Participation in two transformative energy deals on the continent have reinforced our view that this one of the most vibrant and critical sectors to drive economic recovery as Africa emerges from the COVID-19 pandemic.
The oil and gas sector – which makes up roughly 20% of Africa Gross Domestic Product (GDP) - is core to the entire global economy and is a feedstock into a number of other key industries. Being such a large contributor to continental GDP, the sector is also a major driver of foreign exchange earnings and tax revenue for cash-strapped governments coping with the impact of the global economic slowdown.
Before getting into the specifics of the two deals, it is important to deal with the sustainability questions which are becoming increasingly topical in boardrooms and credit committees. In the past, these could have been dismissed as “soft” issues but there is increasing pressure on all stakeholders in the value chain to ensure that they comply with Environmental, Social and Governance (ESG) standards when investing in deals of this nature.
As a bank, Absa has committed itself to compliance with not only the Equator principles but also sustainability mandates introduced by co-financing partners such as the International Finance Corporation (IFC).
As an African bank, we have to rigorously interrogate the impact that our deals have on the continent and the supporting communities. We spend a lot of time communicating this to our clients and as the deals move through the various credit committees, they will be asked some tough questions around this element – for Africa to thrive, it cannot simply continent where resources are extracted for short-term gains.
The two deals themselves are important, because they speak to two critical emerging markets on the continent – Nigeria and Mozambique – and our ability and technical expertise to do big transactions in these countries. Absa has long positioned itself as a Pan-African bank and this has meant extensive investment in human capital and expertise to ensure that we understand the markets we operate in.
We are often asked whether 2020 will be a re-play of the 2008 Global Financial Crisis (GFC) where projects in African markets are abandoned as risk appetite dries up and investors flee Emerging Markets due to liquidity constraints. This has not been our experience – if there is a good deal transaction to be done, there is and will be financing available for it.
The Nigerian deal is an exciting one for us as Absa has contributed $100m of expansion capital as part of a co-funded $3bn expansion of a pre-existing project. The facility was operating six Liquified Natural Gas “trains” and the project will see this expanded to a seventh train.
This deal has a number of interesting elements to it. First and foremost it ticks our ESG sustainability box as you will find the gas is not being flared – something which makes the process far more environmentally friendly.
The second element of this deal which is particularly important, is the buy-in of all stakeholders including government. There is often a perception that Nigeria is a frontier market with the accompanying risk profile. The reality is that the Nigerian government has recognised the strategic importance of the Oil and Gas sector on its economy and have invested heavily in a regulatory framework that encourages foreign investment into the sector.
In fact, it wouldn’t be far off the mark to argue that regulators in the UK have made more changes and created a less stable environment for industry participants, compared to their Nigerian counterparts.
This deal was done in conjunction with a number of funding partners including banks, Development Funding Institutions (DFIs), Export Credit Agencies and a tranche from the Nigerian funding partners. This entire financing deal was structured as an offshore transaction, highlighting the growing sophistication of the African infrastructure funding landscape.
The Mozambique deal is slightly different but equally exciting and a true game-changer for this economy. This transaction is valued at just under $15bn dollars and what is important to be recognised here is that the client (Total) was able to raise this money in the middle of the COVID-19 pandemic – funders remained committed to the opportunity that the continent provides.
As a Greenfields project, this will bring a multitude of other benefits into the economy including new jobs (estimated at 30 000 jobs), technical skills and other supporting infrastructure. These spin-offs are a critical part of developing the region and entire new value chains and local content providers will be natural beneficiaries.
Importantly, this deal also appears to have been a catalyst for other transactions in Mozambique and we have noticed an uptick in the number of new deals being discussed since June.
Our ability to participate in these deals speaks to our institutional maturity and experience in the region and we believe this positions us to do future deals.
As sustainable and growing Oil and Gas sector is structurally critical for the economic fortunes of the African continent and Absa has positioned itself to be a leading player in this sector and we look forward to working with our clients and other stakeholders to help Africa realise its potential.