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Alternative Data Is Making (Credit) History in Sub-Saharan Africa

Posted in Media, Internet, and Technology

In yet another example of how mobile technology is revolutionizing service delivery in Sub-Saharan Africa, application developers, data mining companies and financial institutions are using mobile usage data and social media activity to determine the credit risk of potential borrowers.  These efforts are helping to surmount one of the most significant obstacles to extending credit in developing markets.

In developing markets, conducting the due diligence needed to assess a borrower’s credit risk is a challenge for two main reasons: geographic inaccessibility and little to no information as to the person’s credit history.  First, financial institutions typically have established in cities to be closer to the higher concentration of people and capital found in urban centers.  These institutions have shied away from engaging rural populations because of high transaction costs due to poor infrastructure and a widely dispersed client base.  Second, a dearth of financial as well as vital records creates a significant impediment to assessing the person’s credit risk regardless of whether that person lives in an urban or rural area.  Considering that Africa is home to the world’s fastest growing middle class, this is a significant missed opportunity.

Some of the ways in which modern sources of data are being used to tackle these challenges in assessing creditworthiness include:

  • In partnership with the Commercial Bank of Africa, Kenyan mobile network operator Safaricom created M-Shwari. An outgrowth of M-PESA, M-Shwari allows M-PESA users to save and borrow money through their mobile phones.  Prospective borrowers can qualify for loans if they “save regularly on M-Shwari and continuously use other Safaricom services such as Voice, DATA and M-PESA.”
  • Cignifi uses mobile phone usage to assess not only a person’s credit risk but also the probability that a person will use a particular financial service or product. The company is working with partners in Uganda and Ghana to expand the use of mobile financial products and services in the countries.  In addition to using mobile data, First Access analyzes additional financial information (such as the individual’s water, utilities and educational payments history) to assess a person’s credit risk.  The company has a field office and subsidiary in Tanzania and is in the process of expanding its presence across the region.
  • Lenddo offers loans and free financial education to individuals based on their LenddoScore, a creditworthiness rating that the company generates through analysis of the prospective borrower’s social media activity and related data sources. Following the group accountability model used by community-based microfinanciers, the LenddoScore also is impacted by the LenddoScores of the individual’s network of family and friends.

Importantly, these services allow an individual to prove their creditworthiness in a matter of weeks rather than years.  By both accelerating and innovating how financial institutions determine creditworthiness, these companies and others are promoting financial inclusion and spurring economic development in Sub-Saharan Africa.

An In-Depth Look at the Candidates for African Development Bank President

Posted in Current Events, Public Policy and Government Affairs

In a few months’ time, the African Development Bank (“AfDB”) Board of Governors will vote to decide the successor to President Donald Kaberuka whose presidency comes to an end on August 31, 2015.  Having first gained international prominence for undertaking sweeping economic reforms as finance minister in a post-genocide Rwanda, Kaberuka has had a highly successful ten years of service as AfDB president.  Under his leadership, the AfDB made major improvements in delivery of critically needed infrastructure and technical advice, both of which contributed substantially to the sustained economic growth that Africa has seen during that time.

Today, the AfDB is increasing its impact by using new models of financing projects through investments in infrastructure funds and partial risk guarantees.  Both help to attract private capital, which is absolutely critical to fill the infrastructure gap in Africa.  It is a model that both Power Africa and Trade Africa have adopted.  Indeed, when the Obama Administration was in the early stages of conceptualizing these initiatives, it reached out to Kaberuka for his ideas and support.  Kaberuka quickly embraced the initiatives and mobilized a senior team of experts to work with the U.S. government, creating an effective partnership that lasts today.

Set out below are the eight individuals who are looking to follow in Kaberuka’s sizeable footsteps.  The ideal next AfDB president will be a global visionary, an inspirational leader, and an outstanding manager of a large, multinational bureaucracy of some 1,500 employees involved in billions of dollars in projects across the continent.  The next AfDB president is taking the helm at an especially critical time in the Bank’s history as s/he will be spearheading ongoing implementation of the AfDB’s Strategy for 2013-2022.  With a special emphasis on fragile states, agriculture and food security, and gender, the Strategy aims to achieve sustainable and inclusive growth through infrastructure development; regional economic integration; private sector development; governance and accountability; and skills and technology.  Regional economic integration through the regional economic communities was an objective of particular interest to Kaberuka who recognized the need to change the fact that Africa continues to trade more outside Africa than within Africa.

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South Africa To Ban Foreign Land Ownership?

Posted in Public Policy and Government Affairs

Landowners in South Africa again are focused on a governmental land reform policy that seeks to prohibit foreign ownership of land in the country.  The government has been publicly discussing the policy for over two years but it is back in the spotlight after President Jacob Zuma announced in last week’s State of the Nation Address that a “Regulation of Land Holdings Bill will be submitted to Parliament this year.”  Under the proposed Bill, “foreign nationals and juristic persons […] as well as juristic persons whose dominant shareholder or controller is a foreign controlled enterprise, entity or interest” will be prohibited from owning land and instead only eligible to lease land for periods of between 30 to 50 years.  In addition, the Bill sets a ceiling of land ownership that restricts the amount of land that any individual — regardless of nationality — can own to 12,000 hectares.  Should an individual own land in excess of that amount, the government will purchase and redistribute the land.

The impact that the proposed legislative measure will have on foreigners who currently own land in South Africa is especially unclear.  President Zuma has “recognised that [the Bill] cannot apply retrospectively without constitutional infringements and as such those who have already acquired freehold would not have their tenure changed” should the measure pass.  However, with regards to those landowners, a “Right of First Refusal will apply in favour of another South African citizen in freehold or the state if the land is deemed strategic.”   (Also unclear is if the latter situation is distinct from the government’s already existing constitutional power to expropriate land.)  Another fundamental question that remains unanswered is the types of land to which the foreign land ownership ban will apply.  In the days following the President’s announcement, members of his Cabinet have stated that the ban is aimed at agricultural lands and that they are undecided as to whether it “will apply to all categories of land.”

The proposed measure has been justified on the grounds of a “need to secure [South Africa’s] limited land for food security and address the land injustice of more than 300 years of colonialism and apartheid.”  While section 25 of the South African constitution enshrines various property rights, it expressly does not “impede the state from taking legislative and other measures to achieve land, water and related reform, in order to redress the results of past racial discrimination.”  However, under section 36 of the constitution, any such limitations still must be “reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom.”  One required factor to consider is “the relation between the limitation and its purpose.”  Some critics of the Bill have claimed that “the area of land owned by non-South Africans is relatively insignificant (approximately 5% to 7%) and not the key reason for the slow transfer of land to black South Africans.”

Although the government has been claiming for months that the Regulation of Land Holdings Bill will be submitted to Parliament, inclusion in the President’s State of the Nation Address is a strong indication that it is a priority once again.  Over twenty years since the end of apartheid, the South African government continues to struggle with unravelling the legacies of a horrendously racist regime characterized by arbitrary deprivation of property.  As the proposed measure moves through Cabinet approval, the public consultation process, and the required Parliamentary procedures, it is critical that the government develops a Bill that adheres to basic principles of a constitutional democracy including due process and recourse for those who are adversely impacted by its provisions.

Sunset on AGOA?

Posted in Corporate and Investment, Public Policy and Government Affairs

Time is running out to renew the African Growth and Opportunity Act.

If the renewal process is delayed to AGOA’s expiration date of September 30 of this year, it will undermine much of what the legislation has achieved, especially in the apparel sector.

Apparel and footwear companies are the largest supporters of the several hundred thousand direct jobs that AGOA has created in Africa—not to mention the many more indirect jobs. Though, with the uncertainty surrounding the renewal of AGOA as well as the now-crunched timeline, these investments and jobs are in jeopardy. U.S. apparel and footwear companies plan production lines and place orders months in advance so that shirts from Lesotho and jeans from Kenya, for example, will be on the shelves in American stores in time for the next shopping season. As the deadline looms closer, these companies will face too much uncertainty to place their orders from the continent.

Uncertainty about when AGOA will be renewed similarly leads to uncertainty by U.S. companies about whether to invest in African companies. This is a detriment to development on the continent and threatens to undermine the goodwill that AGOA has created for the U.S. in Africa.

Importantly, Africa is not the only beneficiary of this key trade legislation. According to the United States Trade Representative, exports to Africa support more than 120,000 jobs in theUnited States. Without predictability in the U.S.-African commercial relationship it will be difficult to grow, let alone sustain, this number.

AGOA renewal must come first; enhancements, while welcome now, can come later.

The broad bicameral and bipartisan support that AGOA enjoys in Congress makes it quite unique. It is encouraging that new committee chairs, such as Rep. Paul Ryan of the House Ways and Means Committee and Senator Orin Hatch of the Senate Finance Committee, have spoken out in support of an AGOA extension. The African diplomatic corps in Washington is in full support of AGOA’s extension as are an array of non-governmental organizations, businesses, think tanks and faith-based organizations, which make up the so-called AGOA coalition.

To its credit, the Obama administration called for a 15-year extension of AGOA, through September 30, 2030, in the budget it sent to Congress last week.

Members of Congress need to approach a long-term AGOA renewal with a sense of urgency. If the administration and Congress can agree on enhancements for the legislation, that would be welcome. However, the time has long passed for protracted negotiations on enhancements and new conditionalities.

Given Africa’s growing importance to the U.S., symbolized vividly by last year’s successful Africa Leaders’ Summit, surely it is possible to address enhancements to AGOA without having to wait for the legislation renewal later in this session of Congress.

At the same time, various members of the AGOA coalition have views about whether the legislation should be extended on its own or as part of a larger trade package. That’s fine, but a very near-term extension should be the priority, one way or another.

How might the trade relationship change post-AGOA renewal?

Once a renewed AGOA is in place, there is a need to begin a conversation with our partners on the continent about how we transition from AGOA to a more reciprocal trade relationshipthat provides more benefits and protection to American investors and exports.

With the European Union having established the framework for free trade agreements with 35 African nations, known as Economic Partnership Agreements, the U.S. is in danger of being placed at a long-term competitive disadvantage in most African markets. It is already beginning to happen in South Africa, which has had an FTA with the EU since 1999.

The U.S. and the 40 countries in sub-Saharan Africa that participate in AGOA are increasingly important to each other for reasons that relate to commerce, security, governance and heritage, among other factors. Extending AGOA as soon as possible is vital to ensuring that the U.S.-African relationship remains relevant and as strong as possible.

Witney Schneidman is a nonresident fellow at the Africa Growth Initiative in the Global Economy and Development program of the Brookings Instiution. This piece was first posted on Brookings’ Africa in Focus blog.

European Parliament considering highly restrictive conflict minerals regime

Posted in Energy and Natural Resources, Public Policy and Government Affairs

Recent developments in the European Parliament threaten to make compliance with the future EU conflict minerals regime extremely complicated for companies that require tin, tantalum, tungsten, their ores or gold.

Background

The European Commission was encouraged to propose a European regime which would emulate the US Dodd Frank 1502 legislation in order to discourage the use of the abovementioned minerals extracted in the conflict zone of the Great Lakes region, like Dodd Frank, to the benefit of armed groups. In April 2014, EU Trade Commissioner Karel de Gucht proposed a regulation which was carefully constructed as not to impose unrealistic obligations on end users, suggesting only a voluntary “self-certification” regime for importers and a tracing system from the mine to the smelters. Many Members of the European Parliament (MEPs) vehemently criticized the Commission for a “lack of ambition.”

A mandatory / global mechanism?

The European Parliament and the Council of the European Union are now considering the proposal. We understand that rapporteurs from the Committees on Foreign Affairs (“AFET”) and Development (“DEVE”) have called for a mandatory mechanism.

Furthermore, one of the draft opinions explicitly asks for alignment of the EU legislation with Dodd Frank, thereby extending mandatory reporting requirements to “public-interest entities and large undertakings that manufacture or contract to manufacture products containing [conflict minerals].”

While the draft opinions will need to be discussed and then adopted in the respective Committees, these first drafts set a worrying tone for the upcoming EU debate. These developments are all the more problematic as the proposed EU regime would not just apply to the Great Lakes region but to all conflict zones in the world.

Next steps in the legislative process

  1. The Parliament’s Committee on International Trade (“INTA”), which is the lead Committee, is set to discuss a draft report on February 23-24. This draft report should be published by February 20.
  2. MEPs will be able to amend the draft report until February 26, before INTA is set to adopt it on March 18-19.
  3. The DEVE and AFET Committees are due to adopt their opinions on February 24 and March 9.
  4. The Parliament’s plenary vote is expected to take place in April 2015 (indicative date).
  5. The Council is discussing the proposal in parallel. In practice, MEPs and the Council may want to enter into negotiations in the coming weeks in view of reaching a first-reading agreement before the EP’s vote.

Companies with products containing tin, tantalum, tungsten, their ores or gold should stay abreast of EU legislative developments, and may wish to act quickly in order to inform and educate the MEPs who are considering such a strict regime.

While it is important to support international efforts to discourage the financing of conflict with the revenues from minerals, any legislation must be appropriately balanced so that it does not discourage all mining activity in the Great Lakes region (or worse, all conflict zones) and does not impose requirements on end users that are almost impossible to comply with.

Nigerian Court of Appeal Allows Third Party to Challenge Arbitration Award

Posted in Dispute Resolution, Energy and Natural Resources

In the recently published Abuja Court of Appeal case of Statoil (Nigeria) Limited & Anor v. Federal Inland Revenue Service & Anor ((2014) LPELR-23144(CA)) (“Statoil”) dated 13 June 2014,  the Nigerian court held that a third party had locus standi to challenge an arbitration agreement to which it was not a party.

This decision has been highly criticised by the Nigerian arbitration community, as it appears to have no basis in Nigeria’s Arbitration and Conciliation Act 2004 (“ACA”).  This decision may undermine many of the positive steps taken by Nigeria in recent years to establish itself as one of the more arbitration-friendly jurisdictions in Africa.

Statoil and Texaco, the appellants in Statoil, were one of several oil consortia to have initiated arbitration proceedings against the Nigerian National Petroleum Corporation (“NNPC”).  These arbitrations concerned the payment of “petroleum tax” on oil lifted under production sharing contracts (“PSC”) dating back to 1993.  Initially, the NNPC had obtained a court injunction against the arbitration proceedings on the grounds that tax disputes were not arbitrable under Nigerian law.  However, the injunction was subsequently overturned by the Lagos Court of Appeal[1] in July 2013.

As a further attempt to frustrate the arbitration, the Federal Inland Revenue Service (“FIRS”) applied to the courts to challenge the validity of the arbitration agreement between Statoil, Texaco and the NNPC.  Counsel for the FIRS argued that the purpose of the arbitration was to avoid the proper computation of taxes accruable to its account, stating that:

“[t]he whole game […] was to exclude the [FIRS] from the clandestine arrangement in the Arbitration Tribunal so that in the event the award is made, as it is evident that the tribunal is rail-roaded and programmed for that purpose, the [FIRS] as the Central and component part of the Government of the Federation, will be compelled to disgorge revenues already and severally collected, and allocated, which will form part of the awards to be eventually made by the Arbitral Tribunal.

The Abuja Court of Appeal agreed and confirmed that FIRS had locus standi to make such a challenge, despite the fact that it was not party to the agreement itself.  In its decision, the Court of Appeal noted that if the claimants were successful with their claim, the FIRS would lose tax revenue and therefore would be affected by the outcome of the arbitration.  With this in mind, Tine Tur J of the Abuja Court of Appeal stated:

[i]f a party to an arbitral agreement can challenge the jurisdiction of the Arbitration Tribunal, or that the arbitral agreement was ab initio, null and void, what about a person or authority, such as the [FIRS], who was not a party to the agreement but complains […] that the proceedings or subsequent award by an arbitral tribunal constitute an infringement of some provisions of the Constitution or the laws of the land or impede her constitutional and statutory functions or powers?  Would the person be debarred from seeking declaratory remedies, or by originating summons?  I do not think so.  Where there is a proved wrong, there has to be a remedy.   

Neither the ACA nor any other Nigerian statute suggests that the courts have the power to allow third parties to challenge the validity of an arbitration agreement or the jurisdiction of the tribunal.  Indeed, the decision appears to contradict Section 34 ACA, which provides that “a Court shall not intervene [in arbitral proceedings] in any matter governed by this Act except where so provided in this Act.”  While the reasoning in the judgment is difficult to follow, it appears that Tine Tur J, on identifying a perceived wrong, considered it necessary to remedy such a wrong, regardless of whether or not statute allows for such a remedy.

The court issued its decision despite the fact that the arbitration was still pending.  In the words of Tine Tur J :

I am of the humble opinion that it will be in the best interest of the [FIRS] not to wait or stand by for the Arbitration Tribunal to complete the proceedings and make an award.  [The FIRS] has the locus standing to act timeously to arrest the situation by a declaratory action or originating summons in a Court of Law.  Where the claim succeeds, the Court may make a declaration that the arbitral agreement was void ab initio or that the Arbitral Tribunal lacked the jurisdiction to have entertained the dispute on grounds of constitutional or statutory illegality etc.

The decision is particularly damaging to international arbitration in Nigeria, as it conflicts with two arbitration-friendly Nigerian Court of Appeal decisions from July 2013[2] and February 2014[3].  These decisions had upheld the principle of non-intervention as set out in Section 34 ACA.  In these decisions the Court of Appeal had overturned injunctions seeking to restrain arbitral proceedings, relying on Section 34 ACA and holding that the courts had no power under the ACA to restrain arbitral proceedings with an ex-parte injunction.  Such conflicting decisions create an unpredictable environment for arbitration.

Despite the recent decision of Statoil, Nigeria has taken positive steps to establish a suitable legal framework for international arbitration.  The ACA, enacted in 2004, is based on the UNCITRAL Model Law and the Lagos Court of Appeal has confirmed that foreign arbitral awards will be enforced directly in Nigeria under Section 51(1) ACA and the New York Convention.[4]

However, the decision in Statoil, which appears to have been based on the whims of the judge in question rather than the applicable arbitration law, shows that arbitration in Nigeria remains unpredictable.  Therefore, parties looking to invest in Nigeria should be aware of these risks when negotiating the dispute resolution clauses of their agreements.


[1] The Nigerian Court of Appeal has 16 regional divisions, each with equal authority.  The Abuja Court of Appeal and Lagos Court of Appeal are two of these regional divisions.

[2] Statoil (Nigeria) Ltd & Anor v. Nigerian National Petroleum Corporation & 2 Others (2014 NWLR (part 1373) 1), decided by the Court of Appeal, Lagos Division, on 12 July 2013.

[3] Nigerian Agip Exploration Ltd v Nigerian National Petroleum Corporation & 2 Others (Suit No. CA/A/628/2011), decided by the Court of Appeal, Abuja Division, on 25 February 2014.

[4] See Tulip Nigeria Limited v Noleggioe Transport Maritime SAS (2011 4 NWLR (part 1237) 254).

AU-UN Report Reveals Startling Illicit Financial Flows in Africa

Posted in Anti-Corruption, Consumer Products and Goods, Corporate and Investment, Current Events, Energy and Natural Resources, Food Security and Agriculture, Public Policy and Government Affairs, Trade Controls and Policy

A new, comprehensive report published by the African Union’s high-level panel on illicit financial flows and the United Nations economic commission for Africa (Uneca) concludes that Africa loses more than $50 billion every year to illicit financial flows (IFFs).  The report, entitled Illicit Financial Flows, represents the first African initiative of its kind, and is the product of a study that began in February 2012.  It analyzes various illicit practices of governments and multinational companies that deprive African countries of tax payments, facilitate the undervaluing of African trade, and perpetuate profit-shifting schemes that collectively divert billions of dollars in essential capital from the world’s poorest continent every year.  

According to the AU-UN report, Africa lost approximately $850 billion in illicit financial outflows between 1970 and 2008.  “Illicit financial outflows” are defined as “money that is illegally earned, transferred or utilized,” and that typically originate from one of three sources: (1) “commercial tax evasion, trade misinvoicing and abusive transfer pricing”; (2) criminal activities; and (3) “bribery and theft by corrupt government officials.”  The AU-UN report asserts that “large commercial corporations are by far the biggest culprit of illicit outflows, followed by organized crime.”  Illicit funds are often routed out of Africa to developing countries and tax havens around the world, causing Africa to function as a “net creditor to the rest of the world.”  

Although corrupt practices and weak governance structures are key facilitators of IFFs in Africa, the report notes that tax evasion, international trade manipulations, and organized crime constitute large portions of illicit outflows from the continent.  Indeed, the Open Society Foundations’ Initiative for West Africa recently stated that throughout Africa, only 3% of IFFs stem from government corruption, while 64% arise from trade manipulations and 33% originate from organized crime.  One of the AU-UN researchers’ methods of estimating IFFs was to compare the reported value of African exports with the higher value attributed to the same goods by non-African countries that received the goods as imports. 

Development Consequences

Over the past decade, Africa has maintained an impressive economic growth rate of approximately 5% annually, yet the degree of capital flight documented by the AU-UN panel paints a grim picture, suggesting that Africa’s economic growth will elude many of the estimated 414 million Africans who live on less than $1.25 a day.  A recent study by Global Financial Integrity asserts that illicit finances flow out of Africa at a much faster rate than development assistance enters into the continent, with IFFs outpacing international development funds at a ratio of at least two-to-one.  According to the AU-Uneca report, Sub-Saharan African countries have been most heavily impacted by IFFs; West and Central Africa shoulder the largest numbers of illicit financial streams. 

Governance, Oversight and Capacity Constraints

IFFs plague developing and developed nations alike, yet African governments are especially impacted by these illegal activities because they often lack the capacity, centralization and collaborative networks necessary to identify and reduce illicit practices effectively.  For example, without a consistent means of exchanging financial and tax information among African countries, it is difficult for African authorities to thwart the efforts of those who evade tax payments and engage in other illegal activities.  In light of these obstacles, the AU-UN report makes several key recommendations aimed towards African states, including the drafting of clear and concise legislation prohibiting trade mispricing, the enhancement of financial monitoring and oversight mechanisms, and the automatic exchange of tax information between African governments.

Charting a Way Forward

In addition to making recommendations towards African leaders, the report’s authors call on countries that receive illicit outflows to help prevent these financial streams, assist Africa in repatriating illicit funds, and to prosecute perpetrators.  Recent remarks before the Assembly of the African Union by Thabo Mbeki, South Africa’s former President and Chairperson of the AU-Uneca panel, summarize the report’s call for political mobilization on a global scale:  “[W]hile the study of illicit financial flows seems technically complex, it is ultimately a political matter requiring decisions at various levels of governance.  It can indeed be said that illicit financial flows are an ‘African problem with a global solution.’”

As the first African initiative to comprehensively address IFFs throughout the continent, the report is a strong indicator that African governments are prioritizing the fight to eradicate IFFs throughout the continent.  The target period of the UN Millennium Development Goals is  scheduled to end at the close of this year, and African governments are now looking towards the design of Africa’s Post-2015 Development Agenda.  IFFs will likely be viewed as a seminal source of development financing whose recovery is essential to meaningful progress. 

 

Accelerating the Use of Geothermal Power in East Africa

Posted in Energy and Natural Resources

Last week, London-based firm EnergyNet held its “Powering Africa Summit” in Washington.  The Summit, opened by U.S. Secretary of Energy Moniz, attracted project developers, equipment suppliers, financiers, the U.S. Government’s Power Africa team, and African government officials. Unfortunately, due to the African Union Summit that was being held at the same time in Ethiopia, no minister of energy from Africa attended.  This wasn’t the first event of its kind, but it did draw a much more diverse group of actors, which suggests more developers and energy companies are looking to Africa for new business opportunities.

On the margins of the conference, other institutions in DC convened panels of experts to examine a few specific issues, including ideas for accelerating the development of the Rift Valley’s prodigious, and environment-friendly, geothermal resources.  Studies have shown that the Rift Valley has the potential to generate between 15,000 and 20,000 MWs.  And with countries such as Kenya and Tanzania struggling to keep 2,000 or so megawatts on line and operational, it is a very reliable base-load resource.

So, what’s keeping a relatively cheap, reliable, and clean resource from being converted into power?  Simply put, there are a lot of risks, and capital generally avoids risk.  Those who operate in the industry identify “drilling risk” as a major inhibitor to geothermal development.  It’s quite costly at $6 – $10 million a well, and in the past one had to have both good studies and a “steam diviner” to find the perfect resource.  Recent improvements in technology have actually reduced the risk.  Geo-physics studies have become more precise in locating the resource, while multi-directional drilling has become a game-changer.  A recent World Bank report concluded that the success rate in drilling has climbed to 80%.

Even with these improvements, a 20% risk can still be too high.  To mitigate risk further, donors, industry, and government  have developed several “de-risking” tools, which so far haven’t proved to be as effective as hoped.  Munich Re offers a commercial, and costly, insurance product for drilling.  Some countries are considering to take on the drilling risk themselves.  Kenya, for example, has created the Geothermal Development Corporation (GDC), whose mandate is to develop geothermal sites, drill wells, and bid concessions.  Other countries are considering a similar model in hopes of attracting capital.  On the donor side, Germany’s KfW created a “Geothermal Risk Mitigation Facility” that is housed within the African Union, and the AfDB hosts a number of instruments and funds under its Sustainable Energy Fund for Africa.  Iceland, Germany, the UK, the US, among others, also have their own important programs, but each has its own unique set of criteria for applicants.  Simply put, though intentions are good, the instruments are too restrictive in their use and too diffuse, spreading across a multitude of organizations.  To make a project bankable, a developer will often have to use several of these tools, and that means timing and sequencing of their application are critical factors in successfully closing projects.  The (up-to) 1,000 MW Corbetti project in Ethiopia provides a useful example of artful deployment of many tools on the part of lead developer Reykjavik Geothermal, but it has taken many years to get to this point.

As industry examines the best means of accelerating project development and, more important, the actual delivery of power, below are several recommendations for consideration:

(1) Develop a geothermal resource center that is on every donor’s and industry association’s website.  The resource center would ideally list all the geothermal projects in the Rift Valley in operation, those that are being developed, and ones likely to come up for bid.  It would contain (non-propriety) information on each project, the project costs and terms, and further help prospective developers by identifying de-risking tools (commercial and donor-supplied), how and when to apply for them, and potential financing options.

(2) The donors should consolidate their funds and de-risking mechanisms wherever possible, and identify one single donor to lead and coordinate.  The logical choice for leading the donors is the African Development Bank (AfDB).  With its very strong regional office in Nairobi, technical expertise, and a number of instruments to support geothermal development, the AfDB as the development bank for the continent is by far best positioned to triangulate the interests of developers, financiers, and host governments.

(3) On consolidation, the industry should look hard into whether the Geothermal Risk Mitigation Facility (GRMF) should continue to reside within the African Union Commission in Addis Ababa.  The AU is largely a political and policy-making institution.  Maintaining a facility that supports commercial interests under its control is affecting implementation.  For example, when decisions on how Round I funding would be allocated, staff suggested funds should be “fairly distributed” among the countries and not based on project merits.  The political lens should be removed from this facility.

The GRMF is a good concept – actually a very good one.  Effective execution has been lacking, however.  The AfDB is better suited to run this important de-risking program and make it more timely in evaluating projects on a rolling basis, and allocating funds based on data-driven, technical decisions.

4) Project developers, equipment suppliers, and EPC (engineering, procurement, and construction) contractors should form partnerships and alliances early on in the process to broaden the range of equity partners in order to cover early project development costs.

The Rift Valley presents exciting opportunities for renewable energy projects that will help the countries of East Africa fill its severe electricity deficit.  Millions of Africans could have reliable, relatively cheap power if the tools to attract investment were sharpened.

Mobile Money Continues to Prove to be the Way Forward for Banking in Sub-Saharan Africa

Posted in Media, Internet, and Technology

For the past few years, the explosive growth of mobile financial services (which includes mobile banking, mobile payments and mobile money transfers) in Kenya and other countries in Sub-Saharan Africa has indicated that the future of banking on the continent will be through mobile phone accounts rather than brick and mortar locations.  New analysis by Frost & Sullivan into the mobile money market in Sub-Saharan Africa further confirms these predictions.

According to Frost & Sullivan, mobile money is becoming “one of the most exciting areas in mobile communications and is quickly transforming the way in which consumers and enterprises transact.”  Already worth $655.8 million in 2014, the mobile money market in Sub-Saharan Africa is projected to grow to $1.3 billion by 2019.  Ongoing issues with poor infrastructure, a widely dispersed client base, high transaction costs, and related obstacles all contribute to why the inaccessibility of traditional banking facilities will be one of the key drivers of this growth.  In turn, competitive innovations in financial services delivery and growing adoption of mobile money also will be key market drivers.

Companies seeking to put themselves at a competitive advantage would do well to address key market restraints such as restrictions on interoperability and cross-border transactions, inadequate mobile infrastructure and security concerns.  (Governments have a role to play by ensuring that domestic financial regulations as well as regional cooperative agreements enable the adoption of mobile financial services.)  Companies also should explore the wide range of potential applications for mobile money.  Present applications already include utility payments, payment of government employees, public transport and banking and telecoms services but emerging applications include air travel purchases, fuel and tax payments, and insurance claims systems.

Finally, it must be noted that adoption of mobile financial services is a clear example of how business can accrue development dividends.  In its 2015 Annual Letter, the Bill & Melinda Gates Foundation identified mobile banking as one of four breakthroughs that will radically transform the lives of the poor in developing countries.  The Foundation estimates that, in the next 15 years, “2 billion people who don’t have a bank account today will be storing money and making payment with their phones” and that “providers will be offering the full range of financial services, from interest-bearing savings accounts to credit to insurance.”

Helios raises $1.1 billion fund for African investments

Posted in Uncategorized

On 12 January, the London-based private equity group Helios Investment Partners announced that it had exceeded the $1 billion target that it had set for Helios Investors III, L.P., or “Helios III”, thus making it the first $1 billion-plus private equity fund for African investments.  Founded in 2007 by Nigerian-born Tope Lawani and Babatunde Soyoye, Helios has already established two funds for the purpose of investing solely in Africa.  (Helios Investors II, L.P. or “Helios II” held the previous record for the largest private equity fund in Africa, which it raised in 2011, of $908m).  Approximately sixty percent of the capital committed to the new fund came from Helios’ existing investors which include sovereign wealth funds, corporate and public pension funds, endowments, foundations and development finance institutions across the US, Europe, Asia and Africa.

Helios III will follow the same investment strategy as Helios’ two other funds, and it will acquire and build market-leading, diversified platform businesses which are operative in the core economic sectors of key African countries.  Helios III so far has been used to acquire an interest in ARM Pensions, which is Nigeria’s largest independent pension fund manager, with over $2.2 billion of pension assets under management.

Commenting on Helios’ approach to investing in Africa, Mr Lawani stated that “much has been made of the rise of the African consumer, and that does, from time to time, give rise to potential investment opportunities.  However, as discretionary incomes remain low and the cost of basic goods and services is high, Helios believes that addressing the supply side of the economy is generally more attractive.  Helios’ strategy focuses on investing in businesses that lead the provision of core economic infrastructure: de-bottlenecking the economy, increasing efficiencies and reducing living costs for households and operating costs for businesses.”

In an interview with the Financial Times, Mr Lawani stated that the size of the capital raising and the participation of pension funds and sovereign wealth funds is a sign that private equity in Africa is maturing and moving out of its infancy.  Indeed, according to data prepared by the African Private Equity and Venture Capital Association (AVCA), the aggregate deal value of African deals that occurred in 2013 was $3.2b.  This figure is a significant increase from the $1.6b recorded in 2012.

The positivity in the African market is evident from the 2014 Global Limited Partners Survey which revealed that Sub-Saharan Africa ranks in the top three of the most attractive emerging markets for general partner investment.  The interest in this region is evident from the PE deals that occurred there in 2014.  For example, KKR announced its first investment there, spending $200m to buy a flower company based in Ethiopia.  The Carlyle Group announced a $591m close on its $500m-target initial African fund.  Blackstone entered a partnership with Africa’s richest man, Aliko Dangote, to invest in the region.  In addition, Africa started to attract state-owned funds, including the Investment Corporation of Dubai, Temasek of Singapore and China Investment Corporation.

According to a joint study of private exits in Africa by the AVCA and EY, trade sales remain the key exit route for investors in Africa.  Additional exit routes have however appeared in recent years, including sales to other PE firms, and this is indicative of the maturing private equity market in Africa.  Exits via public markets are not very common in Africa, largely because of the small size of the exchanges outside South Africa.  Nevertheless, the study provides that stock sales on public markets and IPOs were the best performers of all exit route and this mechanism is expected to become even more important when the public markets in Africa develop further.

Exits were down in 2013 as compared to previous years; the number of PE realizations in Africa declined to 27 in 2013, down from 35 the year before and 29 in 2011.  It has been claimed that the reason for the decline in the number of exits in 2013 was due primarily to two external developments: first, the announcement by the US Federal Reserve that it would taper its program of quantitative easing, and, secondly, the fact that Africa’s two key trading partners, China and India, both saw a slowdown in their growth rates in 2013.  However, on a positive note, the pipeline is filling up as investments made over more recent years become ready for sale.  Also, the total entry enterprise value for exits has been increasing year-on-year since 2009, including in 2013.

A recent report provides that the medium term outlook for raising Africa-specific funds is strong and that large global PE firms are looking at the market to capitalise on the growing investment opportunities available on the continent in the infrastructure and resources sectors and also in the consumer-backed sectors such as financial services, agribusiness, retail, education and healthcare.  The report predicts that sectors such as power, logistics and infrastructure will also attract investment as increasingly wealthier populations will require the development of the continent’s infrastructure.  It also forecasts that there will be opportunities in the power production space as privatisation takes place in Nigeria, and also in the banking and financial services sector, as the government there starts to divest its holdings in financial institutions that it obtained under the Asset Management Corporation of Nigeria (AMCON) program.  This confident outlook on the Nigerian landscape was also alluded to by the head of west Africa at Carlyle who told the Financial Times that Carlyle had a strong pipeline of potential deals in the continent and said that it was particularly bullish about the long-term potential of Nigeria.