The AfDB launched its Room2Run initiative last month which effectively freed up $700m off the bank’s balance sheet. We spoke to Raza Hasnani from Africa50 fund who helped structure the deal.
The Africa50 fund officially opened its headquarters in Casablanca, Morocco, in September of this year. Mandated in 2013, during the African Union’s 50th anniversary, it has built a capital base of $850m with a medium-term target of $3bn. When African Business spoke to its senior management team, they said the fund would focus on developing a pipeline of bankable projects (feasibility studies and early stage investments), project finance (taking exclusively strategic equity stakes, as opposed to debt) and mobilising more capital into infrastructure.
Operating with both a commercial and development mandate, they have identified four sectors where they intend to be active: the power sector, transport and logistics, ICT and the mid-stream gas sector. Typically, a $1bn fund will be able to invest in 10-15 projects, but according to Reza Hasnani, given the way Africa50 intends to operate, and the fact that they will in general take a minority stake, they anticipate they’ll be involved in many more than this. To date they have invested in four transactions, mostly in power projects and the fifth being the Room2Run initiative.
This sort of initiative is part of the fund’s strategy to get institutions, development banks and commercial ones to better use their balance sheets through what they call “asset recycling”, by getting out of certain projects and using his freed-up balance sheet to fund new ones. The Room2Run transaction took a while to happen but Hasnani says that now the template is there it’s one that can be replicated not only on the continent but globally by other multilateral development banks (MDBs) and international finance institutions (IFIs). Africa50 were not only investors in the security but also helped select the underlying assets, the 40 or so projects that make up the $1bn portfolio. In this interview, Hasnani tells us how they went about it and also where he sees the fund acting next.
In terms of selecting the underlying projects that you securitised for a billion dollars, how did you go about it?
It was both an art and a science because the transaction had to be large enough for it to make commercial sense for the African Development Bank and for it to make sense for the investor group. We had to find the right balance in terms of risk profile, and we wanted to make sure that our exposure to any underling loan was not more than a certain percentage.
Our preference obviously was to go for very well seeded loans with very good credit characteristics, whilst the AfDB had a different view and wanted a more balanced portfolio.
So this basically frees up another $700m for the AfDB to then reinvest in infrastructure, is that right?
Yes, actually one of the core reasons why we are doing the transaction. It’s part of our strategy to mobilise capital for investment in infrastructure in Africa.
And those securities will then be sold in international capital markets?
No, not really. The way this works is to create headroom for the Bank in terms of lending capacity and still maintain its triple-A rating. So what this does is allows them to do that, which is effectively a risk transfer agreement. There is a mechanism: for example, if Africa50 wants to sell it to other institutional investors it can be done, but this is an investment to be held on our accounts.
Can you tell us a little bit more about the strategy and about the sectors where you see yourselves investing and the pipeline of projects?
Our strategy is to invest in the sectors where there is the greatest need for private investment and where we think we can make the most impact. So power is obviously the first thing that comes to mind. It has both an incredible impact on the lives of people and there is an acute need for power.
We are generally agnostic. We like to do renewables but unlike some of the institutions we also realised that renewables only is not a viable strategy, particularly for Africa because what’s most important is that the African consumer has clean power but at the lowest cost point possible, that is incredibly important.
There is no point on putting power plants in where the price of power is so high that your average consumer is not able to afford it, and that’s why one needs conventional and base load power. If one puts in too much renewable power then the grid is not stable and also the cost is too high because you always need backup power, so we have this view that we’re going to do both renewable, solar, wind, and we’ll also do conventional, which is gas and perhaps other fuels if required.
Transport is also absolutely a core part of our strategy. It’s getting people and goods from one place to another, again in the safest possible manner but at the lowest price point possible.
Cost is critical. Sometimes there’s a tendency when a lot of stakeholders are involved to gold-plate projects, and the issue with gold-plated projects is that at some point somebody has to pay, whether it is the ultimate consumer or it is the government through a subsidy. If the price is too high for the ultimate payer then even the best structured deals in the world will not work.
The next item is midstream oil and gas. There is obviously a lot of focus on exploration and production and there is a lot of focus on power plants. But that middle part which is perhaps not glamourous, which is taking the molecule from the gas feed or from the associated gas from the oilfield and doing all the things to it that are required to make it useful and to take it to where it’s needed is what we’re looking at. That includes transporting it, perhaps liquefying it, perhaps storing it, creating pipelines which reduce the number of trucks etc.
And Finally ICT. We are looking to support things the industry, data centres, telephone towers, and similar investments in the mobile space and in the telecom space.
You have worked at a number of institutions such as Abraaj and Exxon. Are there any new ideas that you bring from your past experience that you think we could be using to accelerate the number of projects that are executed on the continent?
The first is, it’s very important again not to have gold-plated projects and it’s important to realise who the consumer is and what he’s able to pay. Once you keep that in mind a lot more projects become sensible. Another issue is that too often when people are looking to invest in Africa they get caught up in “Africa risks”, when you have investment committees sitting in London or New York adding to the cost of financing because they don’t necessarily fully grasp the real risk.
So how many basis points do you think are we overpaying in terms of the cost of capital?
It’s difficult to say from project to project but it could easily be up to 500 basis points.
You spoke about the need to move away or avoid gold plating projects. What do you mean exactly?
What [developers] will try to do is make sure that every bell and whistle is in the project, so that their risk is reduced regardless of what the cost is to the ultimate consumer. If people are unfamiliar with the environment and the associated risk, they will conduct many more additional studies, they will get equipment which perhaps is at a spec much higher than is required because they want to cover the risks and they know that the costs can be passed on. That’s what I mean by gold plating.