Euromoney – Project Finance Yearbook

Written for, and on behalf of The SA Infrastructure Fund and Standard Corporate Merchant Bank, published in Euromoney, an international finance journal.


Investment in the socio-economic renaissance in Africa.

By Grahame Palmer

Historians may argue the validity of the term ‘renaissance’ in the context of modern Africa. Cynics may even mock the use of the word, but Africa is beginning to awaken from its dark age, and the prospects are bright.

Africa is experiencing a renaissance in a very real sense. Just as Europe started to emerge from is Dark Ages in the 12th and 13th centuries, there is in Africa a growing appreciation for the rights of the individual, freedom of expression and the dignity of man. In Europe, the Dark Ages were characterised by oppressive feudal systems where the wealth of society was controlled and owned by a small minority of powerful elite. They maintained this dominance through denial of basic rights to the common man, perpetuated ignorance, fear and division, and used force to maintain the status quo. The parallels in contemporary Africa are striking, and of equal significance are the clear signs of an emergent enlightenment, identical to that which accompanied the European renaissance five centuries ago. The pace is a lot faster, thankfully, due to the technological advances of human society over the centuries, and given encouragement, committed input and viable support infrastructure, Africa’s Renaissance will be a far more rapid transformation, and one which offers great opportunities to not only the people of the African continent, but global society as a whole.

It is necessary, however, to examine principal reasons why Africa’s socio-economic development has been stunted – restricted is perhaps a better word – before one can make reasonable assessments about its future potential. For many investors, Africa remains a high-risk environment, and in a world where investments ought to maximise their returns in a relatively short period, there are other opportunities elsewhere on our planet which may have a greater degree of immediate satisfaction. However, Africa presents an alternative that may be just as rewarding in economic as well as in human terms.

The chief impediments to growth in the past can be linked almost entirely to the colonial politics of the last 350 years. And certainly, factors even before the great sweeping of the continent’s resources by its colonial masters also paved the way for a gloomy existence for Africa’s natural inhabitants. The exploitation of Africa’s resources by foreign powers began over a thousand years ago with the emergence of the slave trade between East Africa and Arabia. However, the imposition of Africa’s dark ages came when better armed societies in other parts of the world were quick to realise the potential locked inside this dark, mysterious continent. But prior to this age of imperialism, Africa had an active and sophisticated socio-economic infrastructure.

In his engaging study on pre-colonial African history, Richard Effland of the Mesa Community College in Maricopa County, Arizona, describes the events which led to the formation of powerful and economically advanced societies all through Africa. "The history of Africa is marked by the rise of complex societies, migrations, agriculture and pastoralism, and particularly, economic diversity. The introduction of iron transformed the continent because it opened up potentials for agriculture, leading to expansion of populations accompanied by migration. Complexity followed as populations grew. Trade became central on the eastern coast of Africa with links to the east as far away as China. Trade as well was important within the world of Benin and Ghana in the west" says Effland.

"Clearly long distance trade was as important as the introduction of iron to African kingdoms. The establishment of trade routes, both inland and along the coast, offered political opportunities for enterprising individuals," he adds. "Controlling markets meant control over resources and people who utilised them. Larger states developed around market centres, notably the kingdoms of the western Sudan (Ghana, Ife, Benin, Mali and Songhai) that exploited the wealth of the trans-Saharan trade and the kingdoms of south central Africa (Great Zimbabwe) and those along the eastern African coast (Kilwa, Malindi, Mombassa, Bunyoro, and Buganda) that controlled trade within the Indian Ocean region.Gold was a major attraction in Africa, and has been since the time of early Egyptian civilisation. Effland describes its economic significance. "In West Africa, alluvial gold was the first of the important raw materials that societies monopolised in order to supply the markets of northern Africa and southern Europe; a second was salt mined near oases in the southern Sahara. Ghana was the earliest of the great Sub Saharan empires, and reached its imperial zenith A.D. 1000. Ghana was conquered from the south by Islamic fundamentalists in the middle of the eleventh century. The Almoravids swept out of what is now Senegal and across Ghana, into Morocco, and eventually subdued all of southern Spain. Ghana, reduced in size, continued to function, but its major trading ties had been sundered and by the thirteenth century it was no longer a significant power.

"By the middle of the thirteenth century the kings, or mansas, of Mali reigned supreme from the upper Senegal River to the great bend of the Niger River, 800 km to the east, and from the Sahara in the north to the upper Volta rivers in the south," continues Effland. Mali was ruled by generals, many of whom were Muslims, and several of whom as early as 1300 were making pilgrimages all the way to Mecca.

To indicate the degree of wealth in this context, Effland describes the pilgrimage of Mansa Musa, who ruled from 1312 to 1337. "In about 1324 he went to Cairo with 500 slaves, each carrying a six pound staff of gold. His following caravan consisted of 100 camels, each individually laden with 300 pounds of gold. In Cairo, Musa’s wealth, piety, generosity, and fine clothes all made a favourable impression – so much so that until about 1750 the great blank spaces of inner Africa were inscribed by mapmakers only with Rex Melli or Musa Mali."

In northern Nigeria several city-states existed between Mali and its successor Songhai to the west and Kanem-Bornu, the growing empire to the east. Bornu dominated the Lake Chad region from around A.D. 1500 until the onset of colonialism.

Effland emphasises that advanced market-economies also emerged in southern Africa. "The centre of Zimbabwe evolved as an important religious and trading centre that flourished between 950 and 1450. Zimbabwe’s rulers bartered copper and gold from mines under their control with traders from the east African coast."

And similarly, similar empires were evolving on the eastern seaboard. "Two kingdoms, Nyoro and Nkore, in the region of what is now Uganda rose in East Africa. Bantu speaking people settled along the Indian Ocean and took advantage of opportunities for overseas trade with traders from Arabia and the Persian Gulf. About 40 city-states grew up along the East African coast, including Malindi, Mombasa, Kilwa, and Zanzibar," continues Effland. "There wealth came from trade – exports in ivory, which was in great demand in India and China, and gold formed the primary trade items."

From the late fifteenth century, Portuguese, Dutch, French and British traders started to seek a route to the east around the continent, setting up coastal provisions stations along the way. This self-centred philosophy continued until well into the twentieth century when principally European countries expanded their global influence – largely for their own glorious ends – and the colonisation of Africa, India, large parts of America and Indo-China was a consequence of these exploits.

In February 1885, the main European powers who were actively vying for control of large parts of Africa signed the Berlin Act which formalised the process for the partition of Africa. The ‘Scramble for Africa’ had begun. France, Germany, Britain and Portugal all had interests in West Africa and the Act provided the guidelines by which each then proceeded to define their territories. It is significant to note that no input in the resultant demarcation process came from African leaders or communities at the time.

Philip Chen, managing director of the South Africa Infrastructure Fund, a private development organisation based in South Africa, says, "There is evidence of this selfishness all over the colonised world, but more so in Africa, perhaps, than in any other place. Colonisation was not concerned with the economic well-being of local inhabitants. It was simply a process of enrichment for the colonial master. Every infrastructural development in sub-Saharan Africa between the mid 1700’s and the early 20th century was initiated, implemented and managed purely for this purpose." He argues, "The riches of the colonies were the riches of the colonialists. Local people did not count, and in fact, were considered an impediment."

Chen’s observations are not unique. It does not take a learned historian to appreciate the real impacts of imperialism on the contemporary global economy. "From every sphere – social, economic, political and even religious – the objectives of the colonists were single-minded exploitation of the riches of their territorial ‘possessions’. Every inch of railway, every yard or turned earth, had as its central objective the movement of this wealth from the colony to a place far, far away," says Chen.

Some argue that the colonial era provided a chance for primitive societies to enter the (then) mainstream of global economics, commerce and trade. Certainly, in post-colonial Africa there is much so-called "first-world" criticism aimed at the failure of modern independent African states to both adopt and adapt to the infrastructure which the colonists left behind. But as it was all designed to serve a vastly different purpose, and because the infrastructural design had not encouraged local, downstream economic activity, most African countries were not in a position to effectively transform such facilities into activities and projects which would benefit local people.

"Today, much of post-colonial Africa is still saddled with this burden," says Chen. "Take for example, Africa’s rail system. This had been constructed at great expense by the colonial powers, but again, its purpose was to convey the riches of the continent to sea ports, from where it was shipped (usually in its raw, primary state) to downstream consumption and manufacturing infrastructures in far off lands. Inter-colony trade was not even considered. This is demonstrated in the dual standards used in constructing rail in Africa. The Germans built railways of a different gauge from those constructed by the English. And along the thousands of miles of steel which began to snake across Africa, local communities were ignored, disallowed from participating in the economic activities which such facilities could have encouraged. "

So while developed European economies grew rich, and indeed accelerated their pace of development, the indigenous inhabitants of the colonies were suppressed and restricted. The wealth was not to be shared, nor used to advance the prospects of local societies and their economies.

The irony is that prior to any colonial intervention, Africa had its own brand of commerce and economics. Chen continues, "While vast areas of the continent were market-driven, and several advanced societies had evolved and flourished on that wealth. The problem, of course, was that Europeans did not understand or appreciate such an economic model, as it did not fit into their perspective of what was ‘proper’ or ‘correct’. Through force, subordination and sheer greed, they imposed in Africa a set of values and a system which was designed to secure this wealth for themselves."

Along the way communities, political systems, societies and commercial activities were destroyed. Political boundaries in modern Africa still represent those drawn up by the colonial powers. "This segmentation of the continent was done with no regard for local communities, tribal laws or indigenous social momentum," adds Chen. "Much of Africa’s current political turmoil is a direct consequence of this period."

In sub-Saharan Africa, the forces of regional nationalism became too much to bear for the European masters from about 1950, largely because European global influence had been severely weakened by the second world war. Europe had to concentrate on rebuilding itself, and while their colonies provided much of the raw material for this reconstruction, the political will and the military capability to sustain colonial rule had all but evaporated.

Africa was abandoned, to put it bluntly, to get on with its own development as best it could. These colonialists, ravaged by a war of unprecedented scale and the emergence of global superpowers, shifted the focus to new challenges. Indeed, post-colonial Africa became a military testing range for these new superpowers for almost forty years, further ravaging the continent and dividing its people, through the introduction of weapons of destruction, other alien ideologies and the support of dictatorial despots whose principal interest was the lining of their own pockets.

The conventional wisdom is that Africa has still not settled down. However, there is another view. "Conflict today in many parts of the continent can still be attributed to the influence and intervention of foreign powers, and it is perhaps tragically ironic that many people believe that Africa must solve its own problems – problems that were not at all its own making," believes Chen. "The world cannot simply turn its back on this continent. What is needed for the collective welfare of all is active investment in the future of Africa, but one built on a model of sustainable economic development."

It is against this complex background that the future economic and commercial prosperity of Africa must be set. One has to also consider today that there are enormous psychological barriers to overcome as well. The intervention of foreigners has, for well over a thousand years, not boded well for local people. Many local communities regard the efforts of investors with suspicion and distrust. One can hardly blame them. Investors lament the restrictions and conditions they seek to impose on foreign influences. Most independent African states have in place a myriad of laws and restraints on not only the extent of foreign ownership in their economies, but also on the degree to which profits and benefits can be repatriated. They are naturally wary. History has taught them to be so.

And the methodologies of the past several decades encouraged an environment in which corruption thrived. Again, to serve their own (largely political) interests, the superpowers not only turned a blind eye to civil corruption, but in many instances actually allowed it to flourish. The consequences were not considered in terms of what this was doing to Africa. All that was at stake was the global dominance of one ideology over another, and these ideologies were as alien to African society as those imposed by colonialists. But this is beginning to change – for the better.

Africa is a continent full of promise, bulging with unlocked wealth, populated by people who are essentially peace-loving at heart, waiting for a chance to re-join the global economy, and contribute to it in ways which ensure mutual prosperity.

There is tremendous hope and potential in Africa. The fundamental solution lies in socio-economic development, and despite the poorly designed colonial infrastructure which spans the continent, skilful and strategic manipulation of these resources can be the key to a bright future.

Political stability is returning to large parts of Africa and present conflicts are both regionally isolated and diminishing in real terms. This is particularly true in Southern Africa, and there is almost an idolisation of the peaceful transformation which has taken place in South Africa over the last decade. There is a greater realisation in contemporary African politics of the need for the imposition of meaningful democratic processes, the privatisation of industry, and the creation of a more attractive investment environment. "Political stability is fundamental," says Chen, "and it is very encouraging to see the emergence of democratic processes in countries like Zambia, Mocambique, Malawi, Tanzania, Uganda, South Africa and Namibia. The fact that South Africa refuses to take a partisan stand in Angola, the Congo and parts of West Africa also gives a clear signal to the protagonists in these regions that armed conflict is no longer considered a viable option to the resolution of differences. Even in countries where such conflict is still a factor, like Angola, governments are getting on with the processes of social reconstruction. The objective is now one of building stable social infrastructures and a commitment to resolving differences through dialogue and negotiation."

The time is now ripe for investors to come in as their contributions will not only fast-track social and economic development, but serve to show regional aggressors that there is considerably more to gain (for their people) from a co-operative perspective than from one of belligerence and armed confrontation.

Hundreds, if not thousands of organisations (business and otherwise) world-wide are recognising this potential, and as relative political and social stability return to the continent, some are taking proactive steps in helping Africa realise its renaissance.

The South Africa Infrastructure Fund (SAIF) is a case in point.

The SAIF was established to provide both funding and business expertise for promising investments, mostly in South Africa, and in other African countries where such investments promised a benefit of some kind, to South Africa. It is a private organisation, with investors being drawn from main-stream South African institutional investors and the African Development Bank. The SAIF operates both on a philanthropic and business level. Chen explains, "The SAIF represents a group of like-minded businesses in Africa who recognise the need for economic development in Africa and who see that their investments in projects offer the promise of market-related returns. In a sense we are philanthropist, in that we firmly believe we have a commitment to the economic development and prosperity of the South African people, but we approach our investments from a business perspective. They have to be viable, sustainable, profitable, and offer downstream opportunities for commercial development and growth. And they must demonstrate that they can deliver a return to our investors."

Chen argues that there is no point in throwing money at a project simply because it is believed to be necessary. "Over the years we have seen overseas governments and multi-lateral organisations commit billions of dollars in so-called "aid’ money to thousands of projects in Africa. While many have had beneficial effects, a large number are nothing more than white elephants. As we have seen, a lot of projects were initiated and implemented to curry favour with a particular African regime, in an effort to fend off the influences of an opposing cold-war protagonist. Huge international airports were built, massive hydroelectric schemes were constructed, fancy hospitals were erected. Great stuff if you have scores of foreign aircraft landing at the airports, communities and industries capable of buying your electricity, and doctors, nurses and medicine in your new hospital. In many cases, these projects are little more than monuments to self-fulfilling ideologies of the day – usually to a specific individual with a political agenda. There was no business approach to them, no feasibility study done to determine the exact role they would play, or how the local and regional economies would be stimulated so that they could support this wonderful infrastructure."

This, however, is changing. Projects now surfacing in Africa are having to meet world-class standards of performance. Governments of the continent are insisting on commercial viability as a fundamental component of their internal development. More and more governments are looking to public-private partnerships as a way to develop even fundamental infrastructure.

The SAIF will not back a project unless it is confident of its viability. "Even if it is deemed necessary, this alone is not a sufficient reason to invest in it," says Chen. "It has to be sustainable."

To date, the SAIF has currently invested in six key projects. This after only two and a half years of operation. The SAIF has a commitment to contributing its available funds to meaningful investments by 2001, and from a capital base of R507 million, the fund has grown to a present R806 million, with a total of fifteen investor-participants. To date, the fund has committed R225 million to its projects, with R210 million being allocated in 1998. "In being prudent, we’re still committed to a relatively rapid roll-out," says Chen. Approximately 70% of the Fund’s resources are to be allocated to specifically South African projects, with the remaining 30% ear-marked for viable projects in Southern African Development Community (SADC) countries."

These six projects cover five major commercial sectors: telecommunications, airports, ports and harbours, rail infrastructure and toll roads. Chen points out that all encompass communications of one sort or other. "An effective communications infrastructure is essential in any economy. Apart from people being able to talk to each other easily, industrial and commercial activity needs the basic primary infrastructure of roads, railways, airports and harbours. We committed some R50 million to the ICO Global Satellite telecommunications system, for example, based on our belief that an effective telecommunications infrastructure is fundamental to commercial activity. The ICO system will allow even the most geographically remote community to have access to the outside world via solar powered satellite communications." One of the fundamental attractions of the ICO project is its goal of locating thousands of solar powered satellite telephones in areas not currently served by land line telephones: rural telephony.

The SAIF’s largest commitment is the Maputo Development Corridor Toll Road in Mpumalanga Province (in South Africa). This is a government initiated Spatial Development Programme, designed to link more effectively the industrial heartland of South Africa with the Mocambique port of Maputo – the closest sea port to the central Gauteng province where some 65% of the country’s GDP is generated. The primary infrastructure includes upgrading road and rail facilities on both sides of the border, but, more significantly, the intention is to provide appropriate stimuli for the development of both micro and macro commercial operations along the route. The programme is one of the most ambitious regional economic development initiatives in Southern Africa, but is based on practical realities, and an appreciation of what is viable in this unique context."

It’s not just building a road for the sake of a road," says Chen. "The Maputo Corridor Spatial Development Initiative (SDI) is making efforts to factor in every possible economic and commercial prospect that has a chance of benefiting from the programme. This includes established business, as well as promising new ventures which can arise – from small traders and local artisans to large manufacturing concerns. The objective is to build a sound and sustainable economic engine where there is considerable diversity of activity. This provides enough ‘fuel’ for the initiative to manage itself, and in the process boost both wealth and job creation.

A similar view is taken with two other major SAIF investments beyond the country’s borders. The first is the Kidatu Rail Transhipment Facility in Tanzania. Chen comes back to the colonial rail conundrum to explain why Kidatu makes absolute sense.

"The German and Imperial railways in Africa – two different gauges, remember – happen to converge only at a place called Kidatu in Tanzania. It makes strategic sense to develop this facility as a transhipment hub, where goods can be quickly and efficiently transferred to rail wagons designed for the relative rail gauges. It would cost scores of billions of dollars to try to convert either the German or imperial rail networks in an effort to attain continental uniformity, and the time to do so is incalculable. By comparison, Kidatu was developed at a cost of a few million dollars. It’s manageable, feasible and sensible, and we can reasonably estimate the timetables. We’re looking at a few years, not many decades," he explained.

The second SAIF project is the upgrade of Kilimanjaro Airport in Tanzania. "In comparison with other capital projects in Africa, the Kilimanjaro Airport project is small fry," says Chen. We’ve committed about R10 million to it, but it serves as a good example of our investment philosophy. There has always been keen international interest in two major tourist attractions in Tanzania: the Serengeti National Park and Mount Kilimanjaro. South Africa’s recent political emancipation has kindled local interest in these facilities and an increasing number of South Africans are travelling to Tanzania to experience the unique qualities of Serengeti and the challenge of Kilimanjaro. In many respects, there is already a lot of commercial activity in the region which is based on tourism, so by making it a lot easier for tourists to visit these places we can provide a catalyst for these activities to prosper, and also create additional opportunities."

There are two other African ventures of strategic significance in which SAIF is directly involved. The first – the Matola Coal Terminal at Maputo Harbour – relates in some respects to their involvement in the Maputo Corridor SDI, and will benefit from their input here. The second is the bulk terminal at Walvis Bay harbour in Namibia. The bulk handling concessions at both ports are owned by African Portland Industrial Holdings (APIH). APIH therefore controls the access for export of bulk materials on both sides of the continent as far as the northern-most part of South Africa is concerned.

The SAIF is adopting a cautious but proactive approach to infrastructural development in Africa. As it is a private concern, it does not publicly release its financial results, but, assures Chen, "we are answerable to our investors, all of whom expect a market-related return. I am able to report that our involvement in all these projects gives the required assurances in this regard.

While the SAIF is a relatively small, but no less meaningful, player in the African investment environment, other organisations are also making significant contributions to the African renaissance. Among these are the African Development Bank, the Commonwealth Development Corporation, the Development Bank of Southern Africa and the International Finance Corporation. In addition to these multi-lateral banks, other private investors have started looking at investments in Africa.

Roy Reynolds, Chief Executive of the CDC, in its 1998 annual report highlights the socio-political uncertainty in parts of Africa, and when viewed against the background of post-colonialism, it is not difficult to see why the continent needs input on this level, in tandem with commercial and economic investment. Referring to 1998, Reynolds said: "Last year saw the resurgence of hostilities in various African countries, including civil unrest in the Democratic Republic of Congo, bombings in Kenya and Tanzania and other political setbacks. It was also a difficult year macro-economically for many African countries. There were major currency devaluations, particularly in the Southern African countries of Malawi, South Africa, Swaziland, Zambia and Zimbabwe."

CDC has 29% of its gross portfolio invested in a broad range of growth businesses in agricultural, industrial, financial and service sectors in Africa – amounting to approximately US$740 million. In 1998, 36% of CDC’s new investments were in the region, half of which were as risk capital.

SAIF’s Philip Chen concurs with the assessments made by the CDC’s Roy Reynolds on contemporary and future investment prospects in Africa, but believes that investors must factor their approach in both current and historical contexts. "An appreciation and understanding of pre- and post colonial history is fundamental to the process of an African renaissance," he says. "We only need examine the selfish motives of the colonists to determine that the socio-economic philosophies of modern Africa require a unique approach. To come in to this environment with a narrow perspective, based on the fundamentals of a western European or American economic model is sheer folly and will doom an investment to failure. Many of this continent’s needs are relatively simple, and should be considered from the perspective of local communities and their parochial needs.

"We need to gear investment towards infrastructure that will be the stimulus to many thousands of local initiatives, planned and structured to take advantage of local conditions, attributes and resources. The solution does not lie in the funding and development of massive, unilateral infrastructures, which are unsustainable in the medium to long term. We need rather to take a more sober view, and spend our time and energy in finding smaller, more manageable projects which carry greater promise of downstream commercial activity, no matter how humble this may be in reality. The overall objective must be to stimulate commercial activity in as diverse an array as possible, so that the variety opens the doors to growth and the personal prospect of wealth enhancement. The people must have a meaningful, promising stake in this process, and they must derive appropriate reward for their efforts."

If we can provide the catalyst by initiating fundamental infrastructural development to motivate what is principally a socio-cultural change, then the economic benefits will not be far behind," says Chen.