Monthly Archives: August 2018

African state airlines: Necessity or folly?

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

In May 2017, the Nigerian government announced plans to set up a national airline. Considering the country’s chequered history with such ventures, more than a tad eyebrows were raised. The last time an attempt was made at setting up a national airline, the Nigerian government entered into an arrangement with Virgin Atlantic, a British airline. It did not end well. And if the objective was to restore the national pride that supposedly comes with a national carrier, that too failed. The botched airline, then named “Virgin Nigeria” was more “Virgin” than it was “Nigeria”; in name, that is. The issues that led to the Richard Branson – led Virgin Group to finally leave Nigeria are more complicated. They were literally kicked out. When Nigeria had a proper national airline, it was called “Nigerian Airways” and yes, it was a source of pride; for a while. It is a little disturbing that while African countries like Ethiopia, Kenya and South Africa have since then been able to run airlines that by and large meet the mark internationally, Nigeria has floundered in this regard ever since Nigeria Airways ceased to exist officially in 2003 (It stopped major operations years before). Nigeria’s President Muhammadu Buhari seemed determined to forge ahead regardless; especially now that he seeks re-election, at campaigns of which he would have to account for earlier promises, one of which is to set up a national airline. The original plan was to merge a couple of private airlines, which due to insolvency, had been bailed out by the state’s “bad bank” and thus effectively owned by the goverment. There was a change of plans, it seems. Instead, the Nigerian government appointed international advisers for the setting up of a brand new airline in May 2017; a consortium led by Lufthansa. In early February, it emerged Lufthansa’s terms might have been a little onerous for the governmment. The terms, which included a 75 percent upfront payment of costs in Euros to be domiciled in an internatinal bank, suggest Lufthansa took a few lessons from the nation’s not too stellar record. As both parties could not agree, the Nigerian government appointed Airline Management Group in Lufthansa’s stead. With elections due in about a year and the government in full election mode, how much progress would be made thenceforth is doubtful. And should the Buhari administration fail to get re-elected, it is not unlikely that the idea might be jettisoned all together by a new one.

Corruption, cost-cutting, little or no profit
There is a consistency about the causes of the sad narratives of state-owned African airlines: corruption. Whether it is Kenya Airways, South African Airways, Air Zimbabwe, to mention a few, the wreckage they have become can be traced to fraud, patronage and almost maniacal mismanagement. And to repair the damage, the modus operandi is almost always the same: cost-cutting. Just in April, Sudan Airways announced plans to cut 80 percent of its staff. It had little choice; it does not operate any of its planes currently. Sudan Airways’ troubles are unique, though, having been instigated by international sanctions on the Sudanese government. With hopes up that America would eventually delist Sudan from its list of state sponsors of terror, much needed financing might come about in due course to help with a direly needed turnaround. It is a little surprising therefore that African governments remain determined to either continue managing or set up national airlines; even as examples clearly abound about the difficulties of managing one. John Ashbourne, Africa economist at London-based Capital Economics provides some perspective: “For many countries, this is largely a political decision by leaders who see successful flag carriers as a sign of status.” Whether it is Kenya Airways, South African Airways, Air Zimbabwe, or Sudan Airways, the tales of woes are the same. They are not making enough money to cover their costs, some are alltogether insolvent, and others like the South African one have been weighing overly on state treasuries. Kenya Airways, which made a $251 million loss in its most recent 2016/17 financial year and negative equity of 45 billion shillings, had to be rescued by the Kenyan government in November 2017. The resultant restructuring of the airline’s debt upped the equity stake of the government but inevitably diluted the holdings of existing shareholders. It would take at least 10 years for the new management of the airline to clear the airline’s indebtedness; at least that is the period the government’s guarantee covers. Now the priority of Kenya Airways is not so much about making profit as it is about cutting costs to squeeze as much cashflow for servicing its debt.

The story is no different for South African Airways, the continent’s second largest airline. After years of setbacks under the previous Jacob Zuma adminstration, the South Africa’s state airline finally unvieled a turnaround strategy in March 2018. Cost efficiency is the goal as well. Loss-making since 2011, with debt guaranteed by the state to the tune of $1.7 billion, SAA epitomises all that could go wrong when a government manages an airline. Now with new management, there is hope that its fortunes might be turned around; probably by 2023. Why not just sell it, though? There are suggestions flying around in government circles about a potential 49 percent stake sale. But it is believed the government desires that when that happens, if it happens, it should be a better-run and more valuable SAA that it bequeaths to a potential equity partner. An example of the sentimental attachment to the idea of a national airline is the recent purchase of Boeing planes by the cash-strapped Zimbabwean government. Only just emerging from the clutches of longtime ruler Robert Mugabe, and in dire need of foreign exchange to revive an economy long in the doldrums, Zimbabwean authorities bought four Boeing 777 planes for $70 million in April with plans to purchase even more. Although purchased via a special purpose vehicle and not yet transferred to the hugely indebted and floundering state-owned Air Zimbabwe, it is quite astonishing that such a venture would be a priority of a government that most recently ran a budget deficit of $1.8 billion (11.2 percent of 2017 GDP). There are speculations that the new planes would eventually be part of the fleet of new state-owned airline in the place of Air Zimbabwe, which with debt of more than $300 million is expected to be dissolved or privatized.

Bright spot
There is at least one examplar in the African state airline industry. Ethiopian Airlines is virtually a miracle. With revenue of $2.43 billion from carrying 7.6 million passengers in 2015/16, Ethiopian is Africa’s largest airline by revenue. It is also the largest African airline by profit, according to the International Air Transport Association (IATA). And its growth figures have been through the roof. In the year highlighted, its net profit grew by 70 percent. Imagine that? In a continent where its peers are making losses upon losses or are simply insolvent. Unsurprisingly, it is being called upon to help out elsewhere. In January, it signed an agreement with the Zambian government to, like in the Nigerian case, help revive Zambia Airways, a national carrier that was run aground in 1994, more than 20 years ago. This is just a latest addition to a burgeoning portfolio. Ethiopian Airlines already manages ASKY, a West African airline, and Malawi Airlines. Is Ethiopian’s success reason to be hopeful? “Ethiopian’s success does suggest that a few firms will find their niche; but Africa certainly doesn’t need 54 competing national airlines linking their various capitals to London, Paris, and Johannesburg”, says Capital Economics’ Ashbourne. Some African countries, smaller ones, say, would have to give up on their big dreams, however. Mr Ashbourne suggests “[they] should either merge their efforts, or focus on building regional networks. There is a lot of opportunity to improve intra-African links, for example.” 

(An edited version was published by African Business magazine in May 2018)

Can Lake Chad be saved?

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Most Africans probably sometimes just wonder what the fuss about climate change is all about. The planet is getting hotter. So what? What difference does it make to their daily lives? It has always been hot here anyway. What difference would a one to two degrees increase in the temperature make to a people mostly preoccupied with getting their daily bread. Mention the Paris Accord, and some sentiments would probably be jealousy towards the African officials who got to participate in the negotiations while relaxing in the fabled city of love, as opposed to delight at the many laudable measures towards saving the planet in the agreement. But if you start the conversation from the increasing examples of the palpable negative effects of climate change like drought, floods, famine, and so on, on the continent, everyone’s antenna would probably suddenly shoot up.

A striking example is the drying up of Lake Chad in West Africa; which has had debilitating effects on the bordering countries: Cameroon, Central African Republic, Chad, Niger, and Nigeria and a few further afield like Libya, Sudan and Algeria. Erstwhile fishermen have had to make do with less or simply change their vocation. Farmers who relied on the lake for natural irrigation of their farms have also suffered ill fortune. Expectedly, as misery tends to beget more misery, criminals and terrorists have stepped in to fill the vacuum. The costs to lives and livelihoods of the more than 90 percent depletion of the Lake Chad over the past five decades is almost unimaginable. But not until the insecurity it engendered began to make life difficult in much distant lands from the banks of the lake did the authorities in the environs begin to take proper notice. Not that action to save the lake was not taken hitherto. After all, the Lake Chad Basin Commission was established in 1964, more than five decades ago. But with myriad killings from terrorist groups in Nigeria, Niger and elsewhere going on unabated, the authorities had little choice, it seems, but to begin to address not just the symptoms of growing insecurity in their domains but the root causes as well.

Most recently, the efforts towards saving Lake Chad is encapsulated in “The Abuja Declaration” adopted at the International Conference on Lake Chad in late February in the Nigerian capital, Abuja. Highlights of The Abuja Declaration revolve around restoration of the lake, resolution of the security issues emanating from its drying up, and funding for the initiatives towards its restoration. The most important and perhaps the most difficult is the “Inter Basin Water Transfer” (IBWT) project for bringing the lake back to its earlier much buoyant levels. Incidentally, the $14.5 billion IBWT project was first mooted in the 1960s. Considering how little progress has been made since then speaks to the difficulty of the endeavour. The plan entails diverting water from the Congo River more than a thousand kilometres away into Chari River, which feeds Lake Chad. Transferring water from the Congo-Oubangui-Sangha Basin to the Lake Chad Basin would also have benefits for the communities in between. The feeder dam to be built in Palambo in the Central African Republic (CAR) is expected to generate at least 700MW of electricity, for instance. The dredging of the Oubangui River in the CAR would also allow ships to transport goods from what is ordinarily a landlocked country. And expectedly, irrigation, drought mitigation and desertification control would be added benefits.

It begs the question then of how the longsuffering project would be able to break the seeming jinx on it this time around. On the face of it, the right measures are being put in place. A $50 billion Lake Chad Fund under the auspices of the African Development Bank is refreshingly assuring, for instance. Still, the participating countries have strained finances. With their authorities barely able to address burgeoning infrastructural deficits inland, the Lake Chad issue may become another African project that is never lacking in passionate backers with shallow pockets. Still, one should be hopeful.

An edited version of these thoughts was published in my Forbes Africa magazine column in June 2018

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz.

Revamped African ports need good roads & railways to boost trade

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

According to PwC, a consultancy, it is more expensive to ship a container to and from Africa than for other continents. Small shipment sizes are one reason why. Dwell times are another. Some of these inefficiences are due to inadequate infrastructural and human capacity; well-run African ports outside of South Africa tend to be those concessioned to foreign operators. Were African ports to be more efficient, the cost of African goods exports and imports could be cut by more than half, research shows. Higher volumes per port could be a solution. Economies of scale via regional hub ports with shipping volumes of more than 2 million twenty-foot equivalent units (TEUs) per annum would reduce transport costs and make African goods more competitive. That is the thinking of PwC, at least, elaborated in a recent report. Shipments to West Africa, say, would go to one hub port, from where smaller ships and/or inland road and rail infrastructure would be used to transfer the containers to neighbouring countries. PwC believes these regional hub container ports are likely to be those in Durban (South Africa), Abidjan (Ivory Coast) and Mombasa (Kenya). Currently, only the Port of Durban, which handles more than 2.5 million TEUs, qualifies as one. There would eventually be other regional hub port contenders, though.

The Chinese factor
There has been increased invesments in African ports lately; about 10 percent of the global total (based on estimates by PwC). Most are to improve existing port facilities in addition to better managing them via concessions. There are also a few planned greenfield investments. Considering the continent’s contribution to global trade growth has been below 1 percent over the past three decades, the increased interest seems a little counterintuitive. But that would hardly change if what are mostly inefficient African ports are not revamped. African governments now see the need, certainly. Not that they did not hitherto. With so many demands on the public purse, supposedly self-funding ports could not have been a priority. So what changed? John Ashbourne, Africa economist at London-based Capital Economics, a consultancy, suggests reasons why: “There are a combination of factors at work; but a key one is the large pool of Chinese capital that is targeting infrastructure programmes abroad. While France remains a dominant player in West Africa, a lot of the big schemes elsewhere (in Kenya, for example) are only possible due to Chinese involvement.” China, which is now the continent’s biggest trading partner, clearly sees how mutually beneficial it would be to help out.

In late March, Nigeria’s vice president Yemi Osinbajo flagged off the construction of the Lekki Deep Sea Port. When completed, it would be able to handle 1.5 million TEUs annually and as much as 4.7 million subsequently; eclipsing the 650,000 TEUs Tincan Island Apapa port with a channel draught of 13.5 metres. With an expected post-dredging draught of 16.5 metres, the Lekki Port’s channel would also be the deepest in the country; and perhaps the West African region. If all goes according to plan, it would rival that at Abidjan eventually; which is already doubling its capacity to 3 million TEUs from about 1.2 million currently. The $962 million worth of upgrades to the Port of Abidjan by a Chinese construction firm, which began in October 2015, includes a second container terminal and a widening of the port’s main channel. And in east Africa, the Dar-es-Salam and Doraleh ports in Tanzania and Djibouti respectively, are already cannibalising the traffic of the Kenyan port in Mombasa, with Ugandan and Rwandan bound goods increasingly transiting via Dar-es-Salam and Ethiopian ones almost exclusively moved via the port at Doraleh. The capacity of the port at Dar-es-Salam is also being doubled and should be able to handle 28 million tonnes of cargo a year by 2020; when new capacity in Abidjan and Lagos are expected to come on stream. The Chinese are also the ones doing the construction. Incidentally, the Chinese are also the ones doing the deepening and expansion of the port at Walvis Bay in Namibia, which President Hage Geingob confirmed in his April state of the nation address, would be completed in 2019. Apart from the Lekki Port, other greenfield projects are being embarked on. In March, Sudan and Qatar agreed a $4 billion concession to develop the Red Sea port of Suakin in Sudan; though this could potentially be at conflict with an earlier deal with Turkey for the same port in addition to building a naval dock. Similarly in March, about a month after losing its Djibouti Doraleh container terminal port concession, DP World, a Dubai-headquartered ports operator, won a 30-year joint venture management and development concession for a new port at Banana creek in the Bas-Congo province of the Democratic Republic of Congo (DRC) that is expected to cost at least $1 billion to construct. The rationale is the same as the Lekki Deep Port. The DRC’s current main port is too shallow to handle bigger vessels. The new investments are providing model African port operators with new opportunities. For example, South Africa’s Transnet aims to operate three berths at the new port being constructed in Lamu, Kenya and is also looking at a deal with ports authorities in Benin Republic in west Africa. At least $2 billion in port investments are also planned in Ivory Coast, Mozambique, and Tanzania; some of which would be accompanied by new railways and roads.

More ports, more trade?
Is there a risk of overcapacity then? After all, some ports are already cannibalising each other’s traffic. It would be short-sighted to think so. According to the IMF in its April World Economic Outlook report, China is expected to grow at about 6 percent over the next half a decade, and thus remain the main driver of global growth; estimated at about 4 percent in the period. In the same vein, Africa’s projected economic growth of about 4 percent over the next five years is expected to remain driven in part by international trade; more of which it now does with China. In its most recent update, the IMF notes a strong recovery in global trade, which grew by an estimated 4.9 percent in 2017. And although a potential trade war between America and China is a cause for concern, and could potentially dampen the resurgent optimism, recent developments like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership by countries that account for 15 percent of global trade and the African Continental Free Trade Area (AfCFTA) agreement, point to likely higher trade growth in the future. So, better-run African ports, with greater capacity, and indeed new ones, would potentially position the continent to be a more active participant in global trade. PwC explains the logic in its report this way: “increased volumes of trade and more productive and attractive ports will accelerate changes in global shipping routes serving Africa…[and] will lead to increased integration with global shipping and trade routes,…reducing transit times and reducing the unit cost of transport to and from the continent”. But is it that simple? Not entirely. Capital Economics’ Ashbourne assesses the matter this way: “Improved infrastructure will help to boost trade [but] the real problem is often “last mile” links. [So] it doesn’t matter if the port functions perfectly if the rural roads that lead to the inland areas don’t work properly.”Infrastructure for trade, whether they are ports, roads or railways, have to be integrated to make a difference.

An edited version of this article was published by African Business magazine in May 2018

An investment case for African public water infrastructure

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Only water can be so available and yet so out of reach. The lack of access to clean drinking water has been adjudged one of the greatest causes of poverty in African countries. Water-related illnesses are about 80 percent of all ailments in developing countries. According to the World Health Organisation (WHO), only 16 percent of Africans have access to safe pipe-borne water. For one, the 40 billion hours per year invested in collecting water consequently could be put to better economic use. According to the International Water Management Institute, only 7 percent of the total cultivated area of 183 million hectares in sub-Saharan Africa is irrigated. And globally, water is not being replenished as much as it is being used, according to a study by American space agency, NASA. And most of what is being used is for agricultural production, about 70 percent. Thus, short of drastic measures, water could be short in the not too distant future; for agriculture and indeed other purposes. The potential consequences are not just that food may be short, but that wars may be more frequent. To feed a world population expected to breach 9 billion over the next 3 decades, food production must grow by at least 70 percent, studies show. Incidentally, more than half of the world’s uncultivated arable land is in Africa. For that land to become as agriculturally productive as would be needed, it could not just be rain-fed. But even the water that would potentially be used to irrigate it must be made to do much more.

Climate change effects also mean whatever little that is available is fast depleting. Water scarcity is believed to already beleaguer about two-thirds of the world’s population. Nowhere is perhaps the dangers so palpable than on the African continent. Recent droughts in a number of African countries – like Kenya, Botswana, Namibia, Zambia and so on – made writ large their vulnerabilities, with food and power supply constrained significantly consequently. Incidentally, the elements coincided with shocks in the international commodity market. As some of them are also resource-rich countries, it was a double whammy of sorts. But they could easily be unscathed by these potential shocks, if they weaned themselves of their dependence on weather-vulnerable sources for their electricity and food. More of Africa’s agricultural production could be irrigated certainly. That is not to say, irrigation is not already gaining ground in a couple of African countries. For instance, data by the Internationl Food Policy Research Institutue (IFPRI) show irrigated land in Tanzania is about 150,000 hectares currently, more than four times the 33,500 hectares that were seven years ago. But this pales in comparison to 29 million hectares more that remain to be irrigated in that country.

Do more with less
Regardless, whether in African countries or elsewhere, water usage could be better managed. Google, an American internet company, together with the United Nations’ Food and Agriculture Organisation (FAO) have developed an open-access database called WaPOR, which relies on satellite data to show how much water is being used or consumed in any part of the world. “Water use continues to surge at the same time that climate change – with increasing droughts and reducing water availability – is altering and reducing water for agriculture,” Maria Helena Semedo, FAO’s deputy director-general, told Reuters in April. The information WaPOR keeps is supposed to help governments and farmers better efficiently manage water. Better crop yields and more optimal crop choices are expected benefits. Whatever water is available could be better utilized, though. There is a lot of wastage currently. New ways have emerged that would not only make farmers use half of the water they currently use but to also double their crop yields. The problem is that a viable and sustainable business model is needed. Past ones have proved to be inefficient or outright failures, discouraging development organisations and financiers.

Make water investing attractive
Water infrastructure has not enjoyed as much attention in most African countries, unlike power, roads and so on. Bizarrely, sachet and bottled water plants are ubiquitous. Why is this the case? “The availability and quality of tap water in many African countries is not always reliable and therefore bottled water has become a very large and very profitable business for private investors especially since the required investment is relatively small with potentially large addressable markets with a growing middle class across the continent,” says Zemedeneh Negatu, global chairman of Fairfax Africa Fund, in Virginia, USA. Clearly, the amount Africans spend on sachet and bottled water suggest they would be able to afford to pay for pipe-borne water comfortably. With most Africans expected to live in cities in the near future and at least ten of the world’s largest cities expected to be African by 2100, the accompanying need for a robust water infrastructure is an attractive investment opportunity. So there is a strong economic case. Even so, private investors shy away from investing in public water infrastructure. “Private investment in “public tap water” has been very limited because the investment required is big, and unlike bottled water, the selling price is heavily regulated since it is considered public service. Therefore, the profit margins and IRRs are less attractive compared to bottled water,”says Fairfax’s Negatu. Besides, ensuring that the regulated water rates are paid as and when due can be very difficult. So to attract investors, “a strong sponsor or at least a strong and credible buyer of the water who is prepared to pay a decent market price [would be required],” says Andrew Alli, president and chief executive of Lagos-based Africa Finance Corporation, a major African infrastructure investor. And for the off-grid integrated water and power type infrastructure that smallholder farmers need, is there a viable financing model with scale to make it attractive to big ticket investors and yet nimble enough to make it affordable? For any such model, “you will need someone to intermediate the risk of the small holders at least initially [because] it is unlikely that people will invest the necessary capital on the back of the smallholders’ credit risk,” AFC’s Alli concludes(This article was first published by Africa investor magazine in late 2017)

Also published in my BusinessDay Nigeria newspaper column (Tuesdays)

Water is the new black gold

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

“It’s clear that in Africa and globally we need to be working towards doing more with less water” – Kate Brauman, Lead Scientist, Global Water Initiative (GWI), Institute on the Environment, University of Minnesota

Negative water externalities
Insecurity in the Sahel, terrorist activities in the Lake Chad area, and frequent clashes between pastoralist Fulani cattle herders and sedentary farmers on grazing routes can be traced to a lack of water or little of it. Not that there used to be much water in the Sahel. But even the little that there was, has been depleted or long gone. The Lake Chad, one of Africa’s largest once, which straddles the borders of Nigeria, Niger, Cameroon and Chad, could easily be mistaken for a stream these days. It is not an exaggeration. More than 90 percent of the lake is gone. “The shrinking of Lake Chad poses the greatest threat to peace, security and food security [for] the populations of the [countries in the] area”, says Verner Ayukegba, principal analyst for Sub-Saharan Africa economics and country risk at London-based IHS Markit, a research firm. “It is very likely, that the shrinking is directly linked to the economic hardship in the region which in turn provided a fertile ground for the Boko Haram insurgency. Being unable to continue fishing and farming activities supported by the lake, local populations on the shores have had to move to urban areas…for opportunities which remain scarce. Countering the shrinking of the lake or at least addressing the effects…will be at the centre of dealing with the Boko Haram insurgency long term.” Thankfully, efforts are afoot to replenish the Lake Chad.

There are competing needs for water elsewhere. Lately, Egypt has become increasingly nervous about Ethiopia’s big dam on the River Nile. Ordinarily, Ethiopia, being an upstream country on the river, is strategically located to determine or affect the flow of water downstream to Egypt and Sudan. Naturally, the Grand Ethiopian Renaissance Dam (GERD) has become a source of tensions; particularly with Egypt, which is historically, emotionally, and existentially attached to the River Nile. Sudan, on the other hand, is not as antsy. It is happy, in fact. The GERD would be helpful in stopping potential floods when the Nile overflows its banks. For that favour, it would also get cheap electricity once the dam starts generating electricity. Shouldn’t Egypt be happy as well? It worries about losing control over something so crucial to its national identity and existence. With water increasingly scarce, its sovereign pride makes its leaders wonder about their vulnerability to the whims and caprices of the Ethiopian regime. Say, a word or action by an Egyptian official rubs off in a bad way, what is to stop the Ethiopian government from cutting Egypt off? Well, nothing. Understandably, some worry about the likelihood of conflict. The Egyptians could bomb the dam, for instance. This has been assumeed for a long time now. There is, however, limited probability that this would ever happen.

Restraint, efficiency and creativity
But there is a different sort of water trouble elsewhere; down south in fact. Cape Town could run out of water in another year or so. That is, if concrete action is not taken to tackle the crisis. And there is good reason for concern. “Investigation on government’s effectiveness in handling the crisis effectively exposes politics, not rainfall, at the heart of the problem”, says Ibrahim Sagna, director and head of advisory and capital markets at Cairo-based African Export-Import Bank. Rising debt, mismanagement and corruption at the government’s department for water and sanitation hampered drought relief funding, for instance, according to South African Water Caucus, a civil society group. Day zero, the nomenclature the authorities have coined for the ominous day that the taps could run dry, has been shifting depending on attitudes of Capetonians. Now more conscious of saving water, when there has been an appreciable water conservation effort, day zero has been pushed back. When behaviour has not been responsible, it has been brought forward. The point is a water crisis is imminent. Without concrete action, day zero will come eventually; in Cape Town and/or elsewhere. Still, how is a city like Cape Town, awash with water, without water? What about all that ocean surrounding it? Yes, it is salty water. To make it palatable and drinkable, it has to be desalinated; an expensive endeavour. Should that be an excuse, though? Israel, another water-scarce country, is already adept at desalinating the abundant salty water on its shores. In other words, the technology exists and can be used cost-efficiently. For instance, water infrastructure could be redesigned to distinguish between that needed for drinking and cooking and those for laundry, toilet, and so on. Some businesses in Cape Town, hotels especially, are not waiting for fate or the government. Some already desalinate what is really abundant sea water. Others have deployed interesting technologies like one that harvests air to produce drinking water. Imagine that? And a more water conscious society is certainly beneficial in the long run. Since even though the ocean is abundant, the money for refining it for use is not. Dr Brauman of GWI gives another example. “There is appropriate concern in Malawi about water and energy, as the sole hydroelectric facility and really only source of domestic electricity production is on the Shire river and threatened by falling lake levels.” For Malawi and indeed other countries with similar problems but abundant alternative power sources like year-round sunlight, she advises them “to move away from centralized (not to mention water-depenedent) energy production all together and focus on distributed solar energy.”

Predominantly rain-fed, recent droughts in eastern and southern Africa weighed significantly on agriculture and power supply. So how should African countries better prepare to mitigate or prevent these negative effects in the future? For food supply, irrigation would be necessary, certainly. But where will the water come from? “The focus should be on ensuring that irrigation water is used as productively as possible – improving “crop per drop” of agriculture”, says Dr Brauman. “Water is effectively wasted if yields are low because of too little fertilizer or crop disease. That means instead of focusing just on water, we would be better rewarded by focusing on integrated farm management including fertilizer and pest management as appropriate”, she adds. The water scientist has other creative ideas: “To use water effectively, it needs to be clean enough to  use. One really cheap thing that people have done with water for a long, long time is [to] use it for waste disposal. There’s actually an old engineering adage, “the solution to pollution is dilution” – and that was really true when there weren’t many people! But now it’s a lot cheaper to keep water clean than to clean it once it’s dirty, so we need to build systems that not only use less water but keep it cleaner so it can be re-used later.” She goes further: “one idea that I think is really intriguing but I haven’t seen developed relies on flexibility in water use. If we go back to the idea of thinking about the end goals, I think it’s reasonable to assume that farmers want to be able to feed their families and make a living, not that they specifically want irrigation water. So what if there was a system in place to pay farmers to fallow their land during droughts and not use some of the water? I also think developing ways to use groundwater strategically is important. It turns out that there’s a lot of untapped groundwater in Africa, and much of it is a situation similar to the central US where the groundwater is very old and not being recharged. Could that water resource be used, but only in times of drought? Historically, once people put wells in they use them all the time, whether there’s a drought or not (to grow a crop during the dry season, for example). Perhaps there’s some kind of institutional constraint that could come along with physical access to the water to make sure it’s used wisely.”

So what models are there to make irrigation accessible, affordable and available to African farmers? Again GWI’s Brauman has some ideas. “There’s been lots of great work on what’s sometimes called “green water” harvesting – capturing and storing rainfall on farms by, for example, building small dams on gulches. What I think is critical is not trying to grow crops in places where it’s totally impossible without irrigation, but instead using affordable, small-scale irrigation to help ensure that a dry spell during the growing season doesn’t cause crop failure. There is hope. (An edited version of this article was first published by African Business magazine in April 2018)

What is the potential of financing African SMEs via crowdfunding?

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji 

Ask someone for a large donation towards a cause and the person is likely to balk. If considerate, a polite plea to mull it for a while might be made. Ask for something smaller, akin to pocket change, there would probably not be much ado about it. That is the underlying wisdom behind crowdfunding. Network effects of the internet mean small donations from a vast number of people can amount to quite a lot. Now imagine if instead of a charitable course, the proposition is one of profit, naturally with some risk. There is the potential that there would be similarly many takers. But how is that any different from the normal stock or bond issuance process? Do interested investors not similarly take as many units of a share or bond sale as they want or can afford? And one unit of a stock or bond could be less than an American cent in some instances. Well, crowdfunding avoids the regulators and transcends borders. Of course, these supposed advantages also come with inherent risks. Even so, they provide an opportunity for small- and medium-sized enterprises (SMEs) to secure alternative sources of financing in otherwise very difficult environments; especially in African countries where SMEs constitute more than 90 percent of businesses, according to the International Finance Corporation (IFC). By another account, SMEs account for about 80 percent of employment in African countries. And top among their challenges is access to credit; which even when they are able to secure, is usually at exorbitant interest rates.

Just another name
Crowdfunding, a form of so-called “alternative debt” is just one of quite a few new approaches to financing SMEs. Asset-based finance is already widely used. Other approaches other than typical plain vanilla bank debt with such fancy titles like “hybrid instruments” and “equity instruments” are beginning to be used by SMEs as well; albeit still limitedly, according to a report by the Organisation for Economic Co-operation and Development (OECD). The distinction of crowdfunding is that it is mostly project-focused, as opposed to financing the entire business. Although still mostly debt financing, equity type financing is beginning to evolve. Whether it is via donations, reward or sponsorship, pre-selling or pre-ordering, lending or equity, not needing an intermediary other than the platform through which the financing is facilitated is a key attraction. And potential returns to backers need not be financial. For donations, nothing is expected in return, for instance; although this is usually more the forte of charitable organisations. For the reward or sponshorship type, an acknowledgement, service or token of appreciation suffices. As the name implies, investors who back a venture in the pre-selling or pre-ordering format sometimes expect no more than the product they backed before it gets to the mass market; and may be at a much lower price. In the lending format, it is the typical payment of interest and principal that one finds in other credit environments that prevails. Alternatively, the parties could agree to share revenue and thus partake in the risk of the venture. And the equity form is no more than the investors buying into the venture via shares.

Limited activity
Global crowdfunding financing was $34.4 billion in 2015, according to a 2016 report by Massolution; more than 70 percent of which was via lending. And how much of this went to Africa? A paltry $24.2 million; less than 1 percent. Most crowdfunding financing still takes place in North America ($17.25 bn) and Europe ($6.48bn); about 70 percent of the global total. Since only limited crowdfunding makes it to the African continent, what then is the potential for indigenous platforms? A sense of the potential of these would first have to be inferred from current savings in African countries of about 15 percent of GDP, according to the International Monetary Fund (IMF); which is not exactly ideal. What could probably be put to such ventures are increasingly destined for ponzi-type schemes that offer ridiculously high returns. That is not to say there is no potential at all. In Nigeria not too long ago, funds were successfully mobilized for the family of a deceased policeman’s family via crowdfunding. But if the object is a business venture, without the sentimentality of a supposed noble cause, how easy would it be to similarly mobilize funds? One’s observations suggest the potential is limited – for now. (An edited version of these thoughts were first published in my Forbes Africa magazine column in March 2018)

Also published in my BusinessDay Nigeria newspaper column (Tuesdays)

Developments in the African debt capital markets

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

There has been a flurry of new African dollar debt issuances thus far this year. A bunch were for refinancing existing issues. They almost all were also used to fund budgets. Some infrastructure-led ones have also been done. With as much as $15 billion in dollar debt issued by African sovereigns in 2018 to end-March, the appetite for high-yielding but increasingly risky African credit remains high. Ivory Coast blazed a trail by issuing the largest ever euro-denominated bond by an African country in mid-March. The 2-tranche €1.7 billion bond yielded 5.25% for the first 12-year note and 6.625% for the second 30-year note; the first such long-tenored for an African sovereign issuer. And the spread of the interest despite increasingly difficult market conditions is evidence there is probably going to be as much money chasing as much African debt that there is. Take the Ivory Coast case, American and European investors dominated the list of subscribers. Insurance companies and pension funds took at least 70 percent of the notes with banks taking meagre portions. Broader ex-China Asian interest in African credit is about to be tested. Ghana, which plans to issue $2.5 billion in new foreign debt this year, is looking to Asia. In April, before the end of which it plans to issue a $1 billion eurobond, its officials met Japanese investors to gauge their interest for a potential yen-denominated bond. Zimbabwe plans to tap the eurobond market before end-2018. Before then, it has to clear about $1.8 billion in arrears owed the African Development Bank and World Bank; which it has committed to doing by September. As it did not have the funds, it went in search of bridge financing from global banks in April.

More than meets the eye
Lately, there has been concerns about transparency. A number of African countries may not have been truthful about their total indebtedness, it has been found. Of course, this raises questions about their advisers whose jobs it is to ensure that whatever records are published are the correct ones. Even so, the onus of disclosure is primarily on the issuer. While hitherto, investors were just happy to get a slice of these issuances, there is increasing circumspection. Not that the yields do not more than compensate for the risk. But surely, a high yield is no good to any investor if the corpus is lost. With African sovereigns now perceived to perhaps have more debt than they let on, Zambia and the Republic of Congo lately, investors are asking more questions. This adverse development coincides with just the time that more money from developed economies is likely headed back home as interest rates become more attractive over there. 10-year US treasury notes could breach the 3 percent mark by end-2018; they were already yielding 2.8 percent in April. The concerns oft-raised about the potentially dire implications of tighter capital markets for African issuers is somewhat exaggerated, though. With almost $240 trillion in global debt outstanding, the borrowing needs of the just over $2 trillion African economy is minuscule. The last time it was discovered an African sovereign, Mozambique, that is, had hidden debt, a default followed and investors suffered losses from what was a painful and still ongoing restructuring. Although Mozambique is making some headway with some of its foreign creditors, others have not been as accommodating. In March, its main foreign creditors rejected the restructuring plans it presented on about $2 billion of debt it owes them. One of the plans included as much as a 50 percent haircut on accrued interest payments of as much as $700 million. In any case, the IMF says Mozambique is not likely going to be able to fulfill its foreign debt obligations for another five years, having not made payments due on them since 2017. Thankfully, it agreed restructuring terms on the $2 billion owed China and $177 million to India in March. Concerns about Zambia’s true debt load were raised in mid-April. And even after Zambian authorities showed budget documents to prove it had nothing to hide, markets remained sceptical. There are also suspicions about the liabilities of the Republic of Congo. Now, market participants wonder if there might not be others.

Antsy markets
Markets have become antsy lately. Tensions are rising in the Middle East, America is fighting a trade war with China and perhaps any other country that irks President Donald Trump, the Fed is raising interest rates, and other global central banks have either started tightening their monetary policy like the Bank of England, or signalled the paring down of extraordinary bond purchases called quantitative easing (QE) that flooded markets with easy money hitherto. Amidst such sharp changes in global markets, this is hardly the time for African sovereigns to have peculiar encumbrances. The institutions raising doubts about the actual amount of foreign debt in the books of Zambia are credible. Bank of America Merril Lynch and Nomura International are top global investment banks. Investors are taking heed. Almost momentarily after the revelations in mid-April, yields on Zambia dollar bonds rose by more than it ever did in at least a year. It would probably be among the worst performers of African eurobonds this year if the authorities are not able to demonstrate and convince market participants they have been honest all along. What is the prospect of this, anyway? History suggests they would likely not be able to refute the claims. Investors have probably moved on anyway. More importantly, or perhaps adversely, is that the level of disclosure that would be required for future African dollar debt issuances would be unprecedented.

What are the facts? Bank of America claims Zambia’s external debt increased by at least $10 billion from 2015; potentially adding the equivalent of about 30 percent of GDP to the country’s debt load over a 5-year time horizon. The authorities’ rebuttal is that Zambia’s total foreign indebtedness was about $1.3 billion less than the incremental level suggested by the American bank as at the end of 2017; still over 40 percent of GDP. In cases such as these, much store is put in the IMF; which tends to be able to probe deeper than advisers. It has asked the respective countries to provide details of their total indebtedness; especially those to commercial banks and in the case of commodity exporters, swap arrangements and so on. What these latest revelations portend is that investors may begin to ask for more compensation for what they are likely to now see as riskier exposures. The repayment risk adds to still disproportionate perception of political risk of African sovereigns in international debt capital markets. This is probably needless. African sovereigns are more politically stable today than they were years ago. And recent elections in Kenya, Liberia, and Sierra Leone – to mention a few – which all went into second rounds, with the extreme Kenyan case almost at breaking point, proved to be not as disruptive as feared. And with commodity prices recovering, the finances of commodity-dependent African countries are beginning to improve. The fear, though, is that the resurgent commodity boom may not last for long.

Expensive tastes
Incidentally, despite the ramped-up foreign borrowing by African sovereigns, some of the projects the monies are supposedly aimed at are floundering. In April, it was revealed that Kenya, which raised $2 billion from the eurobond market in Q1-2018, was having difficulty funding its $3.5 billion 473km Nairobi-Mombasa expressway project; which was being financed with commercial loans. Not that there is concern that the project would be abandoned: new debt is expected to be in place by mid-year. But with Kenya’s public debt more than 50 percent of GDP already, Central Bank of Kenya governor Patrick Njoroge has started to ring the alarm bells. And so have development partners like the IMF and World Bank. The Kenyan case is instructive because just as it is seeking mulitlateral and capital market debt, so is it also aggressively acquiring expensive commercial bank debt. Neighbouring Uganda, is also increasingly a cause for concern. In the last three years, Uganda’s public debt has risen three times to $15.1 billion from about $6 billion; and more than half of the indebtedness is foreign. Just like in the Kenyan case, the central bank has warned about the disturbing trend. There is increasing risk it might default on its obligations if it refuses to put its appetite in check. The ramped-up Ugandan foreign borrowing is like the Ghanaian case, where an expectation of higher revenue from newly disovered oilfields made the authorities throw caution in the wind. At least, in the case of Ghana, the oil has started flowing; albeit it still does not earn as much revenue yet to justify the earlier recklessness. In the Ugandan case, oil revenue are not expected until 2020 at least. Other African countries of concern are Angola, Chad and Gabon. The Chadian case is a great example of how risky it still is to lend money to African sovereigns. In 2014, Glencore, a commodity trading firm, together with some commercial banks lend Chad $1.4 billion. It was intended that Chad would fulfill its obligations with earnings from future crude oil exports. When oil prices tumbled, the arrangement went up in shambles. Chad was only able to agree a restructuring deal with Glencore and the consortium of banks this year. In mid-April, Fitch, the rating agency, raised concerns about the disturbing trend of such arrangements and the increasing preference of African sovereigns for international debt capital markets; reckoning African sovereigns other than South Africa have to repay at least $6.5 billion in foreign debt over the next five years, more than four times the amount in the preceding half a decade of $1.4 billion. Both investors and issuers should tread with caution.

There have been some pertinent developments since the writing of this article in mid-April and publication in the Q2-2018 issue of African Banker. South Africa sold $2 billion in eurobonds in mid-May. Judging from the orders, it could have sold almost twice as much. Eskom, the country’s power utility, announced in early June it plans to issue a eurobond before end-August; part or all of the $1.6 billion in new external borrowings expected in the current year. In mid-June, Zambia announced it was suspending all planned borrowings indefinitely. Why? Finance minister Margaret Mwanakatwe put it rather well: “The debt sustainability analysis has confirmed that we need to undertake measures to bring debt risk to moderate from the current high risk”. Angolan debt exposure to China has become a source of renewed concerns. Half of Angola’s external debt of about $22 billion are Chinese loans, and another $4 billion is reportedly being negotiated with them; according to the Financial Times in mid-June. As repayments were arranged to be in the form of crude oil, the country’s foreign exchange reserves are not accreting as they could have otherwise. Besides, Afreximbank is already arranging up to $2 billion in new debt, according to Reuters in late May. These are just a few examples. Despite warnings, they point to a continued debt binge on the African continent. And with the American central bank already signalling more rate hikes this year from an increase to 2 percent in mid-June, and the U.S. 10-year treasury yield swinging around the 3 percent area, incremental external borrowings by African sovereigns would be increasingly costly.