Making sense out of $1.4 billion Afrexim deal

post was last updated: July 22, 2019

By Taonga Sabola:

MWANAMVEKHA

Last week, Africa Export-Import Bank (Afreximbank) President, Benedict Oramah, and his executives visited Malawi where they pledged to support the country with about $1.4 billion (about K1.1 trillion) project financing.

Among key projects to be supported by the funds include the Mangochi Airport, a five-star hotel at Cape Maclear, logistics park in Mangochi and industrial parks in Blantyre and Lilongwe.

The visit, by Oramah and team brought a lot of excitement to Malawians considering the magnitude of investment plans promised.

During the visit Oramah, who was accompanied by a team of investors, met with President Peter Mutharika and top government officials as well as business captains who pitched their ideas hoping to get.

Since Friday, when the team left Malawi, there has been many questions among Malawians on how the Afreximbank financing model operates and whether the financing on infrastructure projects would not choke the under pressure fiscus.

What is Afreximbank?

Afreximbank was established in 1993 by African governments, including Malawi, African private and institutional investors, non- African financial institutions and private investors.

The purpose of the bank is to finance, promote and expand intra-Africa and extra-Africa trade.

The bank has a mission of stimulating consistent expansion, diversification and development of African trade while operating as a first class, profit oriented, socially responsible financial institution and a centre of excellence in Africa trade matters.

Afreximbank has its headquarters in Cairo, Egypt, and has branches in Harare, Zimbabwe, and Abuja, Nigeria.

Is the Malawi government borrowing $1 billion from Afreximbank?

No, it is not. To begin with, there are a number of ways through which governments achieve infrastructure development in a country. One way is for governments to pump direct funding into projects through the national budget. Another one is where government borrows money, either within or outside, to finance the projects. Projects could also be financed using grants. In these cases, the projects are owned by government.

In the case of the Afreximbank projects, Malawi is acting as a project promoter. In this case, the government identifies projects which would have significant economic benefits to the country and pitch them to interested investors.

So for the case of Mangochi Airport, hotel and logistics park as well as the industrial parks in Blantyre and Lilongwe, they would be owned by private investors who would construct them and government would own a small percentage of shareholding, as it is contributing land for the projects.

That is to say, these projects would be private sector-led.

The investors that accompanied Oramah during the visit such as Mota Engil, Elswedy and others have been dealing with Afreximbank for many years. In this case, it is these investors who would go to Afreximbank to source funds for the projects when they are convinced beyond reasonable doubt that these projects make business sense.

That is to say, instead of Afreximbank lending money to the government for the Mangochi projects, it would lend the money to institutional investors on its books to enable them to implement the projects in Mangochi, Blantyre and Lilongwe.

As Minister of Finance, Joseph Mwanamvekha, indicated on Thursday, there would be no need for the government to seek Parliament approval on the projects because “we are not borrowing anything from Afreximbank”.

“Of course, at some point, I would have to make a ministerial statement on these projects but we are not borrowing any money from Afreximbank. The private investors will borrow from Afreximbank and invest in Malawi”.

In this case, the speed of the projects would depend on interests from the private investor players as well as their forecasts in as far as revenue generation of the projects is concerned.

Where they feel that the projects would not be profitable enough, they would not take them up. Remember these are business people, driven by profitability, not charity organisations.

Why government is going for this option?

There are a number of benefits on the part of the government. By allowing the private sector to source financing for these projects, it would ease pressure on the fiscus. Instead of Capital Hill pumping money into the projects, the private sector will.

The financing model also enables government to implement projects which it has long desired to do without spending more money.

At the end of the day, the biggest benefit to government would be job creation as well as taxes that would be paid by these companies.

As Mutharika put it, the financing model would help Malawi grow its private sector.

“In these projects, we are focusing on industrialising Malawi, increasing our production and developing our tourism to unprecedented levels. With the Afreximbank support, we are ready to turn the Nankumba Peninsula into a hub for tourism, finance and logistics. And we expect to create not less than 40,000 jobs in this Cape Maclear Tourism Project,” Mutharika said.

What is in it for the investors?

Most definitely profits. What else. They would make their money by charging fees for these facilities.

Elsewhere, facilities such as airports are owned by private firms who make huge profits by charging user fees.

In fact, London’s Gatwick Airport is owned by a Nigerian Adebayo Ogunlesi through his firm Global Infrastructure Partners.

Financing to local private sector

During the visit, Oramah also pledged about $400 million support to the local private sector. However, the local private sector would not get direct financing from Afreximbank.

That is to say, the support would be realised through partnerships with Afreximbank trusted investors.

During the visit, local private sector players had business-to-business sessions with likeminded investors to see if they would strike deals.

Once the partnership is established, the Afreximbank trusted investor would go and borrow the money from the bank to inject in the local project.

Over 20 Malawian firms presented their proposals to the investors for consideration.

Africans must develop Africa

According to Oramah, time has come for Africans to start developing Africa.

He said the investors, mostly African, have the experience of implementing development projects on the continent,

“If we open up Mangochi, then Malawi would realise the true value of Lake Malawi through increased tourism inflows,” Oramah said.

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