Blended Finance as a Realistic Project Funding Option
In July of this year, I spoke at an Agribusiness forum (Abuja, Nigeria) on the topic: Innovation to Catalyze investments into Africa. “Blended Finance as an Impetus”. I have decided to expand on the focus of my presentation, “Blended Finance & Africa” from the angle of the “Why, How, and What”. This is meant to diffuse the generalization about project funding, placated on LinkedIn and other platforms by some misinformed experts, or those pitching some sort of financing or services.
Blended finance has been touted as the panacea for closing the Sustainable Development Goals (SDGs) funding gap, while Africa is perceived as a single country by most institutional investors – leading to what I termed as “Capital Bias”. I have argued that projects across Africa or any other emerging region can be funded, irrespective of location if those projects are appropriately de-risked, structured, and packaged (Developed).
The current reality for Africa and Africans is that “Capital” appears to be biased. One could assert that the reasons are self-inflicting. The narratives point to the following facts; Narrowed fiscal space, budgetary limitations, unsustainable debt, Constraints placed by multilateral Development Institutions, Depreciating of currency and Inadequate foreign exchange reserves, Man-made disasters, Dependency on others, and overall, the limited use of innovation in governance. Competitively, Africa trails the rest of the world; Manufacturing has stagnant since 1970, Fragility remains a challenge; exacerbated by the dropped in commodity prices, and lingering capital immobility.
Moreover, African local debt stock rose from US$150bn to about US$400bn from 2004-2014; external debt is approximately $300bn (Boston Consulting Group-BCG). According to CNBC Africa, Africa has only 5 percent of the developing world's income but carries about two-thirds of the debt. Ironically, the 1996 Heavily Indebted Poor Countries (HIPC) Initiative, supplemented by the 2005 Multilateral Debt Relief Initiative (MDRI), canceled about US$100bn of debt in 30 African countries in exchange for economic reforms. Unfortunately, the debt stock has risen to an unsustainable level. Painfully, in sub-Saharan Africa, the infrastructure deficit is particularly acute, with the poorest countries in Africa falling far below other low-income countries on all infrastructure-related indicators.
Given the above challenges, how can projects across Africa be funded without burdening a nation’s budget, and incurring unsustainable debt. Simplistically, “Blended Finance” is the answer. Not as it has been touted by proponents of the SGDs; for instance, goal-9 of the 17 Sustainable Development Goals (SDGs), proposed these lofty aspirations “Build resilient infrastructure, promote sustainable industrialization, and foster innovation”, without telling us how it should be done. The Organization for Economic Cooperation and Development (OECD) projects SDGs Funding Gap for the world to be between $1.9 – $3.9 trillion USD per annual, while the funding gap for Africa is between $100 Billion to $150 Billion per annual. Africa needs between $1.2 trillion to $3.0 trillion in the next twenty years to play catch up to the other regions of our “One World”.
The World Bank sees Blended Finance as the strategic use of development finance and philanthropic funds to mobilize private capital for development (Leverage, Impact, & Returns). But blended finance can also be viewed as the utilization of de-risking arrangements in combination with private and public capital (Public capital is viewed as funding from multilateral funding institutions; like the World Bank, IMF, Asian or African Development Banks, FMO, or other Sovereign Supra-funding institutions, or direct beneficiary Government Intervention) to successfully fund projects (Mega or otherwise).
Dwelling a bit more on why and how projects across Africa can be financed; it is about the “Blank Slate”, says Bob Geldof. Runa Alam of Development Partners International justified the reasons succinctly; Africa is the second largest continent by landmass and is larger than the United States, China, India, Japan, and Europe combined, Africa has more than one billion consumers, placing it just behind China and India, Africa labor force is 402 million people strong as at 2015, which is larger than the entire population of North America, Africa is experiencing rapid urbanization, with 52 African cities that have a population of more than one million, and 80 cities are expected to have between 3 – 5 million population each by the year 2020. In the words of Ernst & Young (EY) “The size, diversity, and inherent complexity of doing business across the African continent will continue to test even the best-laid corporate strategies. Yet the rewards to be obtained are very real”.
In a comment on an article on LinkedIn, I frowned on the fact that all regions do not have an organized or structured financial market for capital formation, and the key to funding any project irrespective of location is how well the project is structured, packaged, and de-risked. This calls for innovation.
Let take the “Main One” Project - $240 Million USD. In 2009, the inability to access high-speed internet in Ghana and Nigeria, Ms. Opeke launched Main One Cable project with equity funding from Harith General Partners, Africa Finance Corporation (AFC), Skye Bank, First Bank of Nigeria Capital, and debt from a consortium of local and international banks. By July 2010, construction of the undersea cable and terrestrial landing sites were completed; linking Accra and Lagos to a connecting station in Seixal-Portugal, which joins the London Internet Exchange. Main One began selling bandwidth to internet service providers (ISPs) and drove an 80% fall in prices for international connectivity services in Nigeria and Ghana. An estimated 60% of Nigeria’s 25 million internet users access the World Wide Web through Main One’s lines as of February 2014. Harith provided strategic and operational -guidance to Main One. As increasing competition re-shaped the ICT landscape, Main One has developed high-margin, value-added services such as data centers to diversify its revenue streams. This project was done without cash or guarantee from Government. Yet it provides relief to African citizens in Nigeria, Ghana, Benin, and Cote D’Ivoire. The project was conceived by a private citizen, structured, and packaged with the assistance of Harith, and AFC; two African private financing firms; they also invested equity and provided the needed expertise to safeguard the project by de-risking (Multilateral Insurance Guaranty Agency - MIGA and other forms of hedging).
Another unique project is the “Cenpower” of Ghana. As an IPP, Cenpower was established to build, produce, and operate 350MW of hybrid electric power plant @ $900M USD. In 2010, African Finance Corporation (AFC) acquired a 46% stake in the project. 67% of equity is held by African entities, 83% of the senior debt is issued by African lenders, AFC with Knowledge of African Market, appreciation of African culture, and with the required capacity and capability through local Ghanaian expertise, structured and packaged the project by securing a Power Purchase Agreement (PPA) with the Electricity Corporation of Ghana (ECG). The project is at the completion stage, it provided approximately 1500 jobs during the peak of construction, shall add 10% to Ghana's total installed power capacity, and 20% of its available thermal generation (Source AFC). Again, de-risking was provided through the PPA, and other hedging arrangements. In the developed world, MIGA coverage would be classified as a “Credit Default Insurance”. There is no Sovereign Guaranty requirement or budgetary allocation from the Ghanaian Government. Yet, employment was achieved, the tax base is being expanded, infrastructure is being developed, and a significant service will be provided – energy.
In furtherance of our efforts to demonstrate the reality of “Blended Finance”, we are collaborating with an American developer, to develop a Smart City on 1,800 acres near Accra, Ghana. The project is at its infancy, Bentley Kantor & Co. has the responsibility to structure, package, and de-risk the project (Making the project bankable). The project revenue base includes a 500 bedrooms referral hospital, 50,000-student capacity Science, Technology, Engineering, & Mathematics (STEM) University, movie studios & amusement park, seven branded hotels, mixed-used commercial complexes, International Schools, mall, 500MW Power Plant, Water & Sanitation Plant, Retirement Community (Aim at the African Americans & the Diaspora), and 15,000 housing units in various categories. We are using a blended funding model, with various institutional investors, hedge funds, banks, and insurance bonds.
To de-risk the project, the city will operate as a “Special Economic Zone”, each revenue base will be a “Component”, and shall be uniquely packaged and structured. For instance, the power plant would obtain a partial PPA, the hotels would leverage a “Relay Facility” from a top-rated bank, for the housing development, we have executed a tentative agreement with a pension fund along with an off-take agreement from various parastatals, and on the hospital, we are collaborating with an international hospital management group. Bentley Kantor & Co. has committed the initial equity capital to underwrite the costs associated with the architectural concept design, feasibility studies for each component, and capital raising activities.
The question of limited cash or not sufficient localized funding vehicles, has been cited as one of the reasons why we have not accelerated infrastructure development across Africa. For me this is a “Lazy Argument”. The issue for me is not the limitation of cash or the sufficiency of funding thereof. The challenge for many African Governments, is their mindset, and the lack of governing with innovation. Many African countries want to own the asset, the operations, and the associated exposures. Their focus should rather be on the service provision, increasing the tax base, generating employment opportunities, and if possible, a share in revenue from the asset. This can be achieved without Sovereign Guaranty, off budget, and allow the asset and project to carry its own burden-Sustainable debt.
According to “The Africa Report”, the top 200 African Banks reported total cash of $1.5 Trillion USD in 2015. Additionally, latest available data from African pension funds in 10 countries, indicate assets(Cash) under management stood at $380 billion USD. (Satyamuthy, Casey, & Asare). This is an indication of why cash limitation should not be a problem. It is the will to act, and knowing how to act. Can you imagine what would happened if we can leverage $1.5 Trillion 5 times to finance projects across Africa. If our banks are so risk adverse, they Just need to make a third of this amount available as “Guarantee” to hedge oversea institutional investors investment. This would be in a form of Credit Default Swap, back by solid infrastructure assets, such as power plants, toll-roads, airports, seaports, refineries, smart cities, etc.
Africa and other emerging regions must realize, that Current gross levels of official development assistance (ODA) is decreasing due to the current sentiment of the “Global Tilt”; The developed world (Western Europe & North America) are looking inward to deal with their domestic problems. The “Global Tilt” also concerns the rise of China, India, and other BRICS member countries. The so-called level playing field is not just changing sentiments or impacting ODA, it is also shaping the geo-political power base. These are the dynamic shifts, and the reasons why Africa must wake up and act now. "Closing Africa infrastructure gap would increase per capita GDP by 2.6% a year".
Along these lines, Africa Finance Corporation and Boston Consulting Group, cautioned that Africa needs the political will to close the infrastructure “Gap”, and that financing is the least of our challenges. Rather, African Governments should implement practical “Policies and Execute assertively”. This requires a mindset and expectations that reflect the distinctive realities of the African investing environment. They admonished capital providers to obtain a deep knowledge of each target market and each environment, as well as the local dynamics. There also a need to take an entrepreneur/engineer outlook rather than a more hands-off financier-type viewpoint, with an integrated end-to-end view of projects; the willingness to acquire in-house capabilities at different stages and to get involved from initial concept to feasibility, bankability, and eventually construction and operations. Lastly awareness of community engagement as a core priority, not as an add-on.
