INVESTMENT OPPORTUNITIES IN AFRICA

AFRICAN INFRASTRUCTURE INVESTMENT MANAGERS

MARCH 2012

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Disclaimer

― Robust economic performance, 5.6% over the last decade, 4.4% over the next

decade

― A sharp reduction in political conflicts

― An improved macroeconomic environment, with inflation and budgets broadly

under control

― A better business climate owing to regulatory reform and privatisation

― Improved access to and integration with international capital markets

― Favourable demographics: from a young population and labour force, to

urbanisation and growth in the middle class

― The perception of it being the “last frontier”

The key reasons for investing in SSA

African annual real GDP, 2008 $ billion

461

694

839

1067 1108 1144 11911258

13231400

14831561

19

70

19

80

19

90

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

― 46 countries

― 840 million people

― Young, growing population

― Rapid urbanisation; 50% of the population will live in cities by

2035

― USD1.1 trillion economy at market prices

― USD1.9 trillion purchasing power

― Average of USD1,340 GDP/capita

― Geographical area of 20 million square kilometers

Key macroeconomic statistics on SSA

4.40% 4.17%

3.69%

2.55%

1.77%

-%

1.00%

2.00%

3.00%

4.00%

5.00%

Rest of Africa MENA Russia United States European Union

Real GDP CAGR (2011-2020) Africa’s economic growth since 1970

Snapshot of Africa

| 2

Emerging and developed markets’ share of global GDP

According to the IMF, by 2014 emerging

markets will have overtaken developed

economies in terms of share of global GDP

Africa growth

| 3

Below 0

Between 0 and 2

Between 2 and 4

Above 4

Not covered in data

Average projected real GDP growth during 2011-2012

Sources: IMF

World Economic Outlook Database, International Monetary Fund, October 2010

Funding Gap addressed through PPPs

USD93 bn per

year required

USD45 bn

current spending

per year

USD15 from

external

sources

USD30 from

financed by

African taxpayers

& infra users

66% for Capital

33% for M&OUSD17 bn could

be gained from

efficiency

Even with the gains from efficiency, Funding Gap of USD31bn

1 WORLD BANK REPORT: A time for Transformation, Vivien Foster and Cecilia Briceño-Garmendia, 2009

Poor state of infrastructure in

Sub-Saharan Africa cuts national

economic growth by 2% every

year and depresses business

productivity by as much as 40%

Africa’s infrastructure gap

| 4

Why accelerate?

Overall Infrastructure Spending Needs for Sub-Saharan Africa

1 SOURCE: Africa Development forum: “A Time for Transformation”, November 2009

0

20

40

60

80

100

ICT

Irriga

tio

n

Po

we

r

Tra

nsp

ort

Wate

r

To

tal

Current Spend + Wastage Required Spend Funding Gap 1 (wastage removed) Funding Gap 2 (wastage continues)

US

D b

n p

.a.

| 5

Current state of PPP’s in Africa

Lots of false starts – poor planning

Re-inventing the wheel – “the African solution”

Implementing Authorities should borrow

skills/models/tools from leverage off each other

and get integration

Insufficient focus on enforcement of

Government obligations, nor authority in PPP

units to enforce Government compliance

Framework pointless if players don't obey the

rules

Finding a solution

Limited re-invention of the wheel

An implementing authority that knows what it

doesn't know

Contract vs Partnerships

Not a political wish-list

Reasonable “development profit” expectation

Not too big

Is affordable – but not underpriced

Can turn a real project within 2 years

What needs to be done

| 6

Equity should be Agile

Agile

Mobile Faster deployment

Innovative

Capital needed for final close is not

necessarily the capital needed for

project life

Equity based at beginning of project –

more simple, faster deployment

Debt later in project life – more

complicated structure

Informed equity should be the party

driving the process

Type of capital needed

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Best type of capital

The capital requirement is large, but not insurmountable

Infrastructure assets are best suited to long term

investors

― Pension asset

― Insurance asset

― Long term liability match

Ideally want to match source of capital to location of asset

So, can pension funds be the answer to the funding

deficit?

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1. Africa Development forum: “A Time for Transformation”, November 2009

2. Africa Development forum: “A Time for Transformation”, November 2009

3. UNCTAD: “Economic Development Report 2010”, 2010

4. Tower Watson: “Global Asset Pension Study” February 2011

0 200 400 600 800

Africa annual GDP

Infra requirement (2010-2015)

Infra shortfall (2010-2015)

Mining investment (2005-2008)

SA pension industry

DFI (2005-2008)

Relative Scale (USD bn)

0

2,000

4,000

6,000

8,000

10,000

12,000

ZA

R '

m

Uses of Funds during Operations Operating Expenditure

Overheads

Lifecycle Expenditure

Corporation Tax Paid

Overdraft Interest Cost

Cash Available to Shareholders

Shareholder Loan Stock and

Equity Bridge Servicing

Mezzanine Debt Servicing

Senior Debt Cash Sweep

Senior Debt Interest & Fees

Senior Debt Principal

Cash-flow characteristics

Sources of equity capital for Infrastructure

Current sources of capital

― Equity: Funds, DFI, Sponsor, SWFs

― Debt: Commercial Banks, Financial Institutions, DFI,

Government

Both important for different reasons

― Debt: scale

― Equity: mobiliser and risk taker

Capacity

― USD 11bn raised for PE in last 5 years

― Approximately USD 5bn infrastructure focused

― Deployment period 3-5 years

― USD 1 - 1.5bn pa

― Ability to leverage

― USD 3 - 4bn debt pa

― Total funding circa USD 5bn pa

Current “dry powered” of equity approximately USD 2-3bn

― Looking for viable projects

STRICTLY CONFIDENTIAL | 9

Solely Africa focused annual equity fund raising 2000 - 2010

0.1 0.5 0.2 0.4 1.1 0.6 0.3

5.2

0.9 1.8 2.2 2

4

7 9

13 11

18

22

12

9 8

0

5

10

15

20

25

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Aggregate capital (USDbn) Number of Funds

Pensions industry

Recent Study by Towers Watson of the UK

― Top 13 global market = USD27 trillion in assets

― Represents 76% of combined GDP

― 12% increase year on year from 2009

― Record value levels, but off the GDP proportion peak of 78%

in 2007

Largest markets are US (58%), UK (13%) and Japan (9%)

Fastest year on year growth occurred in SA (28%)

Characteristics

― 44% as assets in Defined Contribution schemes, up from

40% in 2005, and 35% on 2000

― Average asset allocation remain largely unchanged

― 65% of assets held by private sector funds

― Japan and Canada anomalous

African markets

― Dominated by SA, but others growing

― Capital is mobile and flows across regions

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Asset Type Allocation

Equities 47%

Bonds 33%

Cash 1%

Other (incl. infrastructure) 19%

256

11.3

4.5

2.1

0 100 200 300

SA

Nigeria

Kenya

Ghana

African Pension Industries (USD bn), 2010

Source: Towers Watson, Global Pension Assets Study, 2011, Feb 2011, & AIIM

Global Pension Asset Allocations

9%

8%

5% 6%

4% 4%

0%

3%

6%

9%

12%

15%

-

4,000

8,000

12,000

16,000

20,000

Netherlands Australia Switzerland Canada UK Japan USA

US

Db

n

2000 2010 CAGR (RHS)

14%

17%

0%

4%

8%

12%

16%

20%

-

70

140

210

280

350

South Africa Brazil

US

Db

n

2000 2010 CAGR (RHS)

Global pension market

| 11 Source: Towers Watson, Global Pension Assets Study, 2011, Feb 2011, & AIIM

6% 1%

5% 19%

40%

33%

49% 47%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 2000 2005 2010

Cash Other Bonds Equity

Equities: Down by 2%

Bonds: Down by 7%

Other: Up by 14%

Cash: Down by 5%

A shift toward alternatives

Source: Towers Watson, Global Pension Assets Study, 2011, Feb 2011, & AIIM

STRICTLY CONFIDENTIAL | 12

Pension asset allocation: A shift toward alternatives

What are Investors saying?

Can we get Global Pension into Africa?

― SA industry are already the majority owners of infra assets

― Other African pensions growing, and

― International pensions looking

Don’t need to mobilise a lot

― 1% of global pension for Africa

― 1% of global pension for Africa

― 10 years shortfall

Pensions funds behind most sources of capital, so “private

sector” is a combination of both public and private funds

But importantly, there is exiting capital available for viable

projects

| 13

Source: Adapted from World Bank’s Private Participation in Infrastructure (PPI) database

0%

20%

40%

60%

80%

100%

120%

140%

160%

Ne

the

rla

nd

s

Sw

itze

rlan

d

US

Au

str

alia

UK

Canada

Ja

pa

n

Ire

land

Ho

ng

Ko

ng

Bra

zil

Ge

rma

ny

Fra

nce

South

Afr

ica

Nig

eria

Ke

nya

Gh

an

a

Pensions Assets as % of GDP

Right capital – Right time

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5%

6%

7%

8%

9%

10%

11%

12%

-

1

2

3

4

5

6

7

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Eq

uit

y R

isk

Pre

miu

m (

%)

ZA

Rm

Equity Value Equity Risk Premium

Risk dissipation and Value

Com

mencin

g o

f

tolli

ng

Co

mp

letio

n o

f

co

nstr

uctio

n

Sta

ble

op

era

tio

ns

Ma

ture

tra

ffic

fore

ca

sts

Agile capital Sustainable capital

Unpacking the risks

Specific risk can be mitigated through project finance structuring

Political Commitment Central government direct agreements

guaranteeing implementing authorities

obligations

Inflation and Forex Tariff escalation designed to mitigate

variations around forecasts

Short term equity hedging to cover

transaction exposure

Longer term hedging instruments for

fixed debt obligations to link costs to

revenue currency

Corruption Transparent procurement process and

multiple party due diligence, plus DFI

funding participation

Sustainability Local lenders and investors capacity

creating long term local vested interest

Dependency on infrastructure makes assets

critical service providers

Realizations Development of local long term capital

markets create natural acquirers of

matched currently assets)

Government Default and Country Risk Political Risk Insurance to cover government default,

currency convertibility, repatriation and contract

frustration. 52 countries in Africa – only pick the best

Quality Strong international (incl. South African,

French and Chinese) contractor

interest and competence

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Unpacking the risks

To solve Africa’s infrastructure gap…

Need to deploy capital faster

| 16

Source: aidinfo.org Source: AIIM

Thank you