Africa is ripe but maybe not ready for investment

According to the African Development Bank, "...Africa's absolute and relative lack of infrastructure points to the existence of untapped productive potential, which could be unlocked through scaling up investments in the sector."
Nigeria currently generates about 4 000 megawatts or about 2% of the electricity needed for its population of 150 million. Going by the world standard of one megawatt per a population of 1 000, Africa's biggest oil producer would need over 100 000 megawatts now or in the future. Consequently, there is about $100-$150-billion worth of greenfield power projects that need to be built over the next several years. The situation in Nigeria repeats itself in all African countries.
Africa Infrastructure Country Diagnostic estimates that to close the infrastructure deficit gap, the continent needs $90-billion per year. The question is: where will the funds come from? Are private equity companies as interested in greenfield projects as they are in existing and performing ones?
Greenfield projects may not be as attractive to private equity investors in developed economies. But in Africa, the majority of investments in the foreseeable future will be greenfield. Success stories can be found in the telecommunications sector, where investors have proven that greenfield projects are profitable and make a lot of sense in a market that is essentially unexploited.
Early greenfield entrepreneurs had a hard time attracting the needed financing, as described by Sudanese businessman, Mo Ibrahim, in an interview with Wall Street Journal. Ibrahim founded Celtel, one of Africa's first mobile networks, and later sold his company for $2.5-billion in 2005. Other early birds include South African company, MTN, in Nigeria and recently Bharti Airtel, which earned $13-billion in 2010.
Africa lacks adequate investment in all the economic sectors and consumers are overpaying for everything. For instance, people pay up to $500 per night for a hotel room in Nigeria while the average phone user spends over 10% of their monthly income on wireless service.
Building greenfield projects often gives the investor a first mover advantage and companies that are not investing in greenfield projects are missing out. The process of making money in such projects is the same as in existing businesses - you perform due diligence and hire the best management team.
Addax Bioenergy recently signed a US$388-million loan agreement to develop a new renewable energy and agricultural project in Sierra Leone, illustrating the need for greenfield investments. Judging by the heavyweight investors who put the package together (the African Development Bank, Emerging Africa Infrastructure Bank (EAIF), German Development Finance Institution and South African Industrial Development Corporation), it seems there is a shift in the investment landscape. This particular deal did not manage to attract the traditional private equity companies.
Another notable greenfield project that attracted funding from Satya Capital, a private equity fund backed by Mo Ibrahim, is satellite telecommunications satellite company, O3B (Other 3 Billion). Google, Internet search provider North Bridge Ventures and HSBC Principal investments are some of the equity investors in the $1.2-billion deal. Other investors provided debt facilities.
Said an article published by Infrastructure Investor: "The deal highlights the different risk-return profiles that drive infrastructure investment in emerging versus developed markets...In developed markets, such as the USA and UK, infrastructure investors tend to back mature, cash-flowing assets such as roads with 40 years' worth of operating history. But in places like Africa, where much of the infrastructure needed to support the continent's roughly one billion people still has to be built, infrastructure projects often don't have a rich history of revenues from which to benchmark future performance."
Even Mark Rigolle, the chief executive officer of O3B Networks acknowledges that the company is several years pre-revenue.
'We've got a developmental mandate, so we were prepared to take risk that commercial entities won't,' said Nick Rouse, whose London-based capital markets consulting firm, Emerging Africa, committed $12-million of the $145-million mezzanine debt facility.
If private equity companies are seeking only mature industries to invest in, they will be sitting on their funds for a long term. Africa is all green. Unlike developed economies that have many deals to chose from and adequate public information to work with when analysing the companies, Africa has only 1 500 publicly traded companies. And most of them are not eager to display information about their performances - the Nigerian Securities Exchange recently suspended 25 companies for failure to file 2010 financial reports.
Private equity companies need to seek ways of investing in greenfield projects that can give them the return they seek without compromising their investment objectives. One can partner with experienced entrepreneurs, who are starting a new project, or governments through public private partnerships.