Unlocking Greater Investment Flows

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Unlocking Greater Investment Flows

With the potential to unleash debt and equity of up to $25bn, the African Financing Partnership is set to play a key role in Africa’s development trajectory. Talking with Simon Jackson, the AfDB’s Head of Syndication & Co-Financing, Stephen Williams learnt more about the partnership’s purpose and mandate.

Syndication, in the banking sense, means a joint venture between a number of financial institutions to both raise capital and to share the risk of investing in a particular project. This might also be termed co-financing, but syndicated loans are very common in commercial banking practices. Yet, for some reason, this has not been the case with the various development finance institutions (DFIs) that operate in Africa, even if this is changing thanks to the African Financing Partnership (AFP) initiative.

As Simon Jackson, the African Development Bank’s (AfDB) Head of Syndication & Co-Financing explains: “The AfDB has gradually been establishing a range of activities, rather than just a purely lending presence, on the African continent. There is liquidity to finance projects in Africa, but we can always do with widening and deepening the pool of potential co-financing partners.

“For those institutions that are already active on the continent, we want to help them to lend more in different countries for longer tenors, and maybe start to branch into industries that are essentially domestic, perhaps investing in infrastructure rather than straight-forward export projects. And then there are obviously other institutions around the edge of the pool that one is seeking to encourage to get their feet wet. To dip their toe into the investment pool.”

The classic syndication model, as practised by commercial banks, provides an element of comfort to the individual institutions that make up the syndicate as the risk is split between them. So, rather than a bank, for example, making one $500m loan that might go horribly astray, it makes more sense to make five $100m loans with five syndicates.

Recognising that this model of investing would also be beneficial to DFIs, the AFP was initiated. It is based on the partnership strategy set out in the Strategy Update for the Bank’s Private Sector Operations, approved by the AfDB Board of Directors in January 2008.

They concluded that there is an evident need for partnerships, including with external development finance institutions, to enhance the effectiveness and efficiency of financing in Africa.

An AFP memorandum-of-understanding was signed between the core group of eight DFIs: the AfDB; Deutsche Investitions Und Entwicklungsgesellschaft MBH (DEG); the Development Bank of Southern Africa Ltd. (DBSA); European Investment Bank (EIB); Industrial Development Corporation of South Africa Ltd. (IDC); International Finance Corporation (IFC); Nederlandse Financierings Maatschappij Voor Ontwikkelingslanden N.V. (FMO); and Société de Promotion et de Participation pour la Coopération Economique (PROPARCO).

However, from the outset it was determined that the AFP would expand to include other DFIs, and commercial financial institutions’ partners as AFP Participating Partners.

“The value-added is in establishing a syndication partnership,” Jackson says. “There are two sides. Our co-investing partners tend to be either commercial investors or public lenders. In terms of the commercial investors, the established investor base for Africa is actually smaller than that for Eastern Europe. There are fewer institutions for which Africa represents a core business, and obviously in the years since the financial crisis, it has been less easy to persuade investors to move away from their core markets.

“So that is a part of our strategy: To get more investors in, and those investors may be banks or non-banks. There is great scope in the African market for funds, for pension funds and potentially for sovereign wealth funds.

“And then on the DFI side, where the role of the official lenders shot to prominence somewhere during the financial crisis around 2008 when,, it became apparent that there was scope to increase the operational efficiencies of the cooperation between them. Whilst deal volumes were down, the proportion of the market that went to the DFIs rose.”

The AFP has become a key component of the AfDB’s mission to help reduce poverty in Africa by mobilising resources for private sector development on the continent. The objective of the AFP is to bring together DFI partners with a similar mission so that further results can be delivered through combined efforts. It is a clear response to the frequent criticism that is levelled at DFIs that they tend to duplicate their efforts.

As an example of such duplication, Jackson told New African: “Whereas the syndication market worked very well through an informal system of market conventions amongst commercial investors that basically started about 40 years ago. It became based on formal procedures about 15 years ago when the loan market association was established.

“That was really just polishing something that already worked pretty well. But no such mechanism used to exist between DFIs – basically whenever they worked together, it would be done how it was done there and then. Things like traditions or conventions, things like mutual reliance on due diligence – the idea that one institution looks at a particular area and then another institution will take that data and that process and use those to come to their own conclusions.. That process was not fully established amongst DFIs.

“So if you had six institutions who are public official lenders, what would tend to happen is that everyone would do everything. But that duplication obviously uses up a lot of time and expense. So we have spent quite a long time on the AFP to introduce the efficiencies of the commercial market, to as great an extent as the DFIs will bear. We started by advising them on more obvious things and then we will build up over time.”

Yet however much the workings of the DFIs align with those of the commercial sector, essential differences remain as to how both sectors operate. “We [DFIs] have our own social standards. These are not radically different to those adopted by most commercial lenders, but we also have criteria such as additionality.”

“Additionality” is not a word found in the dictionary, but it is used amongst DFIs to mean the use of DFI capital to leverage private capital for catalysing greater investments in development in Africa.
“In other words, the DFIs want to see that their involvement in a project results in something that would not otherwise happen,” Jackson clarifies. “We also look at development impact, what are the development consequences of this particular project that is different to the commercial lenders. And we do economic modelling which is when you assess the impact of a project on the economy, which is obviously something above and beyond what the commercial lender is likely to do.

“Also, for example, we will take a closer interest in a project’s wider impact. If it is a mining project, for example, a commercial lender may not go much further than establishing if the concession agreement is legal and properly constituted, properly authorised, properly signed. We will also look at it in terms of the proportion of the value of what is being dug up and shipped out, and that the value is being passed to the population and is contributing to development.”

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