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Revolutionizing access to finance for African SMEs

12.09.2014Jean-Michel Severino

Over the past decade Africa has experienced a 5% growth across the continent. This surprising and spectacular growth attracts investors from around the world. They are both forced to change their perception about what contains profound upheaval, and seduced by what is now considered as the emerging new frontier. Among the ten countries in the world where economic growth was the fastest between 2000 and 2010, five were located in sub-Saharan Africa: Equatorial Guinea (12.3% per year), Angola (9.3% per year), Chad (8.8% per year), Nigeria (7.4% per year) and Ethiopia (6.9% per year).

But this growth remains fragile, uneven and carries huge challenges: how to ensure that it benefits to the greatest number of people and allow millions to get out of the poverty trap?

In 2050, Africa will not only account for 4% of the global economy, it will also make up 23% of the world's population. This new world pole will be facing major issues such as the employment of a young and dynamic population that will be increasingly numerous in the labour markets. In this context, African small and medium sized enterprises (SMEs) are best positioned to create jobs and local added value, as well as develop the local economic fabric. They stand for essential drivers for social and political stability by spreading the wealth created and structuring local economies.

Nevertheless, SMEs appear as missing links in most African economies. They desperately need to find ways to meet their needs for growth despite a latent lack of access to finance. Too small and too costly to manage for large banking institutions, they are also too large to meet the investment criteria of microfinance institutions. They often are in a deadlock and do not fully benefit from the growth of the continent.

In this context, what solution one could bring to these key actors for responsible and sustainable growth in Africa in order to enable them start their business or scale up?

The solution lies in the emergence of new financing capacities that will offer entrepreneurs the opportunity to strengthen their capital stock under conditions compatible with certain constraints in terms of management fees, transaction costs, etc. It consists of developing a new industry of capital investment, 100% African, which can rely on a network of local investment funds, promoted by African investors and managed by locally recruited teams. This new device will revolutionize the access to finance for small African entrepreneurs through new sustainable funding solution.

But this capital will not be sufficient for African entrepreneurs to reach their growth potential and maximize their economic, social and environmental impacts. It should be complemented by strategic guidance for establishing solid fundamentals and ensuring sustainable development in due respect of all stakeholders. Finally, technical assistance missions will be essential to build and strengthen the financing capacities, through the transfer of know-hows, methodologies and the development of local skills.

The creation of this network of African investment funds will draw lessons from successes and failures of microfinance and will bring to private equity the same kind of revolution as the one microfinance has brought to the debt. It will require a real education for not only existing African finance players: banks, development agencies, private institutions, so that everyone contributes to the success of this new funding; but also with entrepreneurs as private equity is sometimes looked at with distrust and its benefits are not fully appreciated today!

Jean-Michel Severino is Chairman of the private finance company Investisseur & Partenaire pour le Développement (I&P). He is the former Director of France's international development agency, AFD. Jean-Michel Severino is General Inspector of Finances at the French Finance Ministry and served as Director in charge of international development at the French Ministry of Cooperation. He has also worked at the World Bank, first as Director for Central Europe and then as Vice President for Asia.

Pension Funds and Private Equity: Unlocking Africa’s Potential

21.07.2014Stefan Nalletamby

Dear Readers,

A resounding thank you to everyone who joined us in Dakar, Senegal, last month for our Partnership Forum. I hope you found the event as engaging and stimulating as we did. One of the lessons for the Secretariat that emerged from the Forum discussions is the need to deepen our engagement with key stakeholders in support of financial sector development in Africa. This means that we will be doing things differently, rather than doing different things. Our emerging work programme with pension funds is an example of this.

Pension funds play a critical role in finance through the mobilisation and allocation of stable long-term savings to support investment. Recent reforms in many African countries have created private pension systems, which are rapidly accumulating assets under management (AUM). The Nigerian pension industry, for example, grew from US$7 billion in December 2008 to US$25 billion in December 2013[1]. Similarly, Ghana's pension industry is expected to expand by up to 400 per cent in the four years from 2014 to 2018[2]. Pension assets now equate to some 80 per cent of GDP in Namibia [3] and 40 per cent in Botswana[4]. How can Africa mobilise these domestic resources to support private sector development, as well as the investment in infrastructure and social services that need to drive continued growth and transformation? How can these long-term savings support the development of capital markets on the continent?

In the coming days, we will be releasing a joint publication, "Pension Funds and Private Equity: Unlocking Africa's Potential" with the Commonwealth Secretariat and the Emerging Markets Private Equity Association (EMPEA). The report provides information that is crucial to a better understanding and appreciation of the pensions industry in Africa. In addition to outlining the latest data and regulatory profiles for 10 African countries, the report estimates how much capital could be available to support private equity in these countries as well as how much has already been mobilised to date. We chose to focus on private equity in particular because in the context of underdeveloped capital markets and a lack of long-term financing, private equity is an attractive option for African companies in search of capital and can be a catalyst for job creation and economic growth.

The report profiles the pension industries of Botswana, Ghana, Kenya, Namibia, Nigeria, Rwanda, South Africa, Tanzania, Uganda and Zambia, in addition to providing expert insights from practitioners in the industry. The aim of this comparative analysis is to advance the dialogue among African pension fund managers, pensioners, regulators and other industry stakeholders about private equity and further the exchange of best practices across the region and with other emerging and developed markets. Whilst this publication focuses on private equity, the lessons learned are applicable to other sectors such as infrastructure and housing, as well as how these long term savings can be used to support the development of capital markets.

In that vein, and based on the publication, we are engaging with pension fund managers, through our recently launched Africa Pension Funds Network (APFN), to explore how the various barriers to unlocking domestic capital can be addressed. APFN was inaugurated during the Partnership Forum in Dakar in June, and membership currently includes industry associations and pension fund managers from Botswana, East Africa (covering Burundi, Kenya, Rwanda, Uganda, Tanzania and Zambia), Namibia, Nigeria, and South Africa, with more countries expected to join in the coming months. The network will provide a platform for exchange of knowledge and expertise amongst industry participants across the continent. The network will also facilitate cross-country collaboration through co-investments, peer-to-peer learning and provide a forum for engagement with other financial sector stakeholders at the pan-African level. We are already in discussions with the International Organisation of Pension Supervisors (IOPS) about the possibility of organising a meeting between African Pension Supervisors and APFN at the IOPS Global Forum in Namibia in October.

We will be building on these foundations over the summer using new tools such as our Online Collaborative Platform, an interactive and secured social networking platform aimed at supporting and catalysing MFW4A networks and working groups, the African Partners Directory, a database repository of key stakeholders active in Africa's financial sectors, and the more traditional tools like the bi-weekly newsletter.

To conclude, I would like to extend special thanks to all our partners for the constructive and stimulating collaboration that is driving us towards our common goal of promoting Africa's financial sectors. I would also like to thank the Secretariat team for their sterling efforts and achievements so far.

To all our readers, sincere and best wishes for an enjoyable and restful summer/winter break.

Stefan Nalletamby
MFW4A Partnership Coordinator

 

 

[1] National Pension Commission Nigeria (PenCom).

[2] According to National Pensions Regulatory Authority officials, pension industry assets could grow from ¢1.06 billion to ¢5.5 billion in this period.

[3] Namibia Financial Institutions Supervisory Authority Annual Report, 2013.

[4] Based on Non-Bank Financial Institutions Regulatory Authority (NBFRIA) and World Bank figures.

Why ESG is here to stay in African investments

14.04.2014James Brice and Markus Reichardt

Africa is still touted as the next investment frontier and the figures bear it out: with over $50 billion foreign investments in 2012 according to UN figures it is the recipient of more foreign direct investment (FDI) than any other continent. Investors appear to view the developed world as over-regulated, and regions such as North Africa or parts of the Middle East too unstable. Africa's economic resurgence has its roots in small but real improvements in governance and transparency, more open societies empowered by social media, and economies leapfrogging directly to new technologies such as the mobile phone as a business tool. More than 720 million Africans have mobile phones and 167 million have access to the internet.

However, due to its low domestic savings rates Africa has to rely on foreign investments to fuel its growth and here two models have presented themselves:

  1. The Chinese 'ask no questions approach' which trades infrastructure investments for access to natural resources; and
  2. The conditional model espoused by the 'West' where investments seem to come with a range of conditions, especially in respect of environmental, social and governance performance.

While some observers have mistakenly framed the two options as a choice between two new forms of colonialism, it is worth looking dispassionately at some of these conditions - particularly those set out in 'global standards' developed by organisations such as the World Bank and the International Finance Corporation (IFC) - the largest source of development assistance in the world and the leading facilitators of infrastructure development funding globally. The most widely accepted of these standards - the 8 IFC Performance Standards and the sector-specific environmental health and safety guidelines supporting them - are remarkably simple in what they seek. In the case of their direct investments (including project and corporate finance provided through financial intermediaries), investors are required to identify and manage business risks and impacts so that development opportunities are enhanced.

Globally more than 500 asset & investment managers managing more than $30 trillion are signatories of investment codes such as Equator Principles which are based upon the IFC Performance standards and require disclosure of environmental & social risks and management responses to such risks. Together these institutions account for nearly 80% of global project finance and they include banks from Nigeria, South Africa, Morocco, Egypt, Togo and China's Industrial Bank.

The traditional Chinese investment model has over the years encountered sufficient and widespread opposition from African civil society in countries such as Namibia, Botswana and Zambia. This has led to social issues being approached more openly with more space given to opportunities for local labour and suppliers. Several surveys are underway by various Chinese-based institutions to measure and understand Africa's opinion of Chinese FDI. Chinese Banks now have to adopt a recently launched Green Credit Policy, and a draft CSR Policy for Outbound Investments in the Extractive Sector is due out in May.

So while it appears that Chinese investors in Africa are starting their ESG journey, this does not imply that 'First World' investors who placed an earlier emphasis on environmental, social and governance (ESG) issues have been more successful. Rather their approach to ESG issues has more often than not resulted in a compliance, "tick the box" approach, resulting in a "do the minimum" level of ESG interest.

This is why it is critical that as Africa continues to grow that project developers and foreign investors are guided by ESG standards towards achieving holistic risk management approaches. All these ESG guidelines are by their very nature generic and encourage interpretation in terms in terms of local context and sectoral expertise. Thus even Africa's biggest development finance institution - the African Development Bank (AfDB) approaches wildlife protection and anti-poaching measures not as measures to appease western sources of capital, but as its head, Donald Kaberuka explains, as part of its basis for sustainable economic growth. The issue, according to Kaberuka, concerns the survival of the ecosystems on which African economies and communities depend for tourism revenues. This makes wildlife protection a key issue for Africa's largest development bank and the projects it considers in pursuit of its mandate.

A project's failure to consider stormwater flow paths in built-up areas during extreme weather events can lead to catastrophic structural failures affecting projects such as shopping centers. Alternatively failure to openly engage with and compensate informal land users of areas being converted to formal farming can lead to consistent community conflict, road blockages and crop sabotage. Failure to explore the use of slightly more expensive but more eco-friendly inputs in a production process can lead to later impacts on cash costs when waste disposal charges or penalties mount. The list of issues to consider is potentially endless and such global ESG standards offer a widely accepted methodology deemed not only as reasonable for risk management purposes but also structurally encourage project proponents to explore more efficient, more sustainable alternatives.

In its search for sustainable economic growth, African communities and institutions must set aside fears of externally-imposed standards. Rather they should take advantage of the proven methodologies such standards, when diligently applied with local context and sectorial expertise, can make on project timelines, project risk profiles and improved economic returns for the investments fuelling Africa's economic resurgence.

James Brice, CEO, & Markus Reichardt, Principal, Environmental Business Strategies Pty Ltd: www.envirobiz.co.za.

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