Underlying resilience signals market is down but not out
Baker McKenzie’s latest report - New Dynamics: Shifting Patterns in Africa’s Infrastructure Funding - analyzes new data from IJ Global that shows the state of the African infrastructure market, and how the major global players’ approach infrastructure lending on the continent is changing. While the data shows a decline in the value of infrastructure lending, the region is known for its resilience and it is expected that as economies recover, new types of financing will be unlocked.
The report’s data shows that multilateral and bilateral lending into Africa has declined - with investment levels falling successively in 2019 and 2020 compared to peak levels seen after the financial crisis. In 2019, bilateral and multilateral lending into Africa amounted to USD 55 billion, which drops to USD 31 billion in 2020. Over the last six years, the decline is significant - deal values dropped from USD 100 billion in 2014 to USD 31 billion in 2020.
This slowdown in infrastructure investment was attributable to a number of factors, including the pandemic. Economic contraction has affected Nigeria and South Africa, meaning that the region’s largest economies have not been feeding in growth as in previous years. However, market fundamentals signal a region with underlying resilience and, as the global economy recovers, finance will be unlocked. There are already positive indicators of forthcoming investment. Commodity prices are rising and landmark deals are returning. For example, mining multinational Sibanye-Stillwater recently committed ZAR 6.3 billion to South African infrastructure projects.
The data also shows that deal tenor is contracting - from a high of 17 years in 2019 to 13 years in 2020. However, the long-term nature of infrastructure projects means that international partners have made lasting commitments to the region, which are unlikely to be abandoned despite immediate pressure on national finances.
Surprisingly, given the pandemic, the data shows that lending by Chinese banks into energy and infrastructure projects in Sub-Saharan Africa saw a small uplift in 2020, although deal values are well below their 2017 peak. In 2017, Chinese banks lent USD 11 billion to African infrastructure projects, which decreased to USD 4.5 billion in 2018, USD 2.8 billion in 2019 and USD 3.3 billion in 2020.
Simon Leung, Partner, Baker McKenzie Hong Kong, explains, “There has been a slowdown in the number of infrastructure deals from China. In the short-term, we expect to see more targeted lending - fewer projects of a higher quality using sophisticated structures - and new finance options, such as factoring, used to deploy Chinese capital into the region.”
It is also clear that other international players have the region in their sights, with key political changes in the United States (US) and United Kingdom (UK) likely to see capital flow into Africa.
Michael Foundethakis, Partner and Global Head of Projects and Trade & Export Finance, Baker McKenzie Paris, notes, “The US hasn’t kept pace with Chinese lending into Africa. The recent change in administration is likely to renew focus on impact-building and financing strategic long-term projects in the region, but bankability and risk-sharing remain a priority for US lenders.”
Lodewyk Meyer, Partner, Baker McKenzie Johannesburg, notes further that, “The infrastructure funding gap is so large and of such strategic importance, it remains necessary to encourage international investment to fill it. African DFIs are very good at collaborating and I am encouraged by the actions of the new US administration, UK government and New Development Bank, in particular in their willingness to work with regional institutions in this regard. The UK is making a strong play for influence, investment and trade with Africa post-Brexit. Further to key summits held in 2020 and 2021, there are signs that finance will be redirected into Africa.”
The report points to infrastructure gaps in energy provision, internet access and transportation that have resulted in an urgent imperative to identify and enable new sources of finance outside traditional lenders and international partners. Further to the expected return of multilateral and bilateral lending, there is room for evolution to bridge the funding-opportunity gap.
The report shows, however, that this vacuum is unlikely to be filled by commercial banks, noting that in 2020, just 84 projects were supported by commercial bank finance and their involvement in Development Finance Institution (DFI) and Export Credit Agency (ECA) deals continues on a downward trend.
Luka Lightfoot, Partner, Baker McKenzie London, explains, “Banks are likely to be focusing on managing liquidity, with lenders deploying capital selectively.”
DFIs and new financing solutions
Instead, local and regional banks, specialist infrastructure funds and private equity and debt are stepping in to collaborate with DFIs and access returns. This outlines the deepening DFI involvement in the infrastructure ecosystem at large, with DFIs increasingly anchoring the infrastructure ecosystem in Africa - serving a critical function for project finance as investment facilitator and a check on capital. This is because they can shoulder political risk and access government protections in a way that others can’t, enter markets others can’t and are uniquely capable of facilitating long-term lending.
The report further shows that the amount of capital needed to fill the infrastructure gap is significant and DFIs can’t bridge it alone. Private equity, debt finance and specialist infrastructure funds are primed to enter the market, and multi-finance and blended solutions are expected to grow in popularity as a way to de-risk deals and support a broader ecosystem of lenders.
Lightfoot comments, “We expect to see an increase in non-bank activity in Africa in future as a result of new credit mitigation products come to market. We have seen an increase in appetite from established market participants, such as development banks, to create products that are not tied to existing arrangements that may have limited the type of finance available.”
A new era
Lamyaa Gadelhak, Partner and Co-head of Banking, Finance and Projects at Helmy, Hamza & Partners, Baker McKenzie Cairo, adds, “The pandemic represents the end of an era and the start of a new one. There will be a re-prioritization of funds and strategy through this lens. I expect to see more investments in the healthcare industry and connected infrastructure, as well as water related projects, to be top priority. We should also consider the impact of other factors aside from the pandemic. For instance, the African Continental Free Trade Agreement and what it needs to translate into increased cross-regional trends. I would expect development of transportation and logistics infrastructure focused projects to enable the acceleration of on-ground execution of intra-African trade.”
Emeka Chinwuba, Partner, Baker McKenzie New York, and Banking, Finance & Major Projects Group member, concludes, “Last year was a relatively difficult year across jurisdictions and for investors - with considerable uncertainty and change in the ways in which we do business. Shutdowns had a depressant effect on the infrastructure market, as deals in the pipeline were delayed and projects halted as a result of COVID-19. Full vaccination in Africa is still quite a long way off comparatively, so we can’t expect a full and fast return to normal activity. But we’ve reached the bottom, and the only way is up.”