At the UK-Africa Investment Conference in January, Vera Songwe, executive secretary of the UN’s Economic Commission for Africa, stated that UK investment to Africa represents only 3% of total FDI, and challenged the UK government and businesses to double this to 6% within the next five years. That same day, the CDC Group announced that it had exceeded its commitment in 2020 to invest £2bn ($2.7bn) over the next two years in Africa.
CDC, the independently operated development finance institution of the British government, is rebranding as British International Investment, changing its name after 73 years. The decision to rebrand was made after two years when other CDCs, including the American Centres for Disease Controls and its African counterpart, Africa CDC, have grabbed headlines in their fight against the Covid-19 pandemic.
Despite the new name, chief executive Nick O’Donohoe says the institution’s commitment to Africa, which receives the bulk of its investments – last year close to 60% – remains unchanged.
Renewed emphasis on climate
Over time, the nature of those investments have been gradually shifting. In the new five-year strategy, released last year, one noticeable shift is a renewed emphasis on climate financing.
“We have been an investor in climate certainly over the last five years, particularly renewables, but I think the mandate is getting much bigger.
It’s also getting more broad-based – we’re increasing our geographic footprint to encompass Southeast Asia and the Caribbean, both of which have been out of scope for us in the last 10 years,” says O’Donohoe.
In recent years, there has been a fierce debate over whether DFIs and their international partners should be putting money towards gas, hitherto classified as a fossil fuel.
Since Cop26 in Glasgow in November – and following many vocal protests by African governments – there is currently a discussion taking place at the EU and multilateral level to re-classify gas as a transition fuel, which would be a game-changer for the continent, home to some of the biggest investments in gas in the world. O’Donohoe is one such advocate.
“We still think that gas has a role to play in a transition [towards net zero],” he says. “We won’t invest in coal, we won’t invest in oil-fired energy, we won’t invest in anything that’s excluded under Paris [the 2015 international climate agreement signed in Paris which seeks to limit global temperature rises].
“But gas, in specific situations in specific countries, if it’s clearly part of a transition to net zero and there’s a clear pathway to doing that, if it’s the most efficient fuel available, if there is optionality to become more efficient and cleaner and greener over the lifetime of the project, if those things are in place, we’re not ruling it out.”
Like many operating in the African space he is pragmatic, pointing to Africa’s advantage and arguing that the developments are clearly favoured by Africans.
“The voice in Africa here is pretty clear,” he says. “Whether or not they would like continued support in terms of building a green economy, using some of their gas resources to solve this energy poverty is critical.”
O’Donohoe talks with excitement about the opportunities in the green agenda and around energy in general.
“We will obviously be involved in investing in renewable generation but I think going beyond that to much more distributed renewable energy, more mini-grids, more focus on adaption and resilience. That is a difficult area for DFIs to invest in but we know that the countries in which we operate are the most vulnerable to climate change.
“Adapting and becoming more resilient to what we know will be an increase in global temperatures of some magnitude is critical. Investing in a just transition, making sure that we think about the people and the workers whose lives are being affected by the transition to clean energy… electric vehicles, electric vehicles infrastructure, all these are capital heavy and will require significant investments and that’s going to have to be led by the development finance community. That climate story is a big story.”
The digital economy
Another area of growth is the technology and digital economy. CDC took a $200m equity investment three years ago in fibre company Liquid Telecom, and last year were part of the Global Partnership for Ethiopia consortium, alongside Safaricom, Vodacom Group, Vodafone Group, and Sumitomo Corporation, which was awarded a licence to operate telecom services in Ethiopia.
While the larger investments made the headlines, O’Donohoe says he is just as excited about developing the VC community in tech hubs such as Nairobi, Lagos and Cairo. CDC have begun co-investment programmes and venture capital scale-up programmes where they typically provide series A and B funding ranging between $1m and $10m, as well as occasional larger amounts for series C and series D rounds. O’Donohoe says that this is a model that has been popular in India and they are looking at ramping it up across the continent.
Although the British government and its affiliated institutions may not admit it, Africa will need to compete increasingly with the India-Pacific region for investment capital.
But O’Donohoe insists that Britain has a “competitive advantage in Africa”, pointing to the City of London’s unique positioning in terms of finance and professional services, strong historical links and the fact that many of Africa’s brightest will at some point have studied in the UK. But there is no room for complacency, he adds, arguing that the UK needs to be more visible.
Headline-grabbing deals in the works
A lot will be expected from CDC, or British International Investment (BII) as it will be known from April, with UK foreign secretary Liz Truss putting investment at the heart of the country’s foreign policy.
Headline-grabbing deals are already in the works. Last year CDC co-invested in ports operator DP World’s African growth and container ports strategy. The original investment was for $320m with the potential to rise to $700m. O’Donohoe believes there are enough deal opportunities out there – but only if investors are prepared to accept a certain level of risk.
“I do think it depends what part of the capital risk spectrum you’re looking at. There’s a lot of money chasing lower risk transactions in Africa, an increasing amount of money, and there’s clearly a need there but it takes a long time to develop transactions to the point where they become financeable.”
He says that CDC’s ability to partner on telecommunications through the Global Partnership for Ethiopia consortium or on ports with DP World is due to their ability to be more patient with their capital and take a longer term view. He likes the model of corporates leveraging their investments through CDC – as opposed to the traditional model of DFIs coming together on a project.
“We are very focused on these big strategic corporate partnerships where we bring some capital but we also bring this development focus, this credibility around environment and social standards and the credibility the UK government gives.”
On the whole, despite a year which saw setbacks on political stability and pandemic, he believes the long-term outlook remains largely positive. He anticipates concluding 50 or so transactions a year, ranging from under $10m to the $200-300m range. There will be a large focus on infrastructure, which includes energy, over the next few years, he adds. And manufacturing and agriculture will be other areas of focus.
“Agriculture has always been central to CDC and we will be announcing a couple of partnerships that will help us reach more actively, particularly into primary agriculture.”
As CDC moves towards its pivotal rebrand, it has appointed a new chairperson – Diana Layfield, a former regional head for Africa at Standard Chartered.
“Diana has a diverse background and brings a really broad, interesting range of skills. She was in the RAF [Royal Air Force] reserve and she actually flew relief flights for the Red Cross around Africa for a period of time and for the UN for a period of time. With her decade at Standard Chartered, she knows the continent very well from a financial perspective and then she spent the last six years at Google as head of their partnerships in EMEA. It’s amazing when you talk about crypto currency for example, she’s absolutely on it.”
As the world opens up and builds back post-Covid, British International Investment will be aiming to take the institution to new heights.