The devil’s in the detail for African transport and logistics projects

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Participants at the Africa Investment Exchange (AIX) Transport and Logistics meeting on 28 to 29 September 2015 saw positive recent developments in the electricity supply industry as a model, during a period when major integrated infrastructure projects are suffering from the severe downturn in the commodities cycle.

From a trucking company growing fast in Republic of Congo to commercial ports serving West and Central Africa, delegates at the 28-29 September AIX:Transport and Logistics meeting discussed a range of developments across the air, ports, rail, roads and logistics sectors. Multilateral and development finance institutions (DFIs) reported on support for big-ticket projects; private equity executives eyed potential deals. But the mood was not entirely upbeat, as all too many participants recounted tales of stalled projects.

Despite the problems that still afflict many independent power projects and public/private partnerships (PPPs), most AIX delegates agreed that private financing and project implementation were more advanced in the electricity supply industry than in most transport sectors. An executive with a major multilateral said that mezzanine, risk-sharing financial instruments could now be mobilised for power projects, but not for most transport schemes. A ports developer told of approaching a DFI for support for his project in West Africa, only to be asked whether he had a power purchase agreement- type contract showing there was an anchor client for the traffic through his port.

Operators said potential major players, like the eight-member Private Infrastructure Development Group (PIDG), could be more responsive to projects in the transport sector. Some DFI officials agreed: greater co-ordination between agencies would be helpful, said one; recent initiatives included action to co- ordinate at in-country level, another said. Delegates noted potential conflicts of interest between donors, some due to differences of national interest (in the case of European DFIs). Divergent aims between supposed partners were observed, for example in deals involving theWorld Bank and its International Finance Corporation (IFC) affiliate.

In project after project, frustrated advisers, developers and financiers returned to the problems associated with complex multi-modal schemes. Projects that have worked most often had a clear commercial approach, such as Lonrho’s Luba Free Port, which serves oil and gas operators in Equatorial Guinea and its neighbours, or its new Atuabo Free Port in Ghana. Former Nigerian president Olusegun Obasanjo’s ports privatisation “has worked very well, at least up to the port’s gates”, one operator said. Big integrated projects “are a multiple of building a solar plant, which poses a real problem for the World Bank and others who want to back schemes”, an AIX panellist said.“A Lonrho port is a single unit with a commercial argument, which is not the case for a project with multiple elements.”

Meanwhile, sectors that could be highly commercial, such as airlines and airports, remain highly constrained by governments’ insistence on their remaining nationalised industries. As an industry specialist put it: “Most airlines in Africa are set up to make it harder for people to do business.”There is little foreign ownership – the Kenya Airways/KLM tie-up is an exception – and very few hubs. Johannesburg, Cairo, Casablanca and even Lomé are exceptional, if still limited, hubs in an industry where potential giants like Lagos remain underdeveloped.

Very few government-owned airlines have real potential to become global players to tackle rivals like Emirates, Qatar Airways and Turkish Airlines. The only two to make a profit, Ethiopian Airways and Royal Air Maroc, were seen as the most likely leaders to emerge in an industry where 85% of intra- African traffic is still carried by non-African airlines. International Air Transport Association studies show African airlines reporting only 0.02% gross operating profit; the global industry average is $9/ticket profit, but only $1.6 for African companies. As an industry executive commented:“If there is not a drastic change, there will be no African airlines in five years.”

Some DFI-supported developer/investors are reporting progress. Paris-based Meridiam Infrastructure Finance is near the end of fundraising for its first African equity fund; it has been targeting an initial €300m of equity (AE 305/18). Among projects already on its scanner is the rehabilitation of airports in Madagascar, with France’s Bouygues as a partner. Meridiam is also looking at roads in Senegal, Côte d’Ivoire and South Africa – despite many investors’ perception that roads are very difficult to develop as PPPs in sub-Saharan Africa. Meridiam’s model is to stay for ten to 15 years, considerably longer than a conventional private equity investor.

Early-stage problems

The commodities downturn has hit major mining schemes, which are often seen as essential to underwrite major rail and other shared-use infrastructure. In a difficult environment – underlined by the collapse in the share price of global player Glencore – imagination is needed to restructure projects and create a greater role for governments in integrated projects, which means a return to focus on capacity-building.

As a ports developer said:“Development costs are substantial, and I have yet to find a government who will pay 10-15% upfront.” He added: “Even with 25%, or 37% [internal rate of return] IRR, you can’t get investors… and PE companies don’t want to take development risk.” Institutions might explore “a development fund for risk”, a private infrastructure development financier suggested.

The lack of early-stage financing is seen as a major drawback – except for the Chinese and a few facilities like the US Trade and Development Agency grants. UK-based InfraCo has been working on an early-stage infrastructure financing fund.

The UK’s Department for International Development (DfID) has been looking at ways of applying the model developed for its Nigeria Infrastructure Advisory Facility – which was seen to have helped planning and procurement for power sector reform in that difficult market. DfID is understood to be looking at five or six countries, and several are interested, including Ethiopia and Zambia, but selection decisions have yet to be made.

The not-for-profit Sustainable Infrastructure Foundation is piloting an online project preparation template, the International Infrastructure Support system, to take public organisations through the process to prepare projects. Designed by Cap Gemini, and supported by the World Bank and other multilaterals, the system was piloted by the Asian Development Bank, through which 31 projects have so far been undertaken.A Tanzania central corridor project has been selected as an African pilot.

In some cases, donor governments are looking to take a more proactive role. The revitalised UK Export Finance can provide support for local and third-country contractors as well as their British counterparts.UKTrade & Investment (UKTI) is looking to play an active role in structuring mining and infrastructure deals, including raising money. UKTI has been playing a transaction advisory role on the Botswana-Namibia Trans- Kalahari (TKR) project, which is intended to open up Botswana’s coal export potential as its income from diamonds is forecast to dip by 2024.This is now being conceived as a “genuine infrastructure corridor”, to allow Botswana and Namibia – who are establishing a joint TKR office inWindhoek – to exploit their potential in the wider Southern African Development Community area. UK Export Finance has registered its interest to provide $500m of support, not all of which would have to go to UK-sourced exports.

Across the value chain, western companies and financiers have been confronted with daunting challenges putting together money and infrastructure linked to major projects such as Rio Tinto’s Simandou iron ore scheme in south-eastern Guinea.

There have been growing signs that the Chinese are pulling back as the extent of their domestic economic problems has become apparent (see AE View). The Chinese model has been based on the huge demand for imported resources of the world’s second biggest economy, which some AIX delegates saw as providing a more “holistic view” of projects; this was also apparent in US initiatives like Power Africa, but much less so in the European offering.

As an adviser said: “Only the Chinese have appetite for providing early-stage development capital for mining… this means they lock down contracts, and deals are fully cooked from a technical feasibility perspective.”He added: “Governmentsare backed into a corner because there’s no alternative to the Chinese.” Against this competition, he concluded that, in integrated projects, “there is the risk that European institutions will be marginalised”.

One exception to this model was apparent in francophone Africa, where Bolloré and AMT SA have a significant presence, doing deals at senior government level and able to mitigate the risk. Delegates observed that the French model often involved a quasi-monopoly for the infrastructure operator. A shipping specialist said that Bolloré had “a very good business model, getting produce to market and earning at each phase”.

“The TransGabonais [railway] almost bankrupted Gabon, but is used only by one French company, with Gabonese government approval,” a delegate said. However, he added, Gabon has other bauxite deposits that could benefit from a multi-user corridor.

In their most recent deal, Bolloré Africa Logistics and AMT Necotrans bid together to develop and manage the new deep-water port at Kribi in Cameroon. Paris daily Le Figaro said their success was helped by a visit in August to Yaoundé by French President François Hollande.

Delegates agreed that it was necessary to reappraise existing mineral railways and ports, often built by host countries but concessioned to mining companies who hold on jealously to ‘their’ infrastructure. This might free up existing infrastructure – a lot of it in good condition – for multiple users, driving growth.

Multi-user projects often have strategic importance, but they can be very complex.To make these work, one adviser said,“a cornerstone industry is required – mining is obvious, but carrying through these projects is challenging in the current price environment, and building transport infrastructure may not be seen as a core activity, even though getting product to market is central to the project’s success”.

Simandou and other downturn victims

A consultant with decades of African experience said the continent’s huge potential was too often “unrealised because of the way business is done”. He cited examples where linking rail developments into agricultural, as well as mining, projects could have had a substantial economic and developmental impact, but was completely ignored, leaving potential boom regions isolated and impoverished. He, too, cited the case of Simandou, where the 650km Trans-Guinean railway line, supported by deep-water port infrastructure in Forécariah district, road upgrades and telecoms along the Southern Growth Corridor route, should open up a 40,000km2 area with huge agro-industry and forest potential; he saw analogies with the opening up of Brazil, in a region where income is now around $155m/yr but could make a $3bn/yr addition to Guinea’s economy.

The deal for RioTinto, Aluminium Corporation of China and the IFC to develop blocks 3 and 4 of the Simandou deposit would create Africa’s largest combined iron ore and infrastructure project, but has been stalled by project economics.

Bond and equities issues

With Angola launching roadshows for its planned $1.5bn Eurobond issue, and Ghana and Zambia also looking to return to market (despite its cedi crisis, Accra raised $1bn in 2014), such instruments are making headlines. But donors are already concerned at growing levels of debt, and borrowers like Zambia – which is looking to raise funds to revive plans to pipe in gas – will suffer from a downturn in international perceptions, due to the commodities price slump. Domestic pensions funds also offer huge potential, with Botswana and South Africa seen as potential leaders in channelling savings into infrastructure. Many others are tempted to do the same, but AIX realists suggested that such moves remain some way off.

There are pointers in recent deals to the way the market could go. The Emerging Africa Infrastructure Fund was an anchor investor for Seven Energy’s bond to finance pipeline infrastructure in Nigeria and also worked on an industrial bond for Perenco. The problems of operators such as Afren are making such issues more difficult, even in pioneering sectors such as the Nigerian upstream. So while a bond market is expected to emerge, it remains several years away from building real momentum,“to build up the billions”.

Source: African Energy

More details on AIX Transport

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