Excluded from many projects in countries under IMF bailout programmes, UK exporters are calling for a trade and aid link in African infrastructure and a rewrite of OECD guidelines that bind export credit agencies. Sarah Rundell reports.
As earthworks for Uganda’s new Hoima airport in the Kabale region continue to scratch out and level the red soil, UK infrastructure groups are readying to sell their products and services for the new runway and terminal buildings. In its largest-ever loan to an African sovereign, the UK’s export credit agency UK Export Finance (UKEF) lent €270mn to the Ugandan government in 2017 to help finance the construction of the airport in support of infrastructure group Colas UK, now contracting out to its UK suppliers.
From transport to hospitals, energy, power and increasingly water and agriculture projects, UK exporters are winning African infrastructure projects on the back of UKEF’s new appetite and budget. Among recent measures are the UK government’s announcement in 2016 that it would increase UKEF’s country-specific cover limits by up to 100%; prime minister Theresa May’s pledge for an extra £5.5bn from UKEF across eight African markets after her visit to the continent last year; and the £2bn direct lending boost as detailed in the 2018 Autumn budget.
Meanwhile, international companies are increasingly sourcing supply from the UK or growing their UK footprint – like France’s Colas UK – to qualify for UKEF support. “The need for infrastructure in Sub-Saharan Africa isn’t in question and the UK government has upped its game since Brexit,” says Darren Keep, sales manager at bridge specialist Mabey Bridge, who leads the company’s sales into Africa.
Trade and aid
The support is good but UK exporters want more. Some of the most lucrative public sector projects in Africa are out of their reach because of IMF rules on borrowing for Africa’s 30 heavily indebted, poor countries. If a country has reached its borrowing limit, it can’t borrow anymore unless 35% of that debt is concessional or has a grant element. Infrastructure groups say they could win much more business if the UK’s department for international development (DfID) was prepared to link some of its annual £13bn foreign aid budget with export credit. “We are campaigning hard and heavily, but we are not getting very far. Every time we see ministers we talk about it, and every time we are told ‘no’,” says Nick Oliver, head of business development at NMS Infrastructure, an EPC developer.
“If there was ever a time for DfID to take the plunge it is now. Even if it was just to provide grant aid for development infrastructure to help to make the financing concessional,” agrees Gabriel Buck, managing director at export finance advisory firm GKB Ventures.
Under its bailout programme, the IMF subjects indebted countries to strict limits on the amount they can borrow on a non-concessional basis without grant-like terms and tenors. It’s part and parcel of its efforts to stop more economies getting into debt – like Zambia, where public debt rose from 21% of GDP in 2011 to 59% in 2017 with two-thirds of that borrowing denominated in foreign currency owed to Chinese creditors and western eurobond investors.
Africa’s sovereign borrowers plug the key loan characteristics like tenor, grace period, fees and repayment into the IMF’s grant calculator, which only focuses on the terms of the loan and not what it is for: the IMF sees the same risk in a worthy water or housing project as a loan for a presidential jet. The calculator deduces the level of grant aid or concessionality within the loan and if it’s not enough to meet IMF rules on that country, the computer says no.
For UK exporters it is never enough. UKEF financing, albeit with long tenors and flexible terms, isn’t concessional. Take the recent £2bn increase in capacity for UKEF’s direct lending facility, available in financial years 2020/21 and 2021/22 and designed to help exporters in markets where there may be limited bank capacity or the competition have tied concessional financing in support of their bid: it is a highly efficient commercial offer but not a concessional product. It’s never been part of the ECA’s remit to provide concessional export credit finance and the grant element of a loan can only come from the UK’s development agency. Unlike other OECD countries such as Japan, South Korea, Italy and France where their ECAs combine loans with a grant or aid element, DfID doesn’t want its budget or support linked to UK companies bidding for infrastructure projects. “The money needs to come from DfID and that is not on the cards,” laments Oliver.
A consultation process in 2015 offered a ray of hope. It studied ways to develop a concessional export credit facility (CECF) that could bring trade and aid together, combining export credit finance from UKEF and grant aid from DfID to make loans concessional under IMF rules. Elsewhere, in a separate exercise begun in 2017, DfID has developed a new economic development strategy with ambitious economic support programmes and together with the foreign and commonwealth office (FCO), department for international trade (DIT) and UKEF is trialling new ways to strengthen existing, and establish new, trading partnerships in a multipronged approach that is having a real impact. “UKEF’s increase in risk appetite limit has facilitated a greater capacity to support DfID priority markets in 40 developing countries within the parameters of the OECD sustainable lending principles,” says Adam Harris, head of civil, infrastructure and energy at UKEF.
But the hope for one holistic financing package covering both grant aid and export credit has been kicked into the long grass. The best advice Buck gives clients looking at African sovereign projects which require concessional finance is to save their money. “If you haven’t secured any grant funding it’s not even worth getting on a plane. You can get there, win the contract, get the finance but even with ECA support it still won’t be compliant with IMF and World Bank concessional borrowing limits,” he says.
Some UK exporters have also put their voice to the International Working Group on Export Credits which is looking at the OECD guidelines that bind ECAs. The hope is it will rewrite blurred lines around aid and trade among the 34 OECD countries and work to clarify the rules with China which, unlike OECD countries, doesn’t distinguish between development concessional finance and export credit. But UK companies aren’t holding their breath on a decision anytime soon. “The working group was established in 2012. It could be five to 10 years until anything is rolled out,” says Keep. “It may not address opaque trading practices completely but a level playing field among OECD countries would help.”
Levelling the playing field with China, where Africa has become a key arena for its US$1tn Belt and Road Initiative (BRI), is more challenging. China’s state-backed cheap finance meets the terms of the IMF and World Bank’s lending rules. It is one of the main reasons why Chinese contractors have mopped up the biggest public sector deals in Africa in recent years. China’s banks loaned US$19bn to energy and infrastructure projects in the region from 2014 to 2017, almost half of which was lent in 2017, says Baker McKenzie’s latest report A Changing World: New Trends in Infrastructure Finance. The report notes how Chinese finance has injected “welcome competition” into African infrastructure and forced ECAs and DFIs to reassess their strategies. According to the China Africa Research Initiative at John Hopkins University, the annual gross revenues of Chinese construction companies in Africa in 2016 topped US$50.27bn. More than three times European contractors’ gross revenues for 2017 at just US$16bn.
But UK contractors notice that African governments are starting to wake up to the fact that the easiest money may not always be the best. On one hand, some Chinese infrastructure has given African governments additional headaches. “I know of one African state that will no longer entertain bids by China in its power sector following past negative experience,” says Calvin Walker, partner at Baker McKenzie and co-author of its report. Partnerships have also soured because government-to-government loans have involved side arrangements around labour, partially to meet tough pricing, giving jobs directly to Chinese contractors and shutting out local African service providers.
African governments have also grown wary of Chinese debt overloading their balance sheets and the prospect of having to forfeit assets in return for extracting themselves from debt obligations, says Walker. A report by the Centre for Global Development listed 23 countries involved in BRI initiatives that were at “significant” risk of debt distress: Sri Lanka’s loss of its Hambantota port to China after failing to repay billions of dollars in loans in 2017 has highlighted the vulnerability of Mombasa’s port and Lusaka’s airport to governments in Kenya and Zambia. It’s also giving competitors a look-in. “Of course China hasn’t gone away but we are getting more of a hearing. Our finance is slower and much of it is more expensive, but clients want the Union Jack attached,” says Oliver.
For Buck it simply makes the argument for concessional financing even more compelling. If African buyers can only use contractors who offer a concessional finance package, they will continue to have a small pool to pick from. “The buying country often only has two choices: either it doesn’t have, for example, power and hospitals, or it goes with the Chinese contractor and its funding,” he says.
And while UK exporters remain shut out, the competition is hotting up. The US’s ‘better utilisation of investment leading to development’ (Build) act will create a new government agency called the International Development Finance Corporation (IDFC). Backed by a US$60bn war chest it is likely to enable financing in African infrastructure within IMF limits and level the playing field between US and Chinese contractors. Of course, it doesn’t mean that UK exporters will lose out: more money and interest in Africa is good and there is no shortage of demand. But if the IDFC offers concessional finance or aid funding linked to US exports, UK exporters could find an already small subset of deals gets smaller still.
Where UK exporters do have an edge is UKEF’s preparedness to support projects where UK content is only 20%. It sounds like an oxymoron, but it’s a flexibility that mirrors the shift in the UK construction industry towards project development, design, installation and maintenance, and illustrates that all elements of a project, right down to the nuts and bolts, no longer need to come out of the UK. “Our ability to support some foreign content means that UK contractors have the flexibility to source the right suppliers for their business. It offers UK exporters the ability they need to maximise their supply chain, but we always want to see as much UK content in a project as possible,” says Harris. UKEF also streamlines the process for the buyer or borrower by enabling its cover for the whole contract, meaning that the borrower only has to negotiate with one ECA in order to meet their financing needs, he adds.
Opportunities in African infrastructure are rarely linear but ebb and flow on the back of politics, and the IMF and debt cycles, and underhand practices still rule out deals. “We have come in the second lowest bidder on projects when the lowest bidder didn’t meet the specification. Rather than winning the bid, it was cancelled, the specifications were changed, and the lowest bidder won,” recalls Keep.
But these are small, and increasingly rare, challenges compared to UK exporters’ enduring beef that they are ruled out from hundreds of projects in countries under IMF programmes, where neither project finance or public private partnership will work, because investment under government procurement programmes needs export credit and a grant element.