The Pan-African Infrastructure Development Fund (PAIDF) is probably one of the most ambitious business ventures yet. For its chief executive, Tshepo Mahloele, it’s just common sense.
Infrastructure makes economic success possible, but in Africa little capital is available to build infrastructure. The solution, as he sees it, is to use African savings to invest in projects across the continent. “Let Africa first put capital down for its own development. We are saying, let Africans be the owners of some of these assets.”
His reasoning is borne out by this week’s World Economic Forum report, which forecasts African economic growth of 6,2% for this year, up from 5,5% last year. But it also finds that Africa is still held back by poor infrastructure. To eradicate poverty and achieve Millenium Development Goals, Africa needs to grow by 7% a year until 2015.
One problem up till now is that there is a lot of debt available to African countries, but it is expensive debt and not much equity is available. “It’s difficult for a debt provider to drive projects. Most have been led by development finance institutions, and the equity some development financiers have provided is really very little. They get lots of mileage, but they bring a lot of debt.”
Debt providers have a role to play, says Mahloele, but Africa can only develop if it has enough risk capital. “They should still come with debt, but we should start saying this debt is properly priced or it is not properly priced.” Debt becomes expensive when there is not enough underlying capital and equity ownership allows countries and investors to choose between debt providers. The fund’s 15-year time frame allows for a longer-term view of projects, which also increases viability.
It’s still early days for the fund, but there are high hopes for its success. The PAIDF is a commercial venture, but in following the Nepad ideals of inter-African trade and cooperation, it is winning the support of governments.
Government support from South Africa has proved crucial and, next month, the fund will be launching in Ghana to the 53 African Union heads of state. The Public Investment Corporation and the Government Employees’ Pension Scheme have been the largest investors, contributing $250million so far. The Development Bank of South Africa contributed $100million, Barclays and Absa coughed up $120million, Old Mutual and the African Development Bank have each invested $50million and Metropolitan and the Social Security and National Insurance Trust of Ghana have each given $10-million. Funds in other countries have also shown interest, he says.
Of course there have been naysayers. Mahloele recalls an international fund representative telling him: “You will not get this done. You will not raise a billion dollars [to invest in Africa].”
“Twelve months down the line we are more than halfway there,” he says; $625-million has already been raised “and that’s before we’ve gone to the international investors”. The fund is targeting a minimum of $1billion, but is aiming for $1,2billion to $2-billion. A minimum of $20million will be invested in any one project, and the maximum invested would be 15% of the fund’s total commitment. By the time of the fund’s second close, this would be “not more than $150million”.
“An amount of $20million goes a long way,” says Mahloele, explaining that the fund will be an equity investor in projects with partners who have established track records, and that it will raise debt capital together with its partners. The PAIDF will invest in four key areas: energy, transport (including rail, roads, ports, airports), telecommunications and water and sanitation. It aims to invest in infrastructure, which will improve trade and benefit two or more countries. To manage risk, it may make no more than 20% of its investments in any one country, with projects diversified across the continent.
Projects under consideration include the Inga hydroelectric project in the Congo River Basin, energy projects in Botswana and Namibia and a toll road and airport, both in West Africa.
When asked how the fund began, Mahloele says: “Different people have different recollections.” The idea crystallised during a speech by President Thabo Mbeki. Mbeki, speaking at the Public Investment Corporation’s (PIC) incorporation in April 2005, asked whether there were other funds, similar to the PIC, on the continent and how they invested their money. “Can they not look at infrastructure development for the continent?” Mahloele recalls him saying.
The idea came a step closer to reality when a “desktop analysis” showed that African pension funds managed about $140billion, with about half that contributed by the PIC’s funds. Botswana, Namibia, Egypt and Morocco also had substantial funds available. In late 2005, Mahloele and the working group presented the idea at the AU heads-of-state meeting in Abuja, Nigeria.
According to the World Bank, there was a $120billion backlog of infrastructure projects “that it could identify – I’m sure there’s more than that,” says Mahloele.
African pension funds had more than this amount available. The new infrastructure development fund would be able to contribute equity to projects, unlock economies and have a regional impact. And the World Bank’s analysis showed that there were more than enough viable projects available.
Mahloele admits that regional collaboration will be a challenge, but says that the timing is right, with increased stabilisation and political will. “Just as South Africa, 10 years ago, couldn’t raise 30-year money [long-term debt], some African countries five years ago couldn’t raise more than five-year debt. Within the next 10 years we should be able to have such development here [that] we can do 30-year [toll road] concessions here.”
He cites the Maputo Corridor as an example of what the fund could achieve. In 1996, there was scepticism about potential investors for the N4 toll road but, by 2005, the road had already been refinanced. “The original investors got their money out and sold to other investors. The viability was proven, the traffic was proven. And Maputo is a different town.
“That road was the catalyst. It made it possible for the port to be developed, for BMW to consider exporting out of Maputo rather than Durban. Spoornet had to up its game,” he says, pointing to the Mozal project and a growing tourism industry as further successes. “We’re buying into that type of future and vision.”