• Sunday, December 03, 2023
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Why are SWFs shy of African investments?

Nigeria, others to unlock $26bn on lower trade finance cost

Sovereign Wealth Funds (SWFs) could easily resolve Africa’s infrastructure funding issues, or go a long way toward doing so. So why are they so hesitant toward investments in Africa and what are the chances for change?

There is no lack in money. SWFs are keen to diversify into real assets with long-term growth prospects – ample opportunities for which exist in many parts of Africa.

Indeed, if SWFs – large state-owned investment funds – were to steer a mere 1.3 per cent to 1.5 per cent of their total assets into sub-Saharan Africa, they could close the region’s infrastructure deficit over the coming years.

According to the African Development Bank, the estimated financing requirement to resolve sub-Saharan Africa’s infrastructure gap until 2020 is $93bn per year. That equates to 1.3 per cent to 1.5 per cent of global SWF assets under management, which were estimated at between $5.9tn and $7tn at the end of 2014.

African governments are in search for large investors with long-term investment horizons for financing vital infrastructure projects, whereas SWFs are increasingly looking for higher yields and diversification into ‘real asset classes’.

Opportunities and challenges

After Asia, sub-Saharan Africa has become one of the world’s fastest growing regions. With growth rates of 5.1 per cent in Ghana and 6.2 per cent in Nigeria in the third quarter of last year, some countries in the region are eclipsing the opportunity on offer in some emerging market behemoths such as Brazil – which is stagnating – and Russia, which is headed for a deep recession this year.

But lack of transport, power, water and information technology infrastructure remains the major constraint for sustaining this growth. One big challenge for sub-Saharan Africa is high debt levels in some countries and the long tenor involved in infrastructure financing. Furthermore, public as well as private debt markets remain very shallow, and some of the region’s countries do not have a credit rating. This makes it more difficult to tap into funds from the capital market via the issuance of infrastructure bonds, or project bonds.

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Status quo: untapped investment potential

Thus far the investment potential of SWFs for financing sub-Saharan Africa’s infrastructure development has remained largely untapped. A recent report by ESADEgeo suggests that between 2006-2013, SWFs allocated insignificant amounts to sub-Saharan African infrastructure. The report shows that among the largest SWF infrastructure deals, none have been in Africa.

A significant portion of existing SWF investments in sub-Saharan Africa are in the commodity and agriculture sector, particularly from Asian and Gulf countries seeking to secure their supply chains. Most of these investments involve small and medium size SWFs such as Temasek ($215bn), the Dubai Investment Corporation ($160bn) and Mubadala ($60.9bn).

But the largest SWFs have remained almost absent from investing in sub-Saharan Africa. The main reason for this lies in their specific mandates. For example, Norway’s Government Pension Fund Global ($897.6bn) is prohibited to invest in infrastructure projects or in unlisted equities. This makes it difficult for Norway to make investments in a region with under-developed equity markets. Interestingly, in December last year, the Norwegian Ministry of Finance called for a re-assessment of whether its SWF should be allowed to invest in infrastructure.

Mobilising sovereign wealth

One possibility is to change SWF mandates, by including infrastructure as an investment category. But given that SWFs are established by law, any change would probably require legislative actions. An alternative would be the creation of a sub-entity with a specified mandate towards infrastructure investment.

Further alternatives would include the pooling of resources among SWFs and bundling the pooled amount into a single portfolio. This can reduce risks and increase their leverage. For example, every SWF could contribute 1 per cent of their annual assets to an entity, which has a mandate to invest in sub-Saharan infrastructure.

The International Forum on SWFs – a voluntary group of 28 SWFs, which meets on a regular basis to discuss issues of common interest – could be an organisational setting, where SWFs can discuss a joint SWF entity with an infrastructure mandate in sub-Saharan Africa.

Juergen Braunstein

Culled from FT