Japan eyes its last largest market

TICAD 7 provides an opportunity to boost Japanese investment in Africa, but many Japanese investors still find the continent a risky bet. Shoshana Kedem talks to figures from the world of finance to find out what can be done to attract more international capital.

Japan can be a wary lender when it comes to Africa. The upcoming TICAD 7 summit, geared towards boosting Japanese investment in Africa, will provide a stage for countries, investors and policy-makers to expand their horizons on the continent.

In relation to the size of its economy, Japanese investment in Africa is low. Japan is home to some of the world’s largest banks and deep pools of capital, much of which is invested locally and across Asia. Yet Japanese investors say a tightening of frameworks and regulations on the continent could improve the investment climate and drive up Japanese investment.

In 2016 direct investment by the world’s third largest economy in Africa stood at $10bn, while UK investment was at $53.3bn, the US at $55.3bn, France $47bn and China $38.7bn.

Land of opportunity

Ahead of TICAD 7, Japanese investors told African Business that while Africa offers a wealth of opportunity to investors in infrastructure, they still find the continent a risky bet based on political and economic uncertainty, and patchy regulatory frameworks.

Sumitomo Mitsui Banking Corporation (SMBC), a commercial bank currently engaged in structured finance of infrastructure, aviation and energy projects across the continent, said it has capital and liquidity ripe for African investment when the business and regulatory conditions are right.

The Japanese funding model differs from Beijing’s in the respect that Tokyo-based banks such as SMBC have preferred working with export credit agencies such as the Japan Bank for International Cooperation, and the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA) to fund projects on the continent. SMBC is also working with development finance institutions (DFIs) and multilateral institutions like the African Development Bank (AfDB).

Past projects have involved SMBC and the AfDB sharing the risk of local African banks on a 50/50 basis under a 2016 trade-finance programme.

Tightening regulation

Africa’s investment climate would benefit greatly from clearer PPP laws, regulations, and frameworks that are in line with global standards, says Katsufumi Uchida, the executive officer and general manager, International and Structured Finance Department, Europe, Middle East and Africa Division, at SMBC. He adds that “PPP is not just magic”, where you can acquire money from foreign investors. “It is something that requires commitment by African governments and, in some cases a nationwide legal framework restructuring to attract money from foreign investors.”

Wild fluctuations in local currencies can also pose a risk, making local currency projects unpopular with foreign investors who are exposed to such currency risks. “Projects that have access to harder currencies such as the dollar, like export-orientated projects, are more attractive to investors,” he tells African Business. 

Some African countries offer a more attractive structure for investments where returns in local currencies are pegged to harder currencies, or indexed tariffs, like the US dollar or euro, making them less risky. “If a country has such a structure, they could attract more investment and debt financing. So SMBC sees opportunities in countries where they have such a structure.” 

Uchida says that “while the funding is there and liquidity is available, it is about finding the right bankable transactions.”

An investor-friendly environment provides strong protections against political risks like resource nationalisation, confiscation, coups or political violence, he explains. “Policy consistency is extremely important and that is lacking in some countries as well. And that is tied to the political system, so sometimes when you have an election cycle, if you have a new government in place, their policies change, and uncertainty is something that investors don’t like.”

Uchida says that financial institutions such as MIGA can help absorb some of this risk and protect investors from these political and social shocks to investment. MIGA provides non-commercial guarantees against investment in developing countries. It insures investors against expropriation, war and a breach of contract, exactly the sort of concerns highlighted by financial institutions such as SMBC.

Risk takers

In conversation with African Business, MIGA’s executive vice president and CEO, Keiko Honda, says the agency is currently providing $1.9bn in guarantees globally, with African projects underway in Ghana, Zambia and South Africa.

Honda has seen investment models in emerging markets evolving in line with G7 and G20 nation groupings encouraging multilateral development banks (MDBs) to leverage more private investors.

“In my conversations with the many African governments I have been consistently and increasingly hearing their expectations for private investors to come in,” she says. “Therefore, I think this is clearly the trend not only in the emerging markets side but also the African countries, including even low-income countries or fragile and conflicted states.”

At the same time, financing models in Africa are also moving closer to the models seen in the rest of the world, including Asia, according to Honda. 

“In some of the relatively lower income countries in Africa, a lot of bilateral organisations like OPEC are quite keen to extend the support, so we are encouraging private investors to find out the best solutions to essentially minimise the project cost so therefore host government can have a better benefit out of it. That is what we are still working on. For example, in the power sector, if the financing cost can be reduced, private investors can often charge lower tariffs to the people in the country who are actually the ultimate beneficiaries.”

Another trend sweeping the continent is companies selling part of all of the shares in equity ownership of the project to other foreign investors with less experience on the continent post-completion, after five years or so of operations.

“This is deepening the pool of foreign investors on the continent, and could pose an opportunity for Japanese investors weary of entering greenfield projects,” says Honda.

Since its founding in 1988, the institution has supported over $11bn of investment in Africa. “At this moment, we are covering 76 projects across all sectors in 26 member countries and our standing order in Sub-Saharan Africa as of June 31st is $5.8bn,” she says.

One of MIGA’s flagship projects currently underway in West Africa is the world’s largest windfarm project, in Senegal, which will provide 450,000 megawatt hours of energy per year for over 2m people.

While Japanese investors are more used to investing in Asia for reasons of geographic and cultural proximity, they do understand that “Africa is the last largest market”, Honda says.

As Japanese companies set their sights on the continent’s booming population of consumers, Honda says she is keen to progress discussions with private Japanese investors on a number of agricultural projects in the pipeline at the upcoming TICAD conference. MIGA also looks forward to advancing discussions on the structures and models of investment financing on the continent with the Japanese government during upcoming talks.

Making Africa work for Japan

One way to encourage Japanese financial institutions to invest on the continent would be corporates such as Hitachi involved in Africa projects sharing their successful experiences, Honda says. 

She also recommends that African governments come up with the risk of the project that they are willing to leverage to private investors: “They are the people who know the needs of their people and also they know their financial capacity.”

She also advises governments seeking to tap into pools of international capital sitting in countries like Japan to set the appropriate power tariffs to ideally cover the cost of the project.

“If, whatever the reason, government cannot allow private investors to charge their costs, they have to come up with a bridge plan,” she says.

Finally, it is essential for African governments to improve their investment climates. “They really need to have PPP laws or they need have agencies to kind of support one-stop-shopping for foreign investors or local investors to come in to go through the proper procedures with the government,” she says.

In the run-up to TICAD 7 Honda also urges African countries to publish potential projects on their websites to give Japanese investors a chance to prepare and research questions to ask at the summit and inform their investment decisions.

SMBC agrees that it’s fundamental for governments to be more transparent about potential projects: “Most of us who are equity investors would not want to look at one-off occasional projects. This means they would expect multiple opportunities in one sector, one place, one country. So, it is important for the government to show the list of projects to be implemented.”