Pragmatic solutions for African infrastructure

Multinational

Samaila Zubairu, president and CEO of Africa Finance Corporation (AFC), talks to The Energy Year about the road ahead for trade and energy finance in Africa during this difficult period, and opportunities for import substitution. AFC was established by sovereign African states in 2007 to provide private sector-led infrastructure investment and development across Africa for natural resource and industrial assets.

What is AFC’s mandate and what lies ahead for trade and energy finance in these troubled times?
Africa Finance Corporation was established as a multilateral financial institution to provide pragmatic solutions for Africa’s large and growing infrastructure investment deficit, within its challenging operating environment. We do this by structuring and financing infrastructure, natural resource and industrial projects with the ultimate goal of boosting productivity and fostering sustainable economic growth and development across the African continent. Since our creation in 2007 we have invested USD 7.2 billion across 32 African states.
We have membership across 27 African states. The natural resource sector is one of our focus areas, where we cover oil (midstream, upstream), gas and mining. Power is also one of our critical areas given it is where Africa needs the most intervention. Africa requires investment in excess of USD 170 billion annually to bridge the infrastructure investment gap. USD 67 billion is needed for water and sanitation and USD 50 billion for energy. USD 46 billion is required for transport and logistics and another USD 7 billion for information and communications technology.
Today, we have a roster of renewables projects across the continent. We have financed some of the most impactful projects for renewable energy in Africa. We built the first wind farm in Cape Verde, which provides 20% of the island’s energy requirements. We are constructing a wind farm in Djibouti – a country where most energy is currently imported – which will provide them with energy independence. We are also building hydropower dams in Côte d’Ivoire and Cameroon, where we use blended finance to attract a diverse pool of financiers. We have helped build transmission lines in Ghana and Rwanda to support power distribution.

How resilient is the African continent to the pandemic?
The Covid-19 pandemic has transformed the world as we knew it. As cases continue to surge globally, the duration of the pandemic remains unknown and the full scale of the impact uncertain. The initial predictions are that global GDP will contract by around 5% in 2020 and the sub-Saharan Africa region will face its first recession in 25 years, with an estimated loss in economic output of USD 112 billion (out of a regional GDP of USD 1.8 trillion in 2019) – that is roughly equivalent to 6.3% of the region’s GDP that will be lost as a result of the pandemic.
The IMF estimates that the crisis impact is set to wipe out almost 10 years of progress in development across the sub-Saharan Africa region. In other words, the expected contraction of real per capita GDP in 2020 will bring the per capita GDP almost back to its level in 2010.
According to the World Bank, the pandemic could push about 26 million more people in sub-Saharan Africa into extreme poverty in 2020, and up to 39 million if downside risks to growth materialise.
The African Union has estimated that 20 million jobs may be lost in Africa due to the pandemic and if the situation lasts, the continent’s governments collectively risk losing up to 30% of their revenues. Exacerbating the commercial and economic disruption and the widespread human and social toll is the risk of civil unrest.
Africa’s recorded cases of Covid-19 totalled 152,444 cases [as of June 2, 2020] and if we look at the continent, we see that the largest and most populous countries with the most proximity and flight connections to the rest of the world have the highest number of recorded cases. In general, the policy response to the pandemic has been very swift. Most African states took immediate containment measures and that helped to limit the spread of the virus.
When the pandemic broke out, we immediately started to advise our staff and clients on the seriousness of the situation and on how they needed to accept and follow health authorities’ social distancing and hygiene guidelines. We formed a crisis management team internally to determine how we could transition to working remotely from home.
We also carried out an assessment of healthcare delivery across the African continent and realised that healthcare systems were largely inadequate and ill-prepared for the pandemic. There was a need for the Corporation to provide some intervention, so we worked with one of our shareholders to build an intensive care unit in Lagos equipped with emergency ambulance, a treatment and an isolation centre. This was completed in four days and handed over to the Lagos State government.
We additionally worked with partners in Abuja, Nigeria, to construct a 340-bed general hospital, which has also been handed over to the authorities. Through our other partnerships, we provided assistance to five more African states in terms of personal protective equipment (PPE), test kits and other items required to manage this pandemic. We have a programme to provide assistance to 10 more African countries and we are in discussions with the African Union to see where we can work with them or just provide direct assistance to the countries.

How has the pandemic affected the liquidity of firms in Africa?
This is a once-in-a-century event. There has been nothing like it during our lifetimes and no one was prepared for a global shutdown and the resulting economic slowdown due to lockdown measures. We see deep contractions in growth across the globe, with knock-on effects for African countries and businesses. Africa will experience its first recession in 25 years as a result of the pandemic. In response, we put together a programme to provide development support solutions for sovereign clients that are dealing with the twin challenges of liquidity and solvency.
We have seen significant volatility in commodity prices, coupled with the sharp fall in crude oil prices. Of course, there was a slowdown in activity; demand for crude oil collapsed and people tried to move towards investing in safer financial instruments, essentially moving to cash at the height of the crisis. We saw a great deal of volatility in global financial markets as well, and what at the time resembled the start of a global financial market crisis.
These trends have been corrected, mainly owing to the aggressive monetary stimulus and liquidity injection by major global central banks. We are now seeing a strong rebound in financial markets coupled with some signs of an economic recovery, particularly in China. As a result, the prices of many commodities have also recovered.
As China gets back to business, we have seen economic activity becoming more robust in one of several ports that we have invested in across Africa. This situation – i.e., the outlook for global demand and in turn, for commodity prices – is especially critical because many African countries are dependent on commodities for foreign currency and revenues.

What opportunities does this crisis hold for African countries?
This current conjuncture presents a significant opportunity for Africa because the disruptions in the global supply chain have underscored the continent’s need to enhance private equity investments and incentivise domestic manufacturing to take the place of imports. By doing so Africa can create jobs domestically, not to mention developing a level of self-sufficiency, and therefore resilience to similar events in the future.
Because of the continent’s lack of manufacturing capacity the bulk of jobs on the continent are mostly in the informal sector, i.e., the services and subsistence sectors. Africa has significant resources, but there is very little value addition taking place on the continent, so we end up being price takers and earning the least amount in the commodity’s entire value chain. But if there is value addition, there can be local consumption of the output (which reduces imports and their associated costs), and then you can export as well and command a higher price than you would for unprocessed commodities.
This is a time for us to seriously consider import substitution, especially for basic commodities and some primary healthcare equipment that we need. At a time when global supply chains are severely disrupted, there is a golden opportunity for continental Africa to develop and increase local manufacturing capacity on the continent. AFC is ready to support this. Import substitution is a big part of our strategic imperative; we work with anyone that launches production on the continent. At AFC, we stand ready to support any of the continent’s import substitution projects.
AFC’s commitment to delivering developmental impact has seen us refine our investment approach to Africa’s infrastructure needs, with a focus on early intervention and ownership of its total value chain and providing the leadership in infrastructure ecosystem investment that integrates Africa’s economies.
For example, our investments in transformational projects such as our USD 200-million investment in the Dangote Refinery and petrochemical and fertiliser complex in Nigeria’s Lekki Free Trade Zone, which once complete will significantly reduce Nigeria’s imports of refined oil products; the Atlantic Terminals Takoradi port in Ghana; and the Nouvelle Gabon Mining project to facilitate value addition by financing of a manganese smelter in Gabon. Manganese is a critical component in the production of electric cars, necessary in the drive to limit climate change. These sustainable developments create capacity, boost economic corridors and create jobs for Africa’s young and growing population.

Which countries stand out regarding financing opportunities in this period?
We have a pan-African mandate and we are looking at investment opportunities in the energy sector, across the spectrum, including in renewables and alternative energies. We are also looking at the heavy industries sector, including fertilisers, petrochemicals and refineries. We are looking at iron ore and steel, aluminium and bauxite production projects.
All in all, these are opportunities for value addition. We have an industrial platform where we are looking at the transformation of basic agricultural production into finished products and a series of other transformation projects for African resources.
Anywhere we find committed sponsors with supportive governments across Africa, we will do projects in the energy, transportation and logistics, natural resources, heavy industries and telecoms sectors.

How confident are you in renewable investments in Africa?
We have a programme to invest USD 200 million in renewables across the continent and I am confident we will find the right projects. We are also having conversations on equipment production on the continent for these projects to have greater impact. For example, we should be able to produce some of the solar panels. This would create much needed jobs and given that more than 50% of Africa’s over 1.2 billion population are less than 25 years old, help to address the problem of youth unemployment and transcontinental emigration.
Because we have a lot of renewable energy sources on the continent, we should become better at embracing sustainable materials and manufacturing for renewables. By not processing raw commodities domestically, you have to send them instead to Europe or Asia, where they will be transported by ship, with significant greenhouse gas emissions.
In Europe and Asia, the old processing plants use coal, which means more emissions. But if you process on the continent using hydro power, you reduce emissions, create jobs, build institutions and truly transform the economic health of continental Africa, to take its place on the world stage.

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