AFC: financing infrastructure in AfricaApril 26, 2022
Osam Iyahen, an investment professional at Africa Finance Corporation (AFC), talks to The Energy Year about the Dangote Refinery project, AFC's ecosystem model and its plans to partner with international financial institutions. AFC is a multilateral financial institution, created to provide pragmatic solutions to Africa’s infrastructure deficit and challenging operating environment.
How was 2021 for Africa Finance Corporation?
In 2021, we had an opportunity to take stock of the post-Covid implications for our business and amend our approach for long-term resilience, as necessary. COP26 occurred, underscoring the need for an energy transition, especially in Nigeria, and AFC is aligned with it. We were able to perform several transformational transactions for large-scale projects. For example, we invested USD 300 million into the Dangote Refinery.
In the resource space, we diversified across the continent with several projects; we showed a lot of resilience. We signed and secured about USD 250 million in tier-two capital from the DFC, particularly important for shoring up our capital. We successfully issued a Eurobond at 2.99%, one of the lowest yields we received.
We added five new country members, putting us at a total of 33, and we added two new shareholders: Guinea and Togo. We also received a boost to our credit rating from Moody’s. We grew our balance sheet considerably, which now is USD 9.1 billion, and we are on track to reach the USD 10-billion goal we set for ourselves.
How important is the Dangote Refinery for AFC?
The Dangote Refinery is a 650,000-bpd facility that includes a urea fertiliser complex with a capacity of almost 3 billion tonnes per year. This is going to be one of the largest refineries in the world, and it will contribute about USD 13 billion to the Nigerian economy upon its completion. All estimates point towards an increase in Nigeria’s GDP by up to 20%, providing the government with more revenue and helping to bridge any deficits.
The downstream sector of Nigeria is exceptionally critical, and this is why it is a vital project for us. The expected impact is for Nigeria to be self-sustaining rather than relying on importing refined petroleum products.
How challenging has it been to finance this project?
When overseeing a project in Nigeria, there are always specific challenges. Because of the jurisdiction, the process of syndicating the financing is a key challenge, but here we have a very strong sponsor that has been able to pull this off. It is one of the most significant financings we have seen on the continent in a long time, underscoring the increased demand for refined products within Nigeria in line with high population growth across Africa.
How do COP26 and the global discussion of the energy transition impact your strategy?
The energy transition is inevitable for Africa because we directly face the brunt of climate change, but we also recognise that there is an energy deficit on the continent. We have a growing population that needs power, and at the moment, 60-70% of Africans do not have access to energy. There is a narrative change post-COP26 where many African leaders have started emphasising the need to transition to cleaner fuels and to ensure that we are sustainably producing our hydrocarbons.
Given Africa’s vast gas resources and its lower environmental impact, we view gas as a viable transition fuel for the continent. AFC will therefore be focusing on supporting the development and financing of gas projects for domestic industrial and power uses, to sustain the growing population and corresponding demands. At the same time, we are focusing on renewables initiatives, which our power group is leading. It is something we will focus on going forward.
Can you explain what your ecosystem model entails?
One of the unique features of AFC is our ability to invest across various industries like oil and gas, mining, transport infrastructure and power, among many others. There is a symbiosis across those sectors that creates a natural ecosystem. For example, in the Gabon Free Trade Zone (now rebranded as ARISE), where we partnered with Olam International and Caisse des Dépôts et Consignations du Gabon (CDC Gabon), the Republic of Gabon’s investment vehicle, we are investing in a platform with a mining component that provides products to a railway owned by the forum.
There is a manufacturing component on the downstream side where the cut timber is turned into veneer and exported out of the country. The approach is to use the various disparate parts of a project instead of investing in just one part of the value chain, creating economic gains and improving job offerings for the population. It is beneficial not to be import-dependent, and that is why we are focused on the export of furniture from Gabon to China. This is just one example of our investments depicting the ecosystem approach strategy.
It is a model that is increasingly being adopted. It takes a well-capitalised institution like AFC that has the unique feature of being able to invest across several aspects. We have to leverage this feature, as we are an Africa-based institution, and we are funded solely by African money. It is incumbent on us to see development opportunities where we can capture the most value.
How does your project development programme work?
The Cenpower Kpone IPP in Ghana, which we did some years ago, is the perfect example of our project development programme: we came in and reconfigured elements of the projects and worked with a local project sponsor to make it more bankable. We were able to mobilise millions of dollars after the project development funding took place, which provided the capital for some additional studies. As part of the development process, we engaged reputable EPC contractors like Group Five, Sumitomo Corporation as a technical partner and a large number of commercial banks later on the debt side.
Over five years, we developed a power plant that produces almost 10% of the power in the country. We learned from that experience how to make bankable projects, which set the template for similar projects in the future.
What is AFC’s growth strategy?
We want to help Africa recover from the pandemic and we plan to do that by complementing our continued financing of strategic, high-impact natural resource projects with viable renewables projects in wind, hydro and solar. On top of that, we will also operate in gas, haulage, warehousing, data centres and technology infrastructure. To effectively do this, we have to amend talent, IT systems and how we finance infrastructure projects.
We are looking to grow our balance sheet to over USD 10 billion this year. To achieve this, we will have to focus on more robust risk management, and we will need to have a more diversified and high-quality asset book. We have to continue to address post-pandemic issues by being a leading innovator and bringing new products into the market.
Complimentary partnerships with government sponsors and other players will continue to play a vital role in our growth strategy because we must understand the needs and requirements of our partners so we can serve them better.
How are you planning to partner with international financial institutions?
We have been around the continent for 15 years; we know the unique nature of financing infrastructure projects in Africa. If international institutions want to partner with us on financing projects, it will benefit them by reducing their learning curve. We represent a reliable partner that has proven itself in infrastructure development on the continent. There is not much capital available for infrastructure projects in Africa; we would welcome them.
Where do you see AFC in the next five years?
The next five years will see AFC continue to reinvent itself, adapting and providing innovative solutions to address Africa’s infrastructure gap. Africa’s natural resources will play a key role in catalysing growth on the continent, and AFC will seek to pioneer a sustainable development model in this sector.
We currently see the oil and gas sector accounting for about 55% of our natural resources business, with more gas in the upcoming future. We are conscious of the energy transition. We want to continue developing the oil and gas sector in a very sustainable fashion so that we have a minimal environmental impact and a more immense social and economic benefit. We want to take a leading role in doing this across the continent as a financier and developer.
We understand it will take a lot of advocacy and require a deliberate approach. The objective for us is to look for ways to continue to fulfil our mandate and balance the need for eradicating energy poverty while looking ahead to provide solutions that account for the energy transition that is occurring.