India Inc will Invest in Africa, But Only if the Government Foots the Bill

The business end of IAFS 2015 has focused on India’s role in building Africa’s infrastructure. But will it work?

Prime Minister Narendra Modi arrives for a group photograph with IAFS delegations during the India Africa Forum Summit in New Delhi on Thursday. Credit: PTI Photo by Kamal Kishore

Prime Minister Narendra Modi arrives for a group photograph with IAFS delegations during the India Africa Forum Summit in New Delhi on Thursday. Credit: PTI Photo by Kamal Kishore

New Delhi: At the crowded plenaries at the Le Meridien Hotel, corporate honchos spoke of African infrastructure, Indian values, and billions of dollars, while ministers of trade nodded sagely, and investment banks offered upbeat assessments.

The India Africa Business Forum, part of the India Africa Forum Summit 2015, estimated the cost of building and maintaining Africa’s roads, ports, bridges, railways, power plants, and dams at a giddy $75 billion dollars a year.

Finding the money is a challenge, delegates admitted, but “the Indian PPP [Public Private Partnership] experience,” the India Africa Business Council noted, “can be emulated in the sector.”

Interviews suggest that African officials are taking the Indian PPP model quite seriously, but it is unclear if they are aware of its risks.

An India-Africa cash crunch

 Prior to the event, Sudan’s Ambassador to India, Hassan E. El Talib said a temporary cash squeeze in his country had led to a new policy for private investments in infrastructure projects like toll roads due to a temporary cash squeeze.

“If the private sector comes, we provide them facilities like tax holidays,” he said, “But we expect the investor to bring expertise and some equity.”

Over lunch at the Meridien, Nhau George Chitsinde, Vice Chairman of the Zimbabwe-India Chamber of Commerce, said the Zimbabwean government and private sector were hoping Indian businessmen partnering with Zimbabwean companies would bring “equity, technology and skills.”

The Zimbabwean government, he said, was cash strapped at present, so was hoping for investors who could put cash down up front in return for tax concessions and land, a gradual pay out from the government over the life cycle of the project.

“We are coming with the land,” he said, “We are saying ‘Come lets do it, lets do a win-win’.”

While Sudan and Zimbabwe are special cases as they are both under US sanctions, a quick examination of Nigeria’s economy reveals how even apparently healthy African economies have been hard-hit by falling global commodity prices.

Nigeria is one of India’s largest suppliers of crude oil, and, in 2012, unveiled a national integrated infrastructure plan that is expected to cost nearly $3 trillion over 30 years; at least half the money is expected to come from PPPs.

Yet a recent analysis by Strategy&, a global strategy team at PwC, estimates that the country needs a “fiscal breakeven crude oil price” of $81 per barrel to balance its budget every year. Seventy per cent of the government’s income comes from crude oil exports, and a 20% decrease in price leads to a 60% increase in government deficits.

Oil, at present, is trading at about $45-50 a barrel.

Corporate India’s debts

 Even if the Nigerian government finds the cash to finance its end of the deal, Indian infrastructure companies are struggling with their own debt.

Corporate India has some of the worst debt to equity ratios in the world, according to a report by the office of India’s Chief Economic Advisor. The possibility of default of infrastructure loans extended by Indian public sector banks is putting pressure on the country’s banking system and making fresh loans hard to come by.

“Over 70% of the projects awarded in the highway sector are with 30-40 highways development companies,” notes a recent report by the government-run NITI Ayog, “This has resulted in saturation of the appetite of these companies and most of them have highly leveraged balance sheets with little or no residual financial capacity to participate in fresh projects.”

A recent downward trend in toll revenues, the report continues, has made “several of the projects financially unviable.”

Thus far, Indian companies in Africa have pursued straightforward construction contracts, called EPC contracts, where the money has come from national governments or multilateral donors like the World Bank.

“Indian infrastructure companies will continue to pursue construction projects in Africa where the funding from national budgets or multilateral funding sources,” said Manish Agarwal, an infrastructure analyst with PwC India, “But, at present, it is unlikely that they will take on self-financed projects as they already have high levels of debt.”

Agarwal said he expected things to change as the business environment improved, “Indian private investment in Africa is likely to be a function of two things: A revival of appetite to invest, which depends on how their debt burdens come down in the coming years. And, on the investment readiness of the project itself.”

All eyes on Exim

INDIA INC WANTS A FREE RIDE: Prime Minister Narendra Modi in a battery operated car to visit the Velodrome for an exhibition during the India Africa Forum Summit 2015 in New Delhi on Thursday. Credit: PTI Photo by Kamal Singh

INDIA INC WANTS A FREE RIDE: Prime Minister Narendra Modi in a battery operated car to visit the Velodrome for an exhibition during the India Africa Forum Summit 2015 in New Delhi on Thursday. Credit: PTI Photo by Kamal Singh

With cash hard to come by, Indian companies have put their hopes on the Indian Exim Bank that has extended  $7.5 billion line of credit (LOC) to Africa. As per the terms of the LOC, African governments must apply to the Exim bank for a soft loan, at interest of between 1 and 2 percent a year, for a project on the condition that at least 75% of the contract is awarded to an Indian firm.

Thus an LOC is credit source for India Inc, facilitated by the Indian government to India Inc, and financed (at very low rates) by a foreign government. Thus far, 29% of the funds approved under the LOC have been allocated to Power projects, while roads and transport account for another 14%.

In an interview on Wednesday, Rahul Sikka, Larsen & Toubro’s Africa Head for the Power Transmission & Distribution, called on the Exim Bank to make more money available to Indian companies. “The Chinese have stolen a march on us, big time,” he said, “We are now hoping that Exim will take some steps.”

L&T, he said, had completed projects in Algeria and Tanzania using funds from the respective governments and multilateral funding and was looking to work with the Indian Exim bank.

“We are not investing ourselves, it has to be funded as a project,” he said, explaining that L&T does not finance projects itself. “A PPP would typically be whenever you would be assured of a return. The assurance of returns or the ability to stay long enough in a particular geography can be a bit dicey for Africa so we don’t see too much of that opening up as an opportunity, so its mainly EPC at this point in time.”

Businessmen invested in Africa say that many companies are now interested in working on LOC contracts as the returns are much higher than normal contracts.

“In LOC contracts the host African nation prepares the financial feasibility plan and awards the contracts. The Exim bank only disburses the money,” explained a businessman who has worked across the continent, “So it becomes a way for African officials and Indian companies to inflate the cost of the project and earn outsized returns.”

Opacity in bidding, a recent report in the Indian Express newspaper reveals, has also meant that a lion’s share of the LOC business has gone to 4 Indian companies.

Bad experiences with China

 Some African nations are already grappling with the unanticipated complications of signing LOCs and PPP deals with Chinese companies on similar terms to those offered by the Indians.

In an interview in Addis Ababa in July, Uganda’s Minister for Planning and Economic Development, Matia Kasaija said his country welcomed Chinese soft loans at 1.5-2% a year, “But loans and grants from China are tied to Chinese companies. This speeds up negotiations and tendering, but reduces competition.”

The Chinese loans, he said, were denominated in US dollars, and the Ugandan shilling had depreciated over 25 percent in the last year, making the loans more expensive than previously anticipated.

Uganda has also signed PPP deals with Chinese companies to build three toll roads on terms where the government guarantees the Chinese company an assured rate of return; a clause that has caused some heartburn in Kampala.

“Should you not recover your money, because the volume of [toll] traffic estimated does not materialise then government will make good,” Kasaija said, “If you want your PPP to be successful, I’m afraid you have to give that kind of guarantee.”

Agarwal from PwC says such complications can be avoided if governments – both in India and in African countries – rethink how to design and implement PPPs with private companies.

“African governments should not see this as a simple model that does not place any burden on the government, “ he said, “Toll road projects, for example, lead to a misalignment of risks. The government is basically a choosing a developer who has the most aggressive view on future traffic, and not one who would build the best quality road, fastest and in the least cost.

“If debt is raised locally in African banks, the project risk is effectively still in the country. Governments need to involve private players, partly for their finance, but primarily for locking in efficiency commitment in executing a project faster, better, and short-circuiting corruption in traditional contracts.”