New Horizons in African Finance Reducing Risk and Mobilizing Financing on a New Scale IN PARTNERSHIP WITH Copyright © IFC, 2016. All rights reserved IFC 2121 Pennsylvania Ave NW, Washington DC, 20433, USA Website: www.ifc.org DISCLAIMER IFC, a member of the World Bank Group, creates opportunity for people to escape poverty and improve their lives. We foster sustainable economic growth in developing countries by supporting private sector development, mobilizing private capital, and providing advisory and risk mitigation services to businesses and governments. This report was commissioned by IFC through its Sub-Saharan Africa department and the Office of the Chief Economist. It has been developed through an external partnership with the Africa CEO Forum. The conclusions and judgments contained in this report should not be attributed to, and do not necessarily represent the views of, IFC, its partner, or its Board of Directors or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publication and accept no responsibility for any consequences of their use. Extracts from this report may be freely reproduced for non-profit purposes, with acknowledgment to IFC. Users who wish to further adapt this report should contact IFC. New Horizons in African Finance Reducing Risk and Mobilizing Financing on a New Scale IN PARTNERSHIP WITH REDUCING RISK AND MOBILIZING FINANCING ON A NEW SCALE Case Studies Contents Azito Energy: Meeting Africa’s Power Executive Summary / 3 Needs / 13 Opportunities in Rapidly Changing Markets / 6 Ecobank: Bringing Credit to Small Businesses / 14 Changing Consumption Patterns Growth Prospects and Challenges Cargill/SIB: Securing a Supply of Cocoa through Loans to Farmers /16 Business Prospects in a Shifting Environment Funding Sources and Impediments Bayport: Tapping Bond Markets to Expand Lending / 17 Finance Solutions for Africa / 11 Africa Improved Foods: Nutrition on Public-Private Partnerships a Larger Scale in East Africa / 20 Co-Financing with Development Banks Bridge Academies: Expanding Blended Finance Education That Gets Results /21 Capital Markets and Tailored Solutions Eleme Petrochemical: A Turnaround Private Equity Plan for an Underperforming Meeting the Market Challenge Manufacturer /22 Helios: Raising Private Equity Funds Focused on African Opportunities /23 2 NEW HORIZONS IN AFRICAN FINANCE REDUCING RISK AND MOBILIZING FINANCING ON A NEW SCALE 3 Executive Summary Africa is a region with enormous potential for private investors. It is a continent in transition, with rapid urbanization, increasing stability, a young and growing population, expanding internet connectivity, rising incomes, and shifting consumption patterns. Taken together, these enduring trends have created an abundance of commercial opportunities across the continent and turned the region into a place that investors cannot afford to ignore. Yet declining commodity prices, depreciating currencies and OPPORTUNITIES IN RAPIDLY CHANGING slowing global growth have increased uncertainty on the MARKETS continent and sharply reduced liquidity that companies had used Africa is not immune to the short-term economic headwinds that to expand activities in recent years. Economies face a significant most economies now face, and changing conditions are causing challenge to diversify and export a wider range of goods and some opportunities to fade. Trade and growth in the region are services. feeling the effects of a slowdown in China, while a significant drop in commodity prices and a depreciation of local currencies Even before recent global economic turmoil emerged, investor are creating challenges for companies and governments alike. activity in Africa was constrained by structural obstacles and While most African economies continue to grow, the impact a lack of financing options that often inhibited the effective of such global economic trends compounds challenges to distribution and mitigation of risk associated with large-scale or diversifying economies and exports, and is unsettling African long-term projects. economies in varied ways. Fortunately, companies looking to seize still significant Yet economies continue to grow—some rapidly—and there are opportunities in Africa can benefit from additional sources of still powerful incentives for businesses to seek a wider range of financing, as well as tools that crowd in more private sector partners to overcome the financing challenges that come with participants and mitigate risk, spreading it among different working in the region. Notable trends include: investor classes and over longer timeframes. Tools such as blended finance, co-financing, local debt and equity instruments, • Many countries in the region are projected to exceed the private equity, and public-private partnerships are being regional growth rate of more than 4.0 percent over the next deployed in Africa in new ways that address risks associated three years. Advanced economies, by contrast, are expected with low-income and fragile states. They provide innovative to grow 2.1 percent a year from 2016-18. paths to securing financing on a scale that can match the scope • Projected per-capita growth rates are impressive in of business opportunities and help manage risk in high-growth numerous African countries, including Ethiopia (8.9 African markets. percent), Rwanda (6.2 percent), Tanzania (6.5 percent), and Nigeria (3.8 percent), among others (2010-2020 Compound Annual Growth Rate). 4 NEW HORIZONS IN AFRICAN FINANCE • Driven by a young population and rapid urbanization, Approaches to financing in Africa that are both familiar and household consumption is expected to continue to grow novel are being expanded upon or tried anew and offer promise in important sectors including clothing, communications, for the years ahead. energy, financial services, food, health, housing, and transport. • Public-Private Partnerships are a strategy for projects • Africa could absorb more than $90 billion annually in with the right regulatory framework, sector planning and infrastructure investment but now receives about half that a high quality off-taker of services and goods to provide amount. The capital shortage going forward is projected to the comfort level private investors require to participate. be particularly acute in Nigeria, Angola and Kenya, while Development institutions often play a critical role in investments in energy, transportation, and logistics offer bringing the private and public sectors together to provide the most potential for both impact and reward. those elements. • Regional spending to adapt to climate change is expected • Co-financing between private investors and development to be between $5-10 billion per year from public and finance institutions draws on the strength of both to build private sources. Rising temperatures and water supply confidence and spread risk beyond private sponsors and issues, among other environmental issues, are creating private commercial banks. investment opportunities for scaling up low-carbon energy • Blended finance mixes concessional funds – typically from sources and managing water more efficiently. donor partners – with those of commercial development The question for private sector entities looking to profitably institutions and private investors in a risk-sharing address growing needs in challenging, less liquid markets is arrangement, with aligned incentives that ensure that straightforward: What methods can be deployed to raise capital official assistance is leveraged as much as possible with and mitigate risks associated with operating in African markets? private capital. • Local capital markets and tailored solutions offer effective FINANCING SOLUTIONS FOR AFRICA ways to access long-term, local-currency finance and A more dynamic banking sector has begun to emerge and now protect economies from capital-flow volatility and reduce plays a substantial role in supporting the growth of private their dependency on foreign debt. Local debt and equity business in Africa. Yet given the scale and long-term nature of markets can be better leveraged by local corporations when new investment required to meet rising consumption patterns, large banks or development finance institutions provide commercial bank financing alone will not be adequate to meet risk guarantees or act as anchor investors, expanding access the expected demand for large-scale projects with associated to additional funding instruments as well as new classes of high risks. investors. Other currency risks and market volatility can be addressed through tailored solutions and instruments. Mobilization of investment from a wide range of sources • Private equity, through the assistance of anchor investors, is critical. To ensure that large, multi-year investments and can support the development of large and specialized funds projects can be successful, commercial finance can be further that are able to invest in a wide variety of enterprises, leveraged and supplemented by additional sources of capital that including small and medium size businesses. Meanwhile, work together with private financiers to make more financing development finance institutions can help global tools available and better spread risks across parties without institutional investors take equity in African companies, misallocating it. including through asset management. REDUCING RISK AND MOBILIZING FINANCING ON A NEW SCALE 5 CASE STUDIES Bridge International Academies: An education company teamed with development banks and new investors to expand its Successful examples of recently financed projects come from low-cost private school chain out of Kenya into three additional across the African Region. countries, at a cost of $60 million. The partnership provided both regulatory assistance and seed investment. Azito 3: Nine development finance institutions teamed up to provide the $345 million in long-term finance and effect Africa Improved Food Holdings: In a project that addresses the regulatory reforms necessary to break ground on a 139 chronic malnutrition, DSM, a Dutch multinational, established megawatt power plant expansion in Cote d’Ivoire. a nutritious food processing plant in Rwanda requiring $60 million in initial investment. This is a project of ambitious scale Ecobank Transnational: The pan-African bank extended and risk that needed to be mitigated by reputable sponsors and lending to small businesses in eight African countries with responsive governments. It required strong purchase, supply and particularly difficult economic environments in terms of fragility off-taker arrangements for raw materials and final products. and low income levels. The project relied on a $110 million risk sharing facility between Ecobank and two development banks. Helios Investment Partners: Anchor investments from IFC were made to an Africa-focused private equity firm, helping it Cargill/SIB: An agribusiness giant and an Ivoirian bank attract otherwise hesitant investors and putting the firm on a partnered with IFC to provide financing, via a $6 million risk path to raising a record $1 billion fund. sharing facility, to cocoa farmers looking for funding methods to purchase better vehicles to transport product from farms to Eleme Petrochemical: A Nigerian manufacturer was coops. transformed from a loss-making industrial giant into a world- class chemical producer with advice, $162 million in financing Bayport Financial Services Limited: A Zambian and deal structuring that allowed privatization of the state microfinance lender was able to issue its first medium-term owned firm. note raising 172 million kwacha, or about $26.5 million, to expand lending to low and middle income borrowers and Methods exist to underwrite successful investments in Africa. In small businesses. Development finance institutions helped by a riskier environment going forward, they are sure to become providing anchor investments on the issue. more important. 6 NEW HORIZONS IN AFRICAN FINANCE Opportunities in Rapidly Changing Markets Africa is a region with enormous potential for private investors. In the midst of a downshift in the global economy, Africa remains a continent in transition, with rapid urbanization, increasing stability, a young and growing population, expanding internet connectivity, rising incomes, and shifting consumption patterns. Taken together, these enduring trends have created an abundance of commercial opportunities across the continent and turned it into a place businesses and investors cannot afford to ignore. Despite those opportunities, Africa is not immune to the short- According to proprietary IFC data, food and beverages continue term economic headwinds that most economies face today. to account for the largest share of household expenditures. Global economic growth over the next two years is projected As incomes rise and basic needs are more easily met in many to be weaker, led by slowing growth in China and lower households, other priorities are emerging. For example, commodity prices after a decade-long boom. Dampened demand household spending on technology and transportation in in both developed and developing countries is leading to a Nigeria, the region’s most populous nation, are each projected slowdown in international trade. to grow by more than 7.5 percent per year through 2020. They are expected to rise by 11.5 percent or more per year Yet even before recent global economic turmoil emerged, in Ethiopia, the second most populous nation, over the same investor activity on the continent was constrained by structural period. Growth of spending on housing will top 9.0 percent obstacles and a lack of financing options that often inhibited the annually through 2020 in Mozambique, Tanzania and Zambia. effective distribution of risk associated with large-scale or long- Other examples of surging consumption abound. See Figure 1. term projects. GROWTH PROSPECTS AND CHALLENGES CHANGING CONSUMPTION PATTERNS Most countries in Sub-Saharan Africa are expected to see Nevertheless, for investors the region’s demographics are all- a gradual pickup in growth over the next two years. Year- important and present significant opportunities. Urbanization over-year growth for the region was 3.4 percent in 2015. It is accelerating spending on transportation, from cars and should rise to 4.2 percent in 2016 and 4.7 percent in 2017- motorcycles to public transport. Young people joining the 2018, according to recent World Bank projections. The work force—the median age in Sub-Saharan African is 18— region’s lowest-income countries are expected to continue to will continue to create demand for housing and access to enjoy even higher GDP growth in the near term. With a few better education, health services and jobs. Connectivity via exceptions—South Africa is a prominent one—countries in the information technology is becoming a larger component of region are projected to sustain growth rates of more than 4.0 household budgets. Education, clothing, and footwear are percent over the next three years, making the region the second dynamic growth sectors in most economies. fastest growing region after East Asia. (Advanced economies, by contrast, are expected to grow 2.1 percent a year through 2018.) See Figure 2. REDUCING RISK AND MOBILIZING FINANCING ON A NEW SCALE 7 FIGURE 1: HOUSEHOLD CONSUMPTION PROJECTIONS IN AFRICA (selected countries and sectors, 2010-2020) COTE SECTOR/COUNTRY NIGERIA ETHIOPIA TANZANIA MOZAMBIQUE ZAMBIA SENEGAL D’IVOIRE DRC   Growth% Share% Growth% Share% Growth% Share% Growth% Share% Growth% Share% Growth% Share% Growth% Share% Growth% Share% Transport 7.9 5.6 11.5 2.1 10.4 4.9 10.7 6.1 10.6 7.1 5.1 4.1 6.9 8.9 6.5 2.8 ICT 7.8 1.4 12.1 0.9 9.1 0.9 10.8 3.0 9.0 3.5 5.0 2.0 6.4 9.1 6.8 1.1 Housing 6.9 12.7 6.9 11.0 9.1 2.3 9.4 13.4 9.3 18.5 4.9 15.8 6.4 12.1 6.4 1.9 Water 7.3 0.4 7.5 0.4 9.7 0.2 9.6 0.8 9.5 1.0 4.8 1.5 5.3 1.0 6.1 1.3 Education 6.6 2.0 7.0 0.9 11.0 2.1 9.1 0.3 8.6 3.3 4.9 0.1 5.5 1.6 5.9 2.8 Clothing and Footwear 7.3 3.8 6.6 7.6 7.7 6.2 8.4 6.3 8.1 3.3 4.4 6.2 5.2 6.2 5.9 5.6 Health 7.6 11.5 6.5 0.5 7.4 1.4 9.3 0.6 8.6 0.2 4.5 2.5 5.2 4.5 6.0 3.2 Energy 6.7 1.9 5.4 9.3 8.2 0.6 7.1 7.5 8.0 4.3 4.8 5.2 5.2 2.5 5.7 5.2 Food and Beverage 6.2 56.8 5.8 58.6 7.3 66.9 6.8 52.5 7.7 49.4 3.9 52.8 5.0 45.2 5.6 69.5 Avg Growth rate 2010-20 6.9 6.7 6.8 7.8 7.6 4.5 6.5 6.2 Avg Population growth 2010-20 2.6 2.0 3.1 2.2 3.3 2.6 2.2 2.6 Population 2014 (millions) 174 91 48 26 15 15 25 79 Consumption (US$ bn; 2010) 44.5 35.2 10.7 6.4 6.1 7.1 17.7 14.3 Sources: IFC and World Bank based on Household Surveys. FIGURE 2: PROJECTED GLOBAL REAL GDP GROWTH (percent) 4,9 4,6 4,7 4,7 4,2 3,4 3,1 3,1 2,9 2,6 2,4 2,4 2013 2014 2015 2016 2017 2018 Note: Figures for 2013-2014 are actual. 2015 figure is estimated. 2016-2018 are forecast. World Sub-Saharan Africa Source: World Bank, Global Economic Prospects, January 2016 While most African economies continue to grow, global economic reduced foreign direct investment. Emerging market currencies, trends and other factors are testing African economies in varied including those across Sub-Saharan Africa, will remain under ways. pressure as the US dollar strengthens. Consequently, the abundance of liquidity and low borrowing costs experienced by Financial markets are suddenly volatile, with a resurgence of Sub-Saharan Africa and other developing regions over the last risk aversion toward developing countries that is expected to few years has been reversing.  continue through the near term. Investor appetite is diminishing across asset classes, as evidenced by portfolio outflows and 8 NEW HORIZONS IN AFRICAN FINANCE Furthermore, domestic conditions in some African countries sector grew more than 10 percent a year over the 2008-2013 remain difficult compared to the period before 2008, with period, more than any other emerging market region. higher fiscal and external deficits and higher levels of debt. There are signs of deterioration in bank balance sheets The bottom line is that Africa’s economies continue to grow, its citizens are becoming wealthier, they have access to more in many African economies, particularly those that rely on disposable income, they are connected to the rest of the world commodity exports, with non-performing loans rising and tight more than ever, and they are hungry for the broad variety goods domestic conditions pushing down lending margins. In addition, and services that businesses can offer. inflation has begun to inch higher, though at the moment it remains at historically low levels.  African countries also face a significant challenge to diversify their economies and build BUSINESS PROSPECTS IN A SHIFTING competitiveness to export a wider range goods and services. ENVIRONMENT Companies in Africa and from around the world have seized Still, per capita gross domestic product in the region has been on these opportunities over the past decade, expanding both at rising rapidly since 2000 and is projected to exceed $4,700 home and regionally. And the region’s potential has inspired a in 2020, up by 50 percent over the 2010 level. The projected new breed of global private investor looking to tap substantial 10-year annual growth rate of per-capita GDP (2010 to 2019) opportunities in Africa. Gross capital flows to Africa increased is 5.5 percent, second only to emerging Asia, according to from just $9 billion in 2005 to $49 billion in 2014, according to IFC projections. And projected rates of per-capita growth are IFC data. more impressive still in numerous African countries including Ethiopia (8.9 percent), Nigeria (3.8 percent), Rwanda (6.2 But recent economic headwinds are having an impact. Gross percent), and Tanzania (6.5 percent). See Figure 3. capital flows to Africa declined in 2015 to $40 billion. South Africa, with a slight increase in flows last year, was the From 2010 to 2015, private consumption accounted for almost exception, apparently a flight to perceived quality relative to 60 percent of total economic growth in Africa, a contribution of other regional markets on the part of international investors. 2.8 percentage points per year on average. As a result, the retail See Figure 4. FIGURE 3: SUB-SAHARAN AFRICA, GROSS DOMESTIC PRODUCT (based on purchasing-power parity (PPP) per capita GDP) $4 704 $4 293 $4 491 $4 109 $3 834 $3 947 $3 606 $3 753 2013 2014 2015 2016 2017 2018 2019 2020 Source: IMF REDUCING RISK AND MOBILIZING FINANCING ON A NEW SCALE 9 And Africa’s thirst for capital remains significant. The continent • Housing: Housing is struggling to keep pace with African lags all other global regions in terms of reliable access to cities, which are absorbing some 40,000 new people every electricity, sanitation facilities, water sources, and paved roads. day. Already in Nigera, for example, there is an estimated Infrastructure projects across Africa could absorb a combined 17 million unit housing shortage and in Kenya the shortage $93 billion annually, yet spending on such projects was half is estimated at two million units. that as of 2009, according to a 2014 World Bank Group report. The related capital shortage going forward is projected • Education: Public education systems in many countries to be particularly acute in Nigeria, Angola and Kenya, and face challenges in providing quality education to the investments in energy, transportation, and logistics offer the poorest children, with more than 50 million children most potential for both impact and reward, World Bank figures out of school in Sub-Saharan Africa, according to World show. Bank estimates. Governments have committed to achieve ‘education for all’ by 2030; to do so additional capacity There are many examples of sectors where opportunities for will need to be created for 127 million students. investment are not sufficiently funded. • Healthcare: Sub-Saharan Africa bears 24 percent of the • Financial services: Only about 15 percent of adults in Sub- global burden of disease but only accounts for about one Saharan Africa had deposit accounts as of 2012, according percent of global health expenditures. The supplies of both to World Bank figures. Yet with incomes rising rapidly health care workers and hospital beds are short of demand. across the continent – and surpassing the critical $1,000 Investment opportunities are expanding for health service level – retail banking in the region is expected to grow at a providers, pharmaceuticals, and medical technology that 15 percent annual rate through the end of this decade. promote greater access to affordable, quality healthcare. • Manufacturing and services: Consumers are demanding a wider range of affordable goods and services. Construction The sector also lacks consolidation, with too many small materials, energy efficient machinery, real estate, retail actors working independently, creating opportunities for and tourism are among the many areas where competitive companies that manage change on a large scale. businesses are likely to thrive in coming years. FIGURE 4: GROSS CAPITAL FLOWS TO AFRICA FELL BY 28% IN 2015 (US $bn) 50 40 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Loan Equity Bond Sources: IFC Research – Global Markets: Gross Capital Flows and FDI Flows to Africa 10 NEW HORIZONS IN AFRICAN FINANCE • Climate Change-Related Business: The World Bank Africa’s banking sector remains underdeveloped even compared estimates that annual regional spending to adapt to climate with other emerging market regions. The sector lags all other change will be between $5-10 billion from public and private regions in terms of access, depth, efficiency and stability, sources. Rising temperatures and water supply issues, for according to a 2012 World Bank study. While the financial example, are creating investment opportunities for scaling sector has grown and matured in recent years, it is highly up low-carbon energy sources and managing water more concentrated—the three largest banks held 78 percent of bank efficiently. sector assets as of 2011—and the focus remains on lending to high-margin corporate clients, as opposed to retail banking to The question for private sector entities looking to profitably individuals and small enterprises. address growing needs in challenging, less liquid markets is straightforward: What methods can be deployed to raise capital And regional capital markets—with a few notable exceptions— and mitigate risks associated with operating in African markets? lack the size and liquidity necessary to make a significant contribution to Sub-Saharan Africa’s capital needs. The FUNDING SOURCES AND IMPEDIMENTS Johannesburg Stock Exchange is more than three quarters of There are numerous sources of funding, including domestic and total Sub-Saharan Africa’s market capitalization and the Nigeria international bank loans and local and international equity and Stock Exchange less than 10 percent. Outside of South Africa bond markets. The problem is that several of those sources are and Nigeria, stock market capitalization in the region remains chronically underdeveloped in Sub-Saharan Africa, while others low at only 10 percent of GDP, a fraction of that in other are currently constrained by recent economic headwinds or the emerging markets. Market liquidity remains a problem region- continued fallout from the global financial crisis of 2007-2008. wide. There was a steep drop in bank loans for African infrastructure Domestic debt markets, while growing, remain shallow and are projects after 2007, most likely a consequence of new capital dominated by government securities, which account for three- requirements imposed on commercial banks since the financial fourths of total bond market capitalization. Only South Africa crisis. Overall, loans to emerging market infrastructure fell after has a deep domestic bond market. Corporate bond markets 2007, slowly recovering through 2014 before turning down again. outside that country remain nonexistent or in an embryonic Bonds and equity have followed a similar pattern. See Figure 5. stage. FIGURE 5: AFRICA GROSS CAPITAL FLOWS TO INFRASTRUCTURE BY ASSET CLASS (US $bn) 70,0 120,0 60,5 60,0 103,3 100,0 103,0 93,2 50,0 83,4 50,6 80,0 40,5 37,9 74,3 40,0 67,9 41,9 39,4 60,6 59,9 64,1 60,0 56,9 30,0 28,9 28,3 34,7 28,8 40,0 20,0 11,5 32,1 33,0 5,9 18,6 12,6 16,0 20,0 10,0 10,8 0,0 0,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Grand Total Loan Equity Bond Sources: Dealogic; Global Markets – IFC Research (CGEIR). Data as of December 31, 2015. REDUCING RISK AND MOBILIZING FINANCING ON A NEW SCALE 11 Finance Solutions for Africa The abundance of opportunities across Sub-Saharan Africa, and the appetite of institutional investors to take advantage of them, stand in stark contrast to the limited approaches available to finance projects. Businesses and investors in Africa are searching for new methods to underwrite potentially profitable ventures on the continent. Increased availability of commercial bank financing and funds, along with the slow but steady growth in domestic capital markets and other sources of commercial financing, are all encouraging signs. These already play a major role in supporting the growth of private business in Africa and they will become increasingly critical in coming years. But given the rapidly Addressing Climate Change changing demographics of the region and the need for investment on a far greater scale than in recent years, commercial finance Urgent energy access needs and the impact of climate change alone cannot underwrite long-term, large-scale projects in Africa require new models that encourage renewable sources of energy. with high risks. Scaling Solar brings together multiple World Bank Group services under a single engagement aimed at creating viable markets In addition to being the world’s lowest-income region, Africa for solar power in each client country. The program enables governments to competitively and transparently procure privately has many fragile and conflict affected states. In fact the region owned and funded solar power stations in the shortest time and accounts for half of the globe’s countries defined as such by the at the lowest tariffs possible. World Bank Group. While governance is improving, it remains Scaling Solar includes an all-in-one package of advice, project weak in most markets. Africa remains the most difficult region documents templates, risk management products, finance, and in the world in which to do business. Poor perceptions of Africa insurance designed to attract leading private sector developers may be exaggerated, but all of the above factors contribute to to new geographies. The project is being implemented across actual risks that must be managed and mitigated. See Figure 6. multiple countries in Africa, creating a regional marketplace and giving even small countries the purchasing power of larger markets. At the same time, part of the attraction of Africa is the improving climate for business. In the 2015 and 2016 World In 2015 Zambia’s Industrial Development Corporation announced that 48 companies sought to prequalify for their two initial 50 Bank Group Doing Business reports, African countries made up megawatt solar projects under Scaling Solar. From these, 11 five of the top 10 most improved global economies for ease of companies, including many of the top global solar developers, doing business. Included in the top 10 were: Benin (2015 and qualified for the tender that was released in February 2016. 2016), Cote d’Ivoire, Democratic Republic of Congo, Kenya, Senegal is now also preparing a Scaling Solar tender and several Mauritania, Senegal (2015 and 2016) Togo, and Uganda. other countries are expected to follow. 12 NEW HORIZONS IN AFRICAN FINANCE FIGURE 6: EASE OF DOING BUSINESS INDEX (1=most business-friendly regulations) 160 144 143 140 127 128 120 110 111 101 102 100 95 95 85 84 80 60 41 41 40 20 10 11 0 2014 fic sia an a a ia a ld 2015 ric ic ric As or ci be lA er Af Af W Pa h Am rib ra ut th n & nt ra Ca So or th ia Ce ha N As & or Sa & a & N st ic pe b- st Ea er Ea Su ro Am Eu e dl tin id La M Sources: World Bank, WDI Datbase, Doing Business Certain other countries have made large strides in recent years. PUBLIC-PRIVATE PARTNERSHIPS Rwanda, for example, has made consistent improvements in PPPs are a tested strategy, especially for large infrastructure its investment climate to become the second easiest place to do projects and other projects involving public services. They can be business in Africa. Within the region, Rwanda falls behind only applied to numerous sectors, from core infrastructure to health, Mauritius, another country that has consistently undertaken education, and other areas. reforms to make the country more hospitable to investors. Power generation, for example, which is lacking across the To ensure that large, multi-year investments and projects can region, requires large-scale funding, the appropriate regulatory be undertaken, existing sources of finance can be leveraged framework, sector planning and a high quality off-taker to provide and supplemented by other types of financing and support, the comfort level that private investors require to participate. including private sector development financing, donor funding, Development institutions often play a critical role in bringing the a mix of public and private financing, and more debt and equity private and public sectors together to provide all of those elements. instruments that work together to better spread risks across parties without misallocating it. In 2012 nine development banks teamed up to provide the long- term finance, regulatory reform and power purchase agreements Fortunately, there is a combination of strategies and innovations necessary enable a 139 MW natural gas power project to go in financing and risk mitigation now being employed in Africa that forward in Cote d’Ivoire. It will increase electricity production can provide those methods. at an existing plant by 50 percent with no incremental gas consumption. REDUCING RISK AND MOBILIZING FINANCING ON A NEW SCALE 13 CASE STUDY Azito Energy Meeting Africa’s Power Needs Public funding has proven insufficient to meet Africa’s enormous power needs. For large infrastructure projects, especially power generation, establishing the right financing, regulatory framework, sector planning, and a quality off-taker can provide the comfort level that private investors require to participate. Development institutions can play a critical role in bringing the private and public sectors together. Despite being blessed with a huge endowment of natural gas reserves, A reliable supply of natural gas was organized among several regional hydro capacity, and other natural resources, Sub-Saharan Africa is producers while the national government and the private utility CIE were massively underpowered. Generation capacity is lower than that of any contracted to off-take and distribute the power produced. And the World other world region and is marked by unreliable supplies, high prices, and Bank engaged the Cote d’Ivoire government on energy sector reform and low rates of access. Some 600 million Africans lack access to electricity, financial management. according to a 2015 report by McKinsey & Co. As part of the expansion, the existing plant was fitted with two heat And the gap between supply and demand is growing. Because new recovery steam generators, a 140MW steam turbine generator, one household connections in many countries are not keeping pace with steam condenser, and an air-cooled cooling water system. Essentially, population growth, the electrification rate, already low, is actually the technology makes use of waste heat generated by the existing gas declining. At the same time, the high penetration of diesel generators turbines to produce steam which drives another generator, thereby across the continent – with prices three to six times what grid consumers reducing the need for additional fuels to increase the plant’s capacity. generally pay – strongly indicates that African businesses and consumers Those add up to an expanded facility that will generate 50 percent more are willing to pay for electricity. McKinsey predicts a period of rapid power with no incremental gas consumption. It is expected to reach electrification for Africa in coming decades. 2.3 million additional customers and is a successful example of a major Yet in the immediate aftermath of a long civil war and a contested and investment in Cote d’Ivoire following the recent crisis. violent election in Cote d’Ivoire, it seemed all but impossible for a private Opportunities to replicate the Azito plant’s successful expansion are entity to embark alone on a major power infrastructure project in 2012. proliferating across Africa, yet are all but untapped. New private sector The risks, from political volatility to regulatory and currency risk to a lack power capacity created in 2012-2014 was just 6.0 percent of annual of local expertise, among many others, were just too daunting. demand for new capacity across Africa. And the continent could absorb To enable just such a project to go forward, in 2012 nine development $490 billion of capital for new power generating capacity over the next finance institutions teamed to provide the long-term finance and design 25 years and an additional $345 billion for transmission and distribution, regulatory reforms necessary to break ground on a 139 megawatt power McKinsey reports. plant expansion in Cote d’Ivoire. The power plant is located near Azito village in Cote d’Ivoire’s Yopougon KEY RISK MITIGANTS district, about 6 kilometers west of the port of Abidjan. It was initially Financing risks: built in 1998 and now majority owned by Globeleq Generation Holdings, a • Development bank long term finance, providing comfort to other power generation developer focused on emerging markets. investors An expansion and modernization of the existing Azito plant was • Strong financial standing of project sponsors estimated to cost $430 million and would require financing and technical • IFC swap, fixing interest rate on the debt for 15 years expertise, currency hedges, interest rate swaps, insurance against Operational Risks: political risk, a reliable fuel supply and end-user purchase agreements. It • Project sponsors very experienced in power sector was a large and complex package to pull together, beyond the scope of • Experienced international contractors any private investor. Market/Off-Taker Risks: Enter IFC. The development bank provided a $125 million anchor • MIGA equity guarantee on the concession contract and political and investment and arranged another $220 million in long-term loans from transfer risk eight other development banks. World class turbine technology was • World Bank engagement in sector structural reforms and financial procured from General Electric and experienced contractors, including Hyundai Engineering and Construction, were brought in to build, operate management and maintain the facility. 14 NEW HORIZONS IN AFRICAN FINANCE CASE STUDY Ecobank Bringing Credit to Small Businesses Committed to inclusive lending and looking for more customers, a pan-African bank wanted to extend lending to small businesses in eight countries with particularly difficult economic environments in terms of fragility and income levels. The project involved a $110 million public-private risk sharing facility and additional risk mitigation measures. S mall and medium sized enterprises have been poorly served by A project to expand SME lending to more economically challenged the banking industry in Sub-Saharan Africa. Fewer than one-in- countries in West and Central Africa, however, required the kind of three medium sized firms in the region have a bank loan or line assistance that development banks can provide. of credit, according to a World Bank survey; for small firms it is fewer than The lending package Ecobank put together with IFC and the UK’s one-in-five. Department for International Development in 2015 was designed to In fragile and conflict affected states those firms represent the backbone overcome the challenges of lending to smaller businesses with high risk of the economy and provide the bulk of employment, yet they receive profiles in very poor countries, including Burundi, Chad, Cote d’Ivoire, just one-quarter of all loans and credits. Part of the explanation is that Democratic Republic of the Congo, Republic of the Congo, Guinea, Mali there is a general lack of knowledge about the creditworthiness of such and Togo. DFID participated through the Global SME Finance Facility. firms. In addition, FCS countries lack institutional lending capacity and The centerpiece of the Ecobank package is a $110 million risk sharing have poor financial infrastructure and generally suffer some level of facility between IFC and Ecobank, with further risk mitigation provided macroeconomic instability. The unfortunate result is that banks in those by DFID, which is available to the eight Ecobank affiliates in the target countries have little appetite to lend to SMEs. countries. Ecobank Transnational Inc., the largest pan-African bank, with a The facility also provides Ecobank affiliates tools to build scale in SME presence in 36 countries, had been strong in corporate banking since lending, including advisory services and SME finance training. There is its incorporation in 1985, but was also committed to serving small and also a pricing incentive for Ecobank affiliates that achieve 50 percent medium business enterprises and retail customers. facility utilization within 12 months. The new facility means improved access to finance for smaller enterprises in the eight countries, stronger financial sectors, and better employment opportunities. For Ecobank it means a broader customer base and – eventually – stronger economies to lend into. KEY RISK MITIGANTS Credit risk of SMEs in fragile situations • The IFC Risk Share Facility • DFID additional risk mitigation • Ecobank risk management framework and IFC’s bank training support Supervision challenges • IFC’s well-structured supervision model REDUCING RISK AND MOBILIZING FINANCING ON A NEW SCALE 15 CO-FINANCING WITH DEVELOPMENT BANKS BLENDED FINANCE Another approach to mobilizing funds and spreading risk Blended finance is an approach that can be used to enable the is co-financing. Through it investors can gain a greater level private sector to invest where it would not otherwise be possible. of comfort via a lead development bank’s connection with The idea is to mix concessional funds – typically from donor governments, its financial strength, its willingness to remain partners – with those of commercial development institutions through difficult economic conditions, and its financial and private investors in a risk-sharing arrangement, with aligned imprimatur, all of which help attract other financiers. incentives to make sure official assistance can be leveraged as much as possible with private capital. Nigeria’s Eleme Petrochemicals was transformed from a poorly performing industrial giant into a world-class chemical In 2015, IFC agreed to provide a $21.5 million loan and $4.5 manufacturer when IFC provided advice, financing and deal million equity investment in Dutch Africa Improved Foods structuring to allow privatization of the state owned firm. It was Holding in Rwanda. This loan comes with support from the acquired in 2006 by Indonesia’s Indorama International Finance, donor-funded Global Agriculture Food Security Program, and after which production increased from 8,502 metric tons per is intended for the construction and operation of a 45,000 annum in 2006, to 282,286 mtpa four years later. tons-per-year processing plant in Rwanda for fortified cereals to Similarly, NewGlobe Schools, which runs Africa’s largest treat child malnutrition. The project will source raw materials network of low-cost private schools, teamed with development through existing farmer cooperatives in Rwanda and through banks and new investors to launch an expansion of its Bridge the government. It was designed with the help of the World Food Academies chain out of Kenya into three additional countries. Program, the food aid branch of the United Nations, which The partnership provided seed investments and regulatory has agreed to buy a significant portion of the final product and assistance, and Bridge is now on its way to educating one million distribute it in Southern Sudan, Uganda, Burundi, and other students from low-income communities at 2,100 schools by countries. 2020. Another example is agribusiness giant Cargill and Cote d’Ivoire’s Société Ivoirienne de Banque, which in 2015 were able to partner with IFC to create a truck leasing program in Cote d’Ivoire that provides more reliable vehicles to collect cocoa beans from the field. 16 NEW HORIZONS IN AFRICAN FINANCE CASE STUDY Cargill/SIB Securing a Supply of Cocoa through Loans to Farmers A four-party risk-sharing facility involving private and public sector actors brought cocoa farmers in Cote d’Ivoire access to medium-term finance allowing them to pare back their biggest cost component—old and unreliable vehicles used to collect cocoa beans from the field. C ote d’Ivoire is among the world’s largest producers of cocoa In 2015 Cargill wanted to expand the Coop Academy program in Cote beans and their export is a mainstay of the West African d’Ivoire to improve the coops’ profitability by reducing the burden of nation’s economy. Nearly all cocoa production in the maintaining old trucks. To do so it collaborated in a risk sharing facility – along with IFC, an Ivoirian bank and the Global Agriculture and Food country comes from small farmers, many of whom belong to farming Security Program – to add a financing arm to the Coop Academy. With cooperatives. Yet logistics has historically proved a major challenge for access to finance, coops could lease trucks to more easily and efficiently those farmers, as bad roads lead to problems with damaged vehicles, collect beans from the fields. and proper maintenance and repair has often proved to be prohibitively IFC and Societe Ivoirienne de Banque, Cote d’Ivoire’s fourth largest bank, expensive. agreed to equally share the credit risk in a $6 million portfolio of medium- Coops have access to short-term financing through exporters, but the term (three-year) truck leases provided by SIB to the coops. Cargill was duration of those loans has generally prevented them from access to new the off-taker for the cocoa produced by the coops and made the deal trucks. Thus they have resorted to second or third-hand vehicles which bankable by arranging to service the coops’ debt on the leases from the involve huge maintenance costs. Cocoa collection via existing or older proceeds of the coops’ cocoa sales, thereby mitigating the credit risk trucks is the largest component in the coops’ cost structure. involved. Last September 43 cocoa cooperatives in Cote d’Ivoire took delivery of In 2013 agribusiness giant Cargill, a major global purchaser and processor new trucks at a ceremony in Abidjan. Medium-term financing is now of cocoa, established Cargill Coop Academy, a program to help Cote available to 70,000 underserved smallholder farmers through 100 d’Ivoire cocoa cooperatives better manage their businesses by teaching cooperatives. For Cargill that means a stronger cocoa value chain and a management, governance, finance, auditing, and marketing skills. more reliable supply of cocoa beans. The program is part of a broader Cargill effort, called Cargill Cocoa The hope is that the multiparty credit arrangement involving both Promise, to secure a reliable supply of cocoa, much of which is grown by private and public sector entities can be replicated for other crops in Cote smallholder farmers around the world, in order to meet a rising global d’Ivoire and beyond, giving farmer cooperatives across Africa access to demand for cocoa and chocolate products. medium-term finance to cut costs and improve profitability. KEY RISK MITIGANTS Financing Risk: • The 4-partite Risk Sharing Facility between Cargill, SIB, IFC and GAFSP • Cooperatives’ long track record of serving Cargill’s working capital advances Sector-Specific Risk: Cocoa sector • Successful implementation of the sustainable trading margin regime for coops following the 2012 reforms Environmental/Social Risk: • Requirements for coops to certify mitigation of child labor and traceability risks through the sustainability and supply chain management programs by Cargill • SIB environment and social due diligence and monitoring of eligible coops REDUCING RISK AND MOBILIZING FINANCING ON A NEW SCALE 17 CASE STUDY Bayport Tapping Bond Markets to Expand Lending Bond markets, though underdeveloped in Africa, are beginning to emerge as a realistic financing option for private companies looking to invest in the continent. Multilateral development banks can issue bonds in local currencies to help develop nascent bond markets as well as assist corporations with private issuance by providing risk guarantees or acting as anchor investor. L ess than one quarter of adults in Sub-Saharan Africa had an as an anchor investment in the Bayport bond and ALCB Fund promised account at a formal financial institution in 2012, compared with to buy 13 percent. Those investments were catalytic, as IFC’s imprimatur about half of adults worldwide, according to IFC research. Lacking enhanced the issuer’s profile and created a comfort level for other a financial infrastructure that includes a place to save money securely, investors, eventually attracting pension funds and insurance companies safe and efficient means of transferring money, and access to credit and to the transaction. insurance, the majority of people on the continent are often barred from Investor interest in the issue was robust enough that Bayport increased making productive investments in their families and businesses. the offering by ZMW 21 million, from the initial 150 million planned. In the Access to financial services and credit is slightly greater in Zambia, where end, the company was able to issue its first medium-term note, raising the banking sector is better developed than many African nations. Still, a ZMW 172 million, or about $26.5 million. Not only did the issue break a large portion of the Zambian populace, especially in rural areas, remains long dry spell for the market, it was the largest corporate bond issuance unbanked and vulnerable to unscrupulous or unregulated loan activities in Zambian history. due to poor access to financial services, according to KPMG. And even in countries with fairly developed financial sectors, services are often In addition to expanding Bayport’s lending base and profit potential directed exclusively toward established businesses and higher income and encouraging Bayport’s efforts to strengthen responsible finance households. Only 16.4 percent of small firms in Sub-Saharan Africa have practices, the Bayport bond project helped deepen Zambia’s domestic a bank loan or line of credit, compared to 29.5 percent in developing capital market, a critical ingredient to financing the country’s domestic countries across the globe. In Zambia it is only 5.2 percent. economy. It also had a positive impact on the private sector by establishing strong financial practices and demonstrating the possibilities Bayport Financial Services Ltd., Zambia’s largest microfinance lender and for tapping capital markets to fund new business ventures in Africa. its market leader in payroll based lending, wanted to expand lending to Bayport’s example is expected to encourage other enterprises in the low and middle income borrowers and small businesses, unlocking the region to pursue bond issuance as a means of broadening their investor credit market to ordinary Zambian citizens while tapping a large new base and lowering their funding costs. customer base. Perhaps most important, the credit now available to low and middle- Capital markets are a traditional source of funds for an expansion of bank income workers and small businesses in Zambia will encourage lending, yet debt and equity markets are underdeveloped and illiquid in investments in business ventures, small scale agriculture, education and many African countries—if they exist at all. And domestic debt markets home improvement, and those in turn will generate economic growth are dominated by government securities in Africa. Zambia is no exception: and new sources of profits for other private enterprises. As of 2014 there hadn’t been a Zambian kwacha (ZMW) corporate bond issuance in five years. KEY RISK MITIGANTS Cooperation with multilateral development banks enabled Bayport Financing Risk: to end that dry spell and tap capital markets for the funds it needed • IFC’s presence in the bond program, providing comfort to investors to expand lending. IFC first developed a constructive dialogue with • IFC’s sound technical expertise to support structuring of the bond Zambian capital market regulators through a Zambezi bond issuance program in 2013. The development bank then used its extensive experience with capital markets transactions—both in Zambia and more broadly—to help Operational Risks: Bayport plan its own issuance that could be appropriately structured and • Competent mid-level management launched in a timely manner. • IFC’s knowledge of Zambian bond market through the issuance of Kwacha denominated “Zambezi” bond in 2013 IFC and African Local Currency Bond Fund, a unit of the German- government owned development finance institution KfW, also made • IFC’s strong relationship with the Company’s senior management, its funding commitments: IFC committed to purchase 35 percent of the issue creditors and the arranger (Barclays/ABSA) 18 NEW HORIZONS IN AFRICAN FINANCE The development bank guaranteed 50 percent of an up-to-$6 million leasing portfolio through a risk sharing facility with some of that risk assumed by donors through the Global Agricultural Food Support Program. A similar approach was used with Ecobank, a pan-African full-service banking group. IFC supported a project to extend Ecobank lending to small businesses in eight African countries with particularly difficult economic environments in terms of fragility and income levels. The project uses a $110 million risk sharing facility between Ecobank and IFC and the UK’s Department for International Development. Meeting the Housing Challenge Where development needs exist, there are opportunities to use blended finance to expand business. In most African Housing is especially important due to the impact it has on the markets, for example, financial institutions have yet to develop overall economy and capital markets. The housing sector produces a sustainable strategy to address the significant market gap jobs, from day laborers to masons, engineers, and architects. in serving women, creating a missed opportunity that also Investments in housing create a domestic, self-reinforcing cycle of constrains private sector development. employment and growth. Yet today Africa’s mortgage market is tiny, and housing markets Rawbank in the Democratic Republic of Congo introduced with millions of homes have only a few thousand outstanding “Lady’s First” banking, offering specialized services to women. mortgages. Increasing mortgage availability would spur the IFC provided advice to help establish services and invested in creation of less expensive housing constructed through more efficient means. That in turn would reduce interest rates that Rawbank with support from the Global SME Finance Facility, now carry premiums to offset risks and costs of construction. a donor facility IFC launched in 2012 to expand lending Standardized mortgage contracts and terms would reduce by development institutions to small businesses in emerging transaction costs. For the lowest income households, microfinance markets. The project supports lending to women and micro, for housing improvements could be applied to improve living small and medium sized enterprises. conditions in existing informal settlements. IFC is making long-term financing available through equity investments in wholesale mortgage liquidity facilities in Nigeria, countries of the West African Economic and Monetary Union, and Tanzania. These facilities issue long-term bonds and then on-lend the proceeds to their commercial bank members, thereby making mortgage financing available at longer maturities. To further increase mortgages, IFC has made $100 million in lines of credit available directly to commercial banks in Kenya, Rwanda, and Uganda. Over time, IFC will work to link primary lenders directly with local pools of investment capital through a variety of means, including securitization, real estate investment trusts, and covered bonds. REDUCING RISK AND MOBILIZING FINANCING ON A NEW SCALE 19 CAPITAL MARKETS AND TAILORED SOLUTIONS Deep, efficient local capital markets are a particularly effective way to access long-term, local-currency finance, the foundation of a thriving private sector and a key driver of jobs and growth. Sound local capital markets protect economies from capital- flow volatility and reduce dependency on foreign debt. Beyond local markets, other currency risks and market volatility can be addressed through tailored solutions and instruments. The development of such markets is a priority for development banks. IFC promotes them by issuing non-government local- currency bonds, paving the way for other issuers. In addition With assistance from development institution anchor to providing local currency finance to meet the needs of the investments, Zambia’s Bayport Financial Services Limited, a private sector, development banks can work with governments microfinance lender, was able to issue its first medium-term note and regulators to promote reforms and policies supporting local raising 172 million kwacha, or about $26.5 million, in 2014, the capital markets and local currency finance. first corporate bond issuance in Zambia in five years. Proceeds from the offering will expand Bayport lending to low and middle IFC has issued bonds in 18 local emerging-market currencies, income borrowers and small businesses. IFC first developed a from Armenian dram and Chinese renminbi to Indian constructive dialogue with Zambian capital market regulators rupee, Peruvian soles, and Zambian kwacha. Loans, swaps, through a prior Zambezi bond issuance in 2013. guarantees, risk-sharing facilities and other structured products are other methods used to hedge foreign exchange, interest rate, Beyond local debt, deploying capital market instruments such and commodity price exposure. as cross-currency swaps can be critical to helping companies manage the risk of market volatility and finance successful projects. In Senegal, for example, IFC and the Overseas Private Investment Corporation provided financing for the 53 megawatt Cap des Biches power plant with project developer ContourGlobal, the Government of Senegal, and Senegal’s national electricity utility. The project’s innovative financing model was customized to the needs of the private sector operator to allow ContourGlobal to finance the project with an 18-year IFC swap to Euros of OPIC’s $91 million US dollar financing. The approach reduced the risk of currency movements to provide stability by ensuring that revenues match debt service obligations. The project will provide electric power to 100,000 Senegalese. 20 NEW HORIZONS IN AFRICAN FINANCE A Role for the Private Sector in Basic Human Development Good health, education and nutrition are the foundations of human development. It is difficult to care for domestic or rural household responsibilities, hold a job, or care for a family if you are malnourished, sick, or lack relevant skills and knowledge. Expanding access to health and education services and improved nutrition is a central element in any strategy to eliminate poverty and reduce inequality. In developing countries, the poor often turn to private sector health and education providers for access to services, as well as food and other basic needs. • The World Bank estimates that over 50 million children are out of school in Sub-Saharan Africa. Governments have committed to achieve ‘education for all’ by 2030; to do so additional capacity will need to be created for 127 million students. • Sub-Saharan Africa bears 24 percent of the global burden of disease but only accounts for 1 percent of global health expenditures. The supplies of both health care workers and hospital beds are short of demand. • Over 165 million children under the age of five are stunted, and over 80 percent of malnourished children live in South Asia and sub-Saharan Africa. Extreme poverty is exacerbated by chronic malnutrition, or stunting, in children under the age of three. CASE STUDY Africa Improved Foods Nutrition on a Larger Scale in East Africa In a project that addresses chronic malnutrition, DSM, a Dutch multinational, established a nutritious food processing plant in Rwanda. This project of ambitious scale needed risk mitigation by reputable sponsors and responsive governments. It required strong purchase, supply and off-taker arrangements for raw materials and final products. I n 2015, IFC agreed to provide a $26 million financing package. agricultural products and that suit local eating habits. After Rwanda, a It comprised $21.5 million in loans from IFC and mobilized from similar plant is planned for Ethiopia. other sources, and $4.5 million in equity to Africa Improved Foods The first phase of the project in Rwanda is expected to cost nearly $60 Holding. The donor-funded Global Agriculture and Food Security million in capital expenditure and working capital. IFC has played a Program private sector window provided key support to this project leading role in the financing and helped to bring in FMO and CDC as with $8 million of the $26 million financing package intended for the equity partners. construction and operation of a 45,000 tons-per-year processing plant The Clinton Health Access Initiative played a key role in developing this to produce fortified cereals to treat malnutrition in nearly one million project, especially by bringing the public parties and DSM to the project. children. CHAI has no financial interest in the project but sees this initiative as This project created a partnership involving several parties: DSM; the important in addressing health issues in Sub-Saharan Africa. UK’s and the Netherlands’ development finance companies CDC and FMO; the World Food Program; the government of Rwanda; and the KEY RISK MITIGANTS Clinton Health Access Initiative. It will source raw materials through Financing risks: farmer cooperatives in Rwanda and through the government, thereby • Provision of patient equity capital by GAFSP, IFC, FMO and CDC providing a stable market for farmers’ produce. • Provision of long-term debt by IFC and other financiers The off-taker agreement with WFP, the food aid branch of the United • Off-take agreement denominated in US dollars to match currency of Nations, is a key anchor for the project. The WFP plans to distribute the debt product in Southern Sudan, Uganda, Burundi, among other countries. Operational Risks: Rwanda has also agreed to purchase a portion of the output to • Highly experienced sponsor, contractor and management team distribute to the most vulnerable, while the remaining output will be sold in the retail market. Market/Off-Taker Risks: • Guaranteed off-take by UN’s World Food Program and the The project aims to develop a suite of nutritious products produced Government of Rwanda locally for young children and women, based primarily on local REDUCING RISK AND MOBILIZING FINANCING ON A NEW SCALE 21 CASE STUDY Bridge International Academies Expanding Education That Gets Results Africa’s largest network of low-cost private schools teamed with development banks and new investors to support the Kenyan-based school and launch expansion into three additional countries. Its strong partnerships provided seed investments and assistance navigating new regulatory environments. M any African nations struggle to provide affordable quality government’s development finance institution. education to the poor in their societies. Limited classroom The funds were used primarily for new country expansion (71 percent) space, high absentee rates among teachers, hidden fees, and new schools in Kenya (14 percent), and development of Bridge’s and non-standardized curriculums all contribute to create obstacles that software and general operations. IFC and the World Bank helped Bridge low income families often cannot overcome. understand and navigate government policies and regulations in the Three years ago NewGlobe Schools Inc. wanted to expand Bridge three new markets. International Academies, which at the time operated 250 low-cost Today Bridge educates more than 100,000 students in 400 nursery and schools in Kenya. The goal was to increase the number of schools, which primary schools across multiple countries. Bridge Academy students serve families living on $2 or less a day, to over 400 in Kenya and to consistently outperform their peers in public and other low-cost replicate the Bridge model in Uganda, Nigeria and India. The ultimate private schools in reading and math, according to independent testing. objective is to provide access to education for 3.5 million low-income Additionally, the World Bank has launched a rigorous, independent students by 2020 and 10 million by 2025. impact evaluation of the Bridge International Academies program in Bridge Academies’ innovative strategy delivers quality education to Kenya, which will be the first large-scale, randomized, controlled trial of children of poor families at low cost. It leverages data, technology and fee-paying schools in sub-Saharan Africa. scale to standardize everything from content development and teacher In November 2015, Bridge’s first class of students sat for the national training to academy construction and billing. Computer tablets provided exams in Kenya, and early results are positive. Bridge’s very first to Bridge Academy teachers allow them to deliver scripted lessons and academy in Mukuru Kwa Njenga, which opened in 2009, was one of track lesson completion and assessment scores. 19 of its academies with a 100 percent pass rate and average scores Bridge schools are generally built on greenfield sites located in high that exceeded the national average. Bridge founders Jay Kimmelman density, low-income communities where children have to walk no and Shannon May were named Social Entrepreneurs of the Year, World more than 500 meters to the school. Its academies reach operational Economic Forum for Africa, in 2014. sustainability after just one year, on average. KEY RISK MITIGANTS The highly standardized and replicable model allows Bridge to charge students an average of just over $6 per month in fees, making them Financing Risk: affordable to 90 percent of the people in the communities where they • IFC’s provision of highly needed long-term financing to support operate and encouraging poor families to send both boys and girls to Bridge’s early stage expansion school to improve their lives and prospects. Operational Risk: With an estimated price tag of $60 million and the new regulatory • High replicability of Bridge’s business model and success in Kenya hurdles inherent in a cross-border expansion, NewGlobe’s expansion Market and Regulatory Risks: project turned to development banks, including IFC, the World Bank, • Action plan initiated by IFC, World Bank and other development and CDC, the UK’s development finance institution, for help. IFC made a partners to support Bridge’s cross-border expansion $10 million preferred equity investment and CDC invested $6 million. The • World Bank assistance in understanding and navigating government Gates Foundation invested $10 million, existing NewGlobe investors put regulations in the new markets in $15 million and new investors another $15 million. A $10 million loan • NGS certification as an examination center for 134 of its schools was arranged from the Overseas Private Investment Corporation, the US 22 NEW HORIZONS IN AFRICAN FINANCE CASE STUDY Eleme Petrochemical A Turnaround Plan for an Underperforming Manufacturer Nigeria’s Eleme Petrochemicals was transformed from a poorly performing and loss-making industrial giant into a world-class chemical manufacturer by an Indonesian investor after IFC provided advice, financing, and deal structuring to allow privatization of the state owned firm. N igeria, Africa’s most populous country, also has Sub-Saharan As a result of the turnaround program, production at the Eleme facility Africa’s largest hydrocarbon reserves, making it an ideal place increased from 8,502 metric tons the year of the acquisition to 282,286 for petrochemical manufacturing. The nation is also a major metric tons per year in 2010. Eleme now supplies polymer products consumer of polyethylene and polypropylene, chemicals used to make to over 200 plastic processing companies in Nigeria, supporting the plastic products, from toys to soda bottles. country’s value-added downstream chemical sector and boosting small and medium size businesses that use polymers as an input. Eleme Yet in the early 2000s Nigeria’s downstream chemical sector – employs 1,200 Nigerians in the Rivers State region and now exports processing, manufacturing and distribution – remained significantly products to Europe, Asia and other African nations. underdeveloped, rendering the nation a net importer of the chemicals. The Eleme turnaround helped turn Nigeria into a net-exporter of Eleme Petrochemicals, one of two state owned ethylene manufacturers polymers, which now account for 10 percent of the country’s non-oil in Nigeria, had suffered operational problems since it opened in 1995, exports. including inadequate maintenance, a lack of spare parts, equipment breakdowns, and other inefficiencies. The result was an unacceptably low capacity utilization rate at the plant with frequent and prolonged shutdowns. The company badly needed a turnaround capital investment program to return it to profitability. With Nigeria’s government looking to privatize Eleme, Indonesia’s Indorama Group approached IFC for assistance in KEY RISK MITIGANTS acquiring the company, its first investment in Africa. Financing Risks: In 2006 IFC structured a turnaround capital investment plan for Eleme • IFC anchor financing, demonstrating support in a risky market and Indorama that included a $50 million loan by IFC, an $80 million • IFC led due-diligence process on behalf of lenders syndicated loan with 12 other partners, and a $32 million loan from • Investment structure fair to all parties German development bank DEG and Netherlands’ development bank FMO. Operational Risks: • Indorama strong track record of delivering projects on budget and on IFC worked with Indorama to put a two-tier structure in place with time in diverse areas two special purpose vehicles to finance the purchase plus a turnaround • Experienced technical advice from SK Corporation maintenance program to return the Eleme plant to full capacity • IFC’s base case under low capacity utilization assumptions reflecting utilization. The total cost of the project was $400 million, including $225 potential inconsistent feedstock supply million for the acquisition, $130 million for the maintenance program, $30 million for working capital and $15 million for transaction expenses and Social & Country Risks: other general expenses. • Employees and local community co-shareholders via local government Other measures were taken to smooth the acquisition and turnaround, • Indorama proactive role in managing relationships with local including improvement of the plant’s environmental standards and communities significant involvement of the surrounding community, including a 7.5 • Insurance against terrorism and sabotage percent equity stake owned by the local government. REDUCING RISK AND MOBILIZING FINANCING ON A NEW SCALE 23 CASE STUDY Helios Raising Private Equity Funds Focused on African Opportunities While only about 1.0 percent of global private equity goes to Africa, PE financing is gaining a foothold and PE funds raised a record $4.0 billion in 2014 to invest on the continent. Helios Investment Partners used an equity injection from a development bank to attract investors who likely would have otherwise hesitated to expose capital to the many risks and obstacles that Africa presents. Africa lacks an institutional investor base with a long-term market view, so development banks can serve as a pillar of market investment that brings others along during good times, and can also play a countercyclical role by remaining involved when other investors flee. T oo often ignored by global investors, Africa has long suffered development institutions. The fund made its first investment in late 2014, from an inadequate supply of long-term equity capital, with buying a stake in a Nigerian firm that invests in oil and gas, on-line retail almost no PE funds investing in the continent until recently. The and micro lending. paucity of capital has been especially acute for investments in start-ups Emerging markets, including Africa, enjoyed a steady flow of investment and small and medium size enterprises due to the risks inherent in Africa’s until recently. Yet in 2015 that reversed and became a large net outflow generally small and often fragile markets. (including a two-thirds drop in PE investments) with investors suddenly Helios already had a record of spotting and investing in start-ups and becoming much more selective. high growth firms primarily in West Africa, including a well-known For long-term investors like development institutions focused on the telecom tower leasing firm in Nigeria that demonstrated resilience private sector, market downturns offer new opportunities. In fact, despite challenges in growing its business. IFC provided an anchor returns on private equity investments in Africa have done relatively well investment of $20 million to Helios’s first Africa fund in 2007. That helped in recent years, with a quarterly average internal rate of return of 10.29 draw additional investors to the fund and it eventually secured total percent from 2012 to 2015. capital commitments of $304 million. IFC’s early, continuing commitment to Helios made it possible to mobilize With a growing reputation for solid returns and an extensive knowledge significant further private capital by the PE firm and paved the way for of the African marketplace, Helios raised a second fund, Helios II. It other firms looking for returns in a low-yield world. initially struggled to close amid the fallout from the global financial crisis. IFC came forward with a commitment of $60 million to the fund in 2010. KEY RISK MITIGANTS That helped provide the comfort other investors required and resulted in a second successful closing at $908 million. IFC and Helios co-invested Financing Risks: in projects, sharing both risks and incentives, to provide additional • IFC’s presence with a long-term horizon, providing stability and financing. comfort to other investors • Debt facility for the fund prudently set at 17% of fund size Helios II is now fully invested in ten companies across various sectors on the continent including oil and gas, financial services, e-commerce and Operational Risk: electronic payments, advertising and telecom infrastructure. It is focused • Allocation of the profit to incentivize the team and facilitate team on growth opportunities located in Nigeria, Ghana, Angola, Cote d’Ivoire, cohesion Kenya, Tanzania and Uganda. • Helios team experience with start-up ventures and knowledge of target countries IFC also made an equity investment of $25 million to Helios’s third fund • Locally-based staff recruited to provide guidance to portfolio (Helios III). That fund had a goal of closing over $1 billion in commitments companies and maintain local contacts and surpassed it in early 2015, with $1.1 billion, the largest Africa fund in • The 1% total capital commitments of the fund managers, indicating history. Investors in the fund included sovereign wealth funds, corporate strong alignment of incentives and private pension funds, endowments and foundations, as well as 24 NEW HORIZONS IN AFRICAN FINANCE PRIVATE EQUITY Private Equity funds are another financing option gaining The IFC Asset Management Company, for example, offers prevalence in Africa. An initial $20 million equity injection from a new way to expand financing for development and help IFC in 2007, followed by another $60 million in 2010, were investors benefit from IFC’s extensive investment experience in made to Helios Investment Partners, an Africa-focused private developing countries. Since it was established in 2009, AMC has investment firm. The development bank’s anchor investment set up nine investment funds, with assets approaching $9 billion attracted otherwise hesitant investors, putting Helios on its way by 2015, including a number of funds specifically focused on to a capital commitment goal of over $1 billion. Meanwhile, Africa. See Figure 7 and 8. development finance institutions can also help global institutional investors take equity in African companies. FIGURE 7: CAPITAL INVESTED THROUGH PRIVATE EQUITY (US $mn) 2 500 31 972 Sub-Saharan Africa Emerging Markets 37 500 40 000 2 329 35 000 28 243 2 000 28 771 2 096 30 000 Emerging Market Total 30 483 Sub-Saharan Africa 28 488 22 021 1 914 1672 1 500 25 000 25 317 1 396 20 661 20 000 1 186 1 128 1 000 15 000 742 691 10 000 500 5 000 0 0 2008 2009 2010 2011 2012 2013 2014 Q1 -Q3 Q1 -Q3 2014 2015 Note: Includes private equity, private credit, private infrastructure and real assets. Source: EMPEA Industry Statistics, data as of 30 September 2015. FIGURE 8: PRIVATE EQUITY INVESTMENT IN AFRICA BY SECTOR, 2014 (US $mn) Other Industrials Oil and Gas Consumer Services Consumer Goods Utilities Telecommunications Financials 0 100 200 300 400 500 Source: EMPEA Industry Statistics REDUCING RISK AND MOBILIZING FINANCING ON A NEW SCALE 25 MEETING THE MARKET CHALLENGE Certainly challenges remain to investing in emerging markets • Providing institutional investors with new ways to tap in general, and in Sub-Saharan Africa in particular. Investors African markets, such as through IFC Asset Management looking at opportunities in the region must consider political Company, which provides equity investment alongside IFC. and sovereign risk, currency risk, regulatory uncertainty, • Providing insurance against political risks such as expropriation and terrorism. governance and corruption issues, and a lack of local expertise and suitable investment vehicles, among other factors. Even in • Providing currency swaps to eliminate foreign exchange volatility. developing economies with mature capital markets and stable • Providing structuring and technical expertise to ensure political systems, achieving the investment grade rating that bankability. many institutional investors require often remains a challenge. • Improving local policy and regulatory environments. Therein lies the role for development finance institutions, which • Supporting regional governments with project selection can help mitigate risk and “crowd in” private investment by: and preparation. • Strengthening domestic capital markets and promoting • Contributing anchor funding to provide the confidence and cross-border investment. creditor status investors require. Even in difficult economic and risk environments, methods exist to underwrite successful investments in Africa. Sources World Bank, “Global Economic Prospects,” January 2016. Public-Private Infrastructure Advisory Facility, “Institutional Investment in Infrastructure in Emerging Markets and Developing Economies,” March 2014. McKinsey & Co., “Brighter Africa: The growth potential of the Sub-Saharan electricity sector,” February 2015. “Azito Power Plant Expansion, Abidjan, Cote d’Ivoire,” http://www.power-technology.com/projects/azito-power-plant-expansion-abidjan/. World Bank, Enterprise Surveys, 2013. Cargill, “Global Cargill Cocoa Promise Report,” 2014. “Private equity in Africa: Unblocking the pipes,” The Economist, Jan 24, 2015. KPMG, “Banking in Sub-Saharan Africa,” 2015. Deutsche Bank, “Capital Markets in Sub-Saharan Africa,” 2013. Javier Blas, “Buyout group Helios raises record $1bn Africa fund,” The Financial Times, Jan 11, 2015. Renee Bonorchis, “Helios Raises $1.1 Billion for African Private Equity Investment.” Bloomberg Business News, January 12, 2015. EMPEA Industry Statistics, “Emerging Markets Private Capital Fundraising & Investment Analysis,” Industry Statistics Q3 2015. PROJECT AND CONTENT TEAM CONTRIBUTORS Matthew Benjamin (Editor), Desmond Dodd (Project Manager), Arthur Karlin, Lin Shi, Tomoko Suzuki Henning Amelung, Oualid Ammar, Jonas Ayeri, Yaa Boakye, Florence Boupda, David Bridgman, Giuliano Caloia, Vanya Candia, Brian Casabianca, Yasser Charafi, CONTENT ADVISORS Omar Chaudry, Silven Chikengezha, Dan Croft, Fatou Regional Oumar Seydi, Vera Songwe Diop, Jim Emery, Coura Fall, Jamie Ferguson, Britt Gwinner, Martin Habel, Bill Haworth, Tor Jansson, Economists Ted Haoquan Chu, Neil Gregory, Frank Douamba, Jean Sylvain Kakou, Yosuke Kotsuji, Maria Kozloski, Lisbet Pierre Lacombe Kugler, Albena Melin, Josiane Kwenda, Monish Financial Institutions Group Mahurkar, Dramane Meite, Biju Mohandas, Gene Aliou Maiga, H. John Wilson, Allen Forlemu Moses, Mainga Mukando, Kevin Njiraini, Donald Infrastructure and Natural Resources Nzorubara, Sean Petersen, Cecile Puiggali, Joe Rebello, Bertrand de la Borde, Linda Munyengeterwa Juliette Rose, Yakhara Sembene, Janne Sevanto, Kalim Shah, Zibu Sibanda, Alok Singh, Wilfried Tamegnon, Manufacturing, Agribusiness, and Services Mary Jean Moyo, Judy Ombura Wendy Teleki Acknowledgment Saran Kebet-Koulibaly PARTNERSHIP DEVELOPMENT TEAM SUPPORT Florian Sefraty, Business Development Director, Groupe Jeune Afrique Nthateng Tsime, Busisiwe Lekoane, Jacqueline Santos Julie Benoist, Editorial Coordinator, Groupe Jeune Afrique IFC 2121 Pennsylvania Ave., N.W. Washington, DC 20433 USA Tel: +1 202 458-9699 Sub-Saharan Africa Hub Offices SENEGAL,  SOUTH AFRICA,  KENYA,  Dakar  Johannesburg Nairobi Rue Aime Cesaire x 14 Fricker Road Delta Center Impasse FN 18 Illovo 2196 Menengai Road Fann Residence P.O. Box 41283 Upper Hill P.O. Box 3296 Craighall 2024 P.O Box 30577-00100 Dakar, Senegal Johannesburg, South Africa Nairobi, Kenya Tel: +221 33 859-7100 Tel: +27 11 731-3000 Tel: +254 20 293-7000/7200 Fax: +221 33 849-7144 Fax: +27 11 268-0074 Fax: +254 20 293-7210 IFC has offices in more than 20 countries across Sub-Saharan Africa. Find contacts on the IFC website. www.ifc.org Stay Connected  www.facebook.com/IFCwbg and www.facebook.com/IFCAfrica www.twitter.com/IFC_org and www.twitter.com/IFCAfrica www.youtube.com/IFCvideocasts www.ifc.org/SocialMediaIndex