Andrew Skipper is Partner and Head of Africa at global law firm Hogan Lovells. With presence in 50 countries and headquartered in London and Washington D.C, the firm offers extensive experience and insights gained from working in some of the world’s most complex legal environments and markets for corporations, financial institutions, and governments. Some of the areas they specialise in include infrastructure and transport, banking, technology and telecommunications, energy, among others. In an interview with the Nairobi Business Monthly, Andrew gives perspective to the macro economic climate in Africa, with a bias for energy, and how the Continent can consolidate growth in an increasingly complex global arena.
BY KEVIN MOTAROKI
What is your strategy for Kenya and the East African market? What are your key sectors of focus in the region?
We recognise that Africa, one of the world’s fastest growing emerging markets, presents great opportunity across diverse sectors. Currently in Africa, Hogan Lovells has a full-service office in Johannesburg with over 100 lawyers. In Kenya and the 52 other countries on the Continent, we work through our hub offices in London, Dubai, Paris, Beijing and Washington D.C and have close relationships with a network of leading local law firms. Kenya and the wider East African region are of strategic importance to Hogan Lovells, where the firm is committed to building business, investing in social enterprise and in-country capacity building. Specific sectors of focus include FinTech, infrastructure and transportation, energy, technology, media and telecoms (TMT), among many others.
What are the trends regarding financing of infrastructure projects in East Africa (Foreign Direct Investment, especially from China)? How diversified is the region’s financing for projects and could it do better – diversify more?
Infrastructure development remains a priority across Africa and the competition for funding is as intensive as ever. Their traditional sources for funding have included ECA financing and commercial debt. However, other sources of finance are available, such as Islamic financing and project bonds. In addition, governments have historically also relied on inter-government debt as a means to finance infrastructure projects. The scope and appetite for pension funds and private equity investment in infrastructure on the right terms is increasing.
The infrastructure boom is not likely to slow down in Kenya or indeed across Africa. According to a report by Britam Asset Managers, investments in the rail and energy sectors have the greatest multiplier effect on East African Community economies. As a result, countries in the region are set to continue the active search for investment from external investors in a variety of forms. China, for example, is set to invest about $60 billion (Sh6.2 trillion) in Africa over the next few years, with much of this investment going into infrastructure-related (including energy) projects. Beijing has taken an aggressive approach to entering African markets. And others, such as Japan, India and Turkey, are also active as political and economic concerns combine. A recent example of the growing global appetite for Africa investment is the World Bank announcing at a meeting of the G20 countries, a record financing package of US$57 billion (Sh5.9 trillion) over three years for sub-Saharan Africa, with a focus on infrastructure.
Furthermore, there has been a significant increase in debt financing models such as Sukuks, or Islamic Sharia compliant bonds and Eurobonds, across the continent. The total value of yearly issues of Eurobonds by sub-Saharan governments rose from just about $200 million (Sh20.7 billion) in 2006 to about $6.3 billion (Sh654 billion) in 2014 and 2015.
According to UNCTAD’s Africa Report (2016), many economies in the region have been accessing the debt market in a number of ways, but cautions that this approach should not be at the expense of debt sustainability. Debt sustainability is also a responsibility of the relevant lenders and all parties must endorse principles of responsible lending or risk ultimately losing out. For example, Kenyan and East African governments need to retain their ability to raise and service debt directly as well as indirectly service any associated debt costs effectively in project finance transactions.
Kenya is doing fairly well in terms of renewable energy but lags in exploiting such sources as solar and wind; in your opinion what has contributed to the little investment in these and other areas of renewable energy?
Kenya has the best track record for the use of geothermal energy in Africa. The cost of renewable energy has decreased significantly in recent years and renewable energy has, in many jurisdictions, achieved grid parity. The number and scale of renewable energy projects is continuing to expand, and governments have had to create environments to facilitate the introduction and continuity of renewable energy projects. However, projects such as utility-scale solar projects can require large tracts of land, and the intermittent nature of the power produced by these projects requires investment on the transmission and distribution side. These issues, combined with institutional delays, such as delays in land registration or in obtaining approvals or in seeking sufficient government support undertakings are common among the barriers. However, in this respect, Kenya isn’t unique. Both PV and CSP Projects tendered in the United Arab Emirates have seen world record tariffs. Low tariffs were also seen in respect of a solar project in Zambia. It is therefore not surprising that Kenya and other countries in Africa are evaluating how similar tariffs can be achieved locally. Furthermore, there are various initiatives that have been undertaken to pave the way for the introduction of rooftop solar solutions for domestic and commercial purposes.
What are the key challenges faced in renewable energy development in Kenya? What measures can government and the private sector initiate – financing and policies – to support development of the sector?
Indeed, Kenya’s renewable energy sector is among the most diverse in Africa, with opportunities in geothermal, solar power, wind power and hydro energy, being the most exploited in the country. However, there remain challenges that need to be managed in order to ensure that Kenya continues to attract foreign and domestic investment in the sector.
The main limitation on the development of energy infrastructure is primarily the costs associated with the same. A study conducted by the International Energy Agency notes that to achieve universal access to electricity by 2030, sub-Saharan Africa will require an investment of more than $300 billion (Sh31 trillion).
In terms of funding, commercial bank debt is typically more expensive than debt from other sources. Funding from institutions such as the World Bank or IMF tends to be less dynamic and might be subject to restrictions, for example where the availability or use of funds is linked to non-project conditions. From an international lenders perspective, issues relating to the availability of foreign currency and offshore transferability are amongst key considerations – others being the robustness of the legal and regulatory framework, creditworthiness of the off-taker and the general political climate, among others.
One way to address these issues is, of course, to obtain funding in-country, rather than from international lenders. In many cases, funding is available from local investors, including government-backed infrastructure funds and pension funds, but whilst these are useful for equity, they may not be appropriate for large utility-scale projects.
It is important to ensure that officials involved in development, procurement and management during the operational phase of a project are trained, empowered and knowledgeable – this means ensuring that officials have the right skill sets and are properly resourced to deliver projects. Creating a strong regulatory framework is also critical to developing the sector and attractive international and pan-African investment.
What is your take on financing projects through public private partnerships? How meaningful would it be in bridging the financing gap, and does it offer value for Kenyans?
The answer to achieving Kenya’s potential in energy, infrastructure, and indeed in any sector, lies in the partnerships that the Government and private sector forge. The role that Government plays is to set up clear policy structures. It must also operate with workable strategies that it then delivers. Diverse sectors in Kenya face capacity-building issues, and often this gap is filled by the private sector in training and supporting people.
Financing the infrastructure deficit in Kenya and across Africa will involve collective innovation both across the public and the private sectors. Traditional funding sources such as government budgets and donors no longer suffice; rather, co-opting in the private sector provides the necessary platform on which to accelerate infrastructure growth.
Governments are fast recognising that they are best at governing but not always the best at providing services. This is where PPPs, if structured correctly, can be very useful tools in promoting infrastructure development and partnerships between the public and private sectors. However, a word of caution – there are examples of PPP projects from around the world that have been less-than-successful. It is therefore important that lessons learnt from other jurisdictions are considered when structuring projects and key performance indicators so as to ensure that mistakes made elsewhere are not repeated in Kenya.
Kenya’s PPP Unit has an impressive pipeline of projects in line with the Government’s Vision 2030 plan. If structured correctly, they will play an important role in the next phase of Kenya’s development and economic growth potential. Apart from creating jobs, these projects will also contribute to the economic development of Kenya and, more importantly, ensure knowledge and skills transfer and empowerment of Kenyans.
On the whole, where the private sector once viewed the wider context that surrounds business opportunities and the challenges therein – such as poverty, poor governance, missing institutions and unskilled labour – through the lens of corporate social responsibility or philanthropy, today many of these contextual gaps pose real threats to business expansion and long-term success in emerging and mature markets. These businesses cannot afford to wait for governments to automatically overcome or resolve the gaps. Businesses must actively contribute in assisting governments to create strong environments in which growth, development and investment can flourish.