10 times, which crowded in private capital, anything up to 30 times.
The point is that if an institution like the International Development Association is prepared to lend its support to 30% or 40% of the value of the deal, and that effectively – for a guarantee of around US$180mn – can bring in private commercial banks totalling US$600mn, that is hugely worthwhile and needs to be developed more.
I know that OPIC renamed itself to be the US International Development Finance Corporation and doubled its budget to US$60bn, so it is going to look at using US money to support natural resource transactions in places like the DRC and other large natural resource countries – for self-serving reasons I’m sure: the US wants to try to recover lost ground from the Chinese. So there are different solutions for different sectors that are coming in.
Ahinful: The focus at the moment is on investors outside of the traditional norm. The structures you can put in place, like the IDA guarantee, can make a deal a lot more attractive to new investors. All I have heard about throughout this conference is pension funds, whether local or international. Those are now the target audience in these big infrastructure deals. How do we get them to buy into using this insurance product, to give them the comfort to do these deals? And once you have the likes of IDA and the renamed OPIC on board in a transaction – so investors know there are risk mitigation tools in place, KYC, due diligence, environmental and social impact agendas and so on – straight away there is interest, and that is where we are seeing the drive. It is a little bit unfortunate because the smaller deals still have to be looked after, but the bigger deals are taking on a completely different structure.
de Vleeschauwer: One major new thing is the rise of alternative trade finance players such as ourselves, Barak, Scipion and Kimura that have started out in the last while.
There is an increasing interest from large institutional capital, such as pension and fixed income funds, to invest into structures that can give them access to a competitive yielding and secure asset class that was previously not available to them. Alternative finance players provide exactly such an opportunity and are, for the most part, typically structured as a GP/LP (general partners/limited partners), with other more transactional ringfenced structures also being available. The alternative managers subsequently deploy the funds into a series of self-originated opportunities.
This is a mechanism by which alternative finance managers are able to access larger pools of institutional capital that was not previously investing in that space. Quite a lot of my time is spent on talking to and educating new potential investors that want to participate in the region and asset class.
To summarise, the alternative finance sector is increasing its investment in Africa. It’s exciting and a great opportunity. But to be clear, just because it bears the label of ‘alternative, doesn’t mean the underlying deals and transactions are structured any different to what you can expect from a mainstream bank. Most alternative finance managers are ex-bankers after all.
Gerakaris: The trend is around the rise of trade as an investable asset class. Apart from the syndication and clubs which have long been a part of it, we are seeing alternative uses of insurance. Insurers come on as risk participants rather than writing policies, and surety providers take on not just guarantees, which was their historical place, but are now risk participating in letters of credit. Then there are the alternative funders, hedge funds, specific trade funds investing in projects. That is a big change.
Williams-Oyetayo: We are also seeing more insurers risk participating in transactions. Apart from that, a growing number of international banks are leveraging more on the different programmes out there with DFIs or multilaterals. They do this to support and create additional capacity, which had reduced following specific challenges in some markets.