Private Investing in Africa in the Era of Sustainable Development

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1 Private Investing in Africa in the Era of Sustainable Development Aniket Shah SDSN

2 What is Africa? Africa is Not a Monolith 1) The con4nent of Africa consists of 54 countries with highly varying growth models, human development levels, language, culture and more. 2) Despite recent growth, Africa is s4ll less than 3% of global GDP and 2% of publically investable assets. 3) The African con4nent is experiencing a growth spurt, but a) this has happened before and b) human development is not improving sufficiently. 4) The Africa growth model will need to take into account inclusiveness and environmental sustainability from the beginning. This is different than prior growth processes.

3 What is Sustainable Development? Sustainable Development Requires Highly Func4oning Public and Private Sectors 1) Sustainable Development is not a new concept: Gro Brundtland ar4culated this concep4on in Our Common Future Report in ) What is different today compared to 1987 is we have a) more sophis4cated technologies, b) much more global wealth and c) a more inter- connected world. All three give more poten4al as well as challenges 3) We must move beyond public vs private debate: we need both

4 Key Conclusions 1) A mul(- part financing framework is required for sustainable development in Africa. This includes, but is not limited to, private capital. 2) There is enough capital in the world to achieve sustainable development in Africa. Global investment landscape will impact private capital flows to Africa. 3) Private investors need to look beyond GDP growth and natural resources for long term returns 4) Africa must develop local savings pools for local investments can t only rely on external, Eurodollar financing 5) Physical and financial infrastructure must be built first: otherwise Africa will not be able to absorb capital 6) Foreign sovereign investors role must be understood and guided towards sustainable development. 7) Public- private partnerships are cri4cal to achieving sustainable development in Africa

5 1) Africa requires a mul4- part financing framework for Sustainable Development A mul4- part financing framework for Sustainable Development is required. This will include: Global Funds and Global Partnerships Climate Financing (private and public) Infrastructure Financing (private and public) Development Aid Financial market transparency Interna4onal Financial Flows to Least Developed Countries

6 1) Africa requires a mul4- part financing framework for Sustainable Development Source: UN Report of the Intergovernmental Commifee of Experts on Sustainable Development Financing

7 1) Africa requires a mul4- part financing framework for Sustainable Development Global shorgall of ODA in rela4on to commitments has been over $5 trillion since 1970 and $2.4 trillion since Had commitments been kept, human development and inclusive growth would have improved throughout Africa, which currently receives approximately 38% of global total ODA.

8 2) Global Investment Landscape and Africa Key Characteris4cs of Today s Investment Climate 1) Low yielding environment has forced investors to channel capital into riskier assets. 2) Shadow banking sector growing quickly and moving capital beyond public regula4ons 3) Global savings pool in secular growth as growth of middle class consumer means growth of middle class saver All of these characteris4cs mean a growing amount of interna(onal and domes(c capital moving to Africa. Source: IMF WEO

9 2) Global Investment Landscape and Africa In 2013, Rwanda issued a $400m Eurobond yielding 6.625% (10 year dura4on). This is the price the US Government borrowed money in 2000 and GE could borrow in This is encouraging as well as risky.

10 3) Private investment needs to move beyond growth stories and natural resources. There is no direct rela4onship between GDP growth and investor returns. Investors need to look at broad- based development (human, ins4tu4onal, capital market) for long term poten4al of profitable returns.

11 3) Private investment needs to move beyond growth stories and natural resources. Foreign Investment in Africa 1) Foreign investment into Africa has reached mul4- decade highs: FDI in 2013 into Africa was $57 billion. 2) FDI is very lumpy : a large majority if foreign private capital (both FDI and porgolio flows) go to Egypt, Nigeria, South Africa and Sudan are focused in extrac4ve industries. Most na4ons get very lifle, if any, private capital. 3) Risk/reward concep4ons from porgolio theory make porgolio investors focus on short term, high reward profits and not long term investments Source: World Bank

12 4) Development of local savings pools for local investments is cri4cal for Africa African Balance Sheets Are Looking OK For Now 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% USD bn (constant Dec 2013 prices) Development of Local Currency Markets Will Be Vital - Zambia Uganda Tunisia Tanzani a South Africa Rwand a Nigeria Namibi a Mozam bique Morocc o Mauri4 us Kenya Ghana 0% EGYPT GHANA MOROCCO SEYCHELLES KENYA TUNISIA SENEGAL MOZAMBIQUE TANZANIA IVORY COAST ZAMBIA UGANDA ANGOLA RWANDA NAMIBIA CONGO GABON NIGERIA Gabon Egypt Côte d'ivoire Planned Eurodollar bond % GDP Eurodollar bond % GDP Non Eurodollar bond debt % GDP Source: IMF/Investec Asset Management Source: IMF/Investec Asset Management

13 4) Development of local savings pools for local investments is cri4cal for Africa Fixed Income Ac4vity S4ll Highly Concentrated Limited activity/not covered T-Bill markets Short dated LCU bonds Yield curve & liquidity building Eurodollar bonds Corporate bonds International access of LCU bonds Source: IMF/Investec Asset Management

14 5) Physical and Financial Infrastructure Needs to be Developed With Sustainable Development in Mind African Infrastructure Challenge 1) The investment gap for African Infrastructure is currently $50 billion per year (total of $93 billion of investment needed). 2) We must bring bankable projects to the market. The capital is there. These projects need to be build with a sustainable development framework of growth- enhancing, socially- inclusive as well as environmentally sound Source: AICD 3) Risk capital is essen4al: this can come from philanthropic community too. MDBs are essen4al given human capital. These need to be re- capitalized and scaled

15 5) Physical and Financial Infrastructure Needs to be Developed With Sustainable Development in Mind African Infrastructure Challenge 1) Between 2003 and 2013, Sub- Saharan Africa has closed 158 project finance deals with debt totaling USD 59 billion Source: World Bank 2) This represents a very small por4on of the global project finance market: over , over 5,000 projects closed worldwide and raised total debt of USD 2 trillion 3) 4 countries accounted for 70% of all project finance deals in Africa. 4) Huge investment opportunity for broader African infrastructure

16 5) Physical and Financial Infrastructure Needs to be Developed With Sustainable Development in Mind Financial Architecture of Africa 1) The total market cap of Africa stock exchanges is approximately $1 trillion. This is the same size as the market cap of Google and Apple combined. 2) Not enough African companies are coming to public market given very shallow public markets and highly accessible private capital. This is problema4c for Africa s long term inclusive growth 3) Africa savings needs to be u4lized in Africa. It does not make sense for large capital to be sent overseas, invested in overpriced US and European assets that have no development value for Africa. Source: Bloomberg, 2013

17 6. Role of Foreign Investors Must Be Understood and Guided US From aid to commerce China Investors of first resort Increasingly complimentary rela(onship Brazil A knowledge partnership Europe Major trader partner and aid provider

18 6. Role of Foreign Investors Must Be Understood and Guided China- Africa economic rela0ons are driven by strong Chinese government support for investment and business expansion in Africa. China- Africa trade is heavily concentrated in commodity- based economies. There is an argument that the strong appe4te for natural resources in China, as well as the impor4ng of low- cost manufactured goods from China, is impeding the diversifica4on of many African economies. The SEZs are a major element of China s involvement in Africa. It exemplifies an eastern economic development model as opposed to the neo- liberal policies of Western organisa4ons. Chinese investments in SEZs in Africa Chinese trade with Africa Source:IMF

19 7. Public- Private Partnerships are Cri4cal to Private Inves4ng in Africa Time to move beyond public vs private debate - > development needs both Source: UNSDSN. Jeffrey Sachs and Guido Schmidt Traub Background Paper on Financing for Sustainable Development

20 7. Public- Private Partnerships are Cri4cal to Private Inves4ng in Africa

21 SDGs and Investment Prospects for Africa SDGs will lead to high- quality development within Africa and other regions. Countries that follow this development path will be able to tap a wider stream of public and private capital, ensuring broad- based, environmentally- friendly development and sustainable growth. If host- countries and investors use the SDGs as a guide and scorecard, it will be possible to mobilize a lot more high- quality investment.

22 SDSN and Financing for Sustainable Development The Sustainable Development Solu4ons Network (SDSN) was launched by UN Secretary General in 2012 and is directed by Professor Jeffrey Sachs. The SDSN is providing technical advice on the Financing for Development Summit hosted in Addis Ababa in July The SDSN is leading four Working Groups to provide recommenda4ons to the Summit s Co- Facilitators and Hosts: Working Group 1: Public Private Partnerships and Pooled Financial Mechanisms Working Group 2: Climate and Infrastructure Finance Working Group 3: Mobilizing Resources from Public and Private Sector Working Group 4: Financial Regula4on for Sustainable Development

23 SDSN and Financing for Sustainable Development If you would like to be involved in our work, please be in touch: Aniket Shah SDSN