B&R in Africa: More seats at the table

As B&R expands further into Africa, international firms begin to seize on investment opportunities.

China’s investment into Africa long pre-dates the 2013-launch of the Belt and Road initiative. Yet its establishment has focused the spotlight on the region in recent years.

And thanks to emerging Belt-and-Road success stories, other countries are now also recognising the investment potential of Africa, according to Saif Malik, Standard Chartered, Regional Co-Head of Global Banking Africa and Middle East.

“China has taken a long-term view but given the huge opportunity, we’ve seen Japan, Europe and other countries repivot to position themselves to refocus on Africa,” he said. “The Chinese investment has really helped a lot of countries move forward and now they are in a better position to open up and look at other agencies from other countries.”

Large-scale examples include the International Development Finance Corporation – established in September 2018 by the United States – which will provide USD60 billion in loans to developing nations including African countries.The European Union is also proposing an extra EUR40 billion in grants to Africa between 2021-2027.

Beyond the norm

And as the international pace picks up, China continues to make clear just how important Africa is for its Belt and Road ambitions. In addition to notable visits to select African nations by President Xi Jinping, funding shows no signs of slowing. For example, at the Forum on China-Africa Cooperation (FOCAC) in September 2018, China pledged an extra USD60 billion of investment and concessional lending to the region.

Moreover, the Africa spotlight is now shining beyond the markets that traditionally received such investment. “China has been one of the earliest, strategic investors in Africa. In the initial stages they were investing heavily in countries like Nigeria and Angola because it was mainly a commodity play, but over the last three to four years it has widened to include Belt and Road projects and to cover all of Africa,” explained Nimrita Bedi, Standard Chartered, Head, Leveraged & Structured Solutions, Africa and Regional Head, Corporate Finance, Africa and Middle East.

Building foundations

A precise figure for the value of Belt and Road projects in Africa is difficult to ascertain. In part this is because much of the investment has not been specifically designated ‘Belt and Road’. China’s investment since 2013 has tended to focus on large infrastructure projects that encourage better trading links. Examples include the Standard Gauge Railway (SGR) in Kenya, which when fully completed will create a transport link between the Kenyan seaport of Mombasa and Malaba, on the border near Uganda. Awarded to the China Road and Bridge Corporation, this is East Africa’s largest infrastructure project. The first phase between Mombasa and Kenya’s capital Nairobi was completed in June 2017, at a cost of USD3.2 billion.

Like many of the biggest projects under Belt and Road in Africa and elsewhere, the SGR has been organised and funded at a government-to-government (G-to-G) level. One consequence of this approach is that projects have not always been structured and costed on a commercially sustainable basis. This is one of the reasons why debt sustainability is now a major concern in the region. China’s heavy investment means it accounts for a large proportion of external debt in Africa: 40 per cent of Angola’s, 30 per cent Ethiopia’s, 28 per cent of Zambia’s and 20 per cent of Kenya’s.Unsurprisingly, the lack of financial viability of some projects and the struggle of governments to pay back the loans has led to some highly public criticism of Belt and Road projects in Africa.

However, China has shown a willingness to address the problem, with President Xi promising to grant either debt relief or restructuring at 2018’s FOCAC, which Standard Chartered believes should limit contagion and prevent systemic fallout for now.

Powering up private investment

And critically for the long-term success of the Belt and Road in Africa, there is an increasing shift away from G-to-G funding towards projects financed through public-private partnerships (PPP), according to Alan Sproule, Standard Chartered, Executive Principal, Project and Export Finance.

“Chinese banks and sponsors are being encouraged to seek commercially-viable projects and to incorporate some level of PPP structure to infrastructure projects. Given the pressure on many countries just to service existing debt, PPP is really the way forward for new projects,” he said.

In turn, this more commercial approach is increasingly attracting non-Chinese companies that understand the opportunity presented by Belt and Road in Africa.

As well as providing a more sustainable approach to infrastructure development, the shift towards PPP reflects the efforts of African governments to establish legislation and promote this type of financing in recent years. Between 2004 and 2017, some 30 African countries have adopted PPP laws as they seek to attract more foreign investment for infrastructure projects.

Promoting sustainability

While transport and energy infrastructure projects will continue to make up the bulk of new opportunities, China investment is beginning to broaden into new areas. This will include green and sustainable schemes, following President Xi’s commitment to invest in 50 projects focusing on fighting climate change, desertification and wildlife protection in his opening speech at FOCAC. Some progress has already been made in this area with Kenya opening East Africa’s largest solar park in November 2018. The 85-hectare plant was built by China Jiangxi International (K) Limited with a loan from Export-Import Bank of China.

Chinese loans have also financed several renewable energy projects in other parts of Africa. Prime examples include projects to develop wind farms in Ethiopia, solar power in South Africa and hydroelectric power in Uganda and Cameroon.10 

African countries have also made inroads into sustainable finance for some time now. South Africa and Nigeria, for example, have both seen the issuance of first-of-their-kind green bonds in recent years. The former has also taken steps to fund the development of efficient water and waste management projects, among other green initiatives.11 

But, with as many as 600 million people still lacking access to electricity across Africa,12  there is significant scope for the Belt and Road initiative to help Africa further embrace sustainable finance and address the continent’s energy problem.

From building roads that connect countries to developing the infrastructure that will create a greener future, China and increasingly international companies are seizing the opportunities offered by the Belt and Road in Africa.

 

References

https://www.nytimes.com/2018/10/14/world/asia/donald-trump-foreign-aid-bill.html

https://ec.europa.eu/commission/sites/beta-political/files/soteu2018-factsheet-africa-europe_en.pdf

https://www.inkstonenews.com/politics/its-popular-travelers-kenyas-chinese-built-railway-massive-white-elephant/article/3019761

https://www.inkstonenews.com/politics/its-popular-travelers-kenyas-chinese-built-railway-massive-white-elephant/article/3019761

Standard Chartered, Belt and Road – Making its presence felt, October 2018

Standard Chartered, Belt and Road – Making its presence felt, October 2018

http://blogs.worldbank.org/ppps/ppp-laws-africa-confusing-or-clarifying

https://www.reuters.com/article/us-china-africa/chinas-xi-says-funds-for-africa-not-for-vanity-projects-idUSKCN1LJ0C4

https://www.constructionkenya.com/2747/china-garissa-kenya-solar-plant/

10 https://www.ictsd.org/bridges-news/bridges-africa/news/crossing-rivers-feeling-stones-the-rise-of-chinese-infrastructure

11 https://www.climatebonds.net/files/files/CBI-PolicyRoundup_2017%20Final%203.pdf

12 https://www.devex.com/news/opinion-financing-africa-s-green-energy-revolution-92396

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