Tshepo Mahloele: Now is time to invest in Africa’s development

Power generation and transport sector offer huge investment opportunities on the continent

Our Chief Executive Officer, Tshepo Mahloele recently wrote for South Africa’s premium business publication, Business Day about the impact of Covid-19 on the South African economy and, more specifically, how he sees the future of infrastructure financing in the post-Covid era. The article, republished here below, was first published by the Business Day on 07 June 2020.

In the Business Beyond Covid series, CEOs and other business leaders and experts in their sectors look to the future after Covid-19. What effect has the pandemic and resulting lockdown had on their industries and the SA economy as a whole? Which parts will bounce back first and which will never be the same again? Most importantly, they try to answer the question: where to from here?

The global nature of Covid-19 is unprecedented, and we expect it to be some time before we can begin to understand the full economic impact of the pandemic. We have been hit by what can only be described as a genuine black swan event, which has provided a true test of the robustness of our business models and relationships, and commitment to our assets.

According to Bloomberg Economics, the wider economic fallout could include recessions in the US, the eurozone and Japan, the slowest growth on record in China, and a total of $2.7-trillion in lost output. Predictions from The Economist project a drop in GDP of 5% and the loss of a quarter of the global GDP forecast for 2020.

The African Development Bank has said the pandemic’s affect on African countries — particularly those with high debt levels — may see sharp increases in their fiscal and current account deficits, negatively affecting their ability to respond to the crisis.

This period in our collective history, characterised by contracting supply chains, decreased economic activity across the board and companies drawing down on their financial resources to survive, has not been without impact on African infrastructure players such as Harith. We have developed a pipeline of infrastructure projects we believe will make a material difference to Africa’s gaping infrastructure deficit. The World Bank estimates poor infrastructure costs the continent 2% of GDP a year in lost growth.

The crisis has necessitated that we pull our investee companies, partners and investors in this critical area of finance and investment even closer to us to ensure we remain effective and on track. We expect to experience disruption in the delivery of information from our investee companies as their operations and reporting mechanisms may be affected by the virus. We’re keeping a close eye on how the virus will further impact our investments and are in constant contact with the management teams of these assets across the continent.

But there’s a broader, more important question we must ask ourselves: where will the pandemic leave infrastructure investing as a specialised and critical niche of finance in the months and years to come? No-one can pretend to know the future after the volatile events of the past three months, but I’m pleased to say the evidence we have gathered in this period shows that the opportunities to invest in Africa’s development remain as rich and compelling as they have been over the past decade.

As might be expected, one of our investments in the transport sector has been the most affected by the pandemic. Lanseria, a regional airport outside Johannesburg, has not been able to conduct international flights from late March, when the lockdown began in SA.

We believe there is scope for flights from Lanseria to Cape Town, Port Elizabeth and Durban to resume as the constraints to economic activity posed by a lack of internal flights are serious, and a heavy reliance on road transport is simply not sustainable in the longer term. The region will still need efficient transport connections and trade must resume.

The key challenges for us all to address is how we survive the troughs that this period in our history will inevitably bring. We believe that there are immense opportunities in efficient transport operations in future.

The other key opportunity we see coming out of the pandemic era is in the power generation space

Before the pandemic changed our lives our transport strategy had begun to explore the immense potential that rail has to open up investment and trade on the African continent. We are now looking to increase exposure to rail in its broadest sense via Traxtion. Traxtion controls one of the largest, privately owned mainline locomotive fleets in Africa, working across full service rail freight operations, rail network operations, locomotive operations and leasing.

The other key opportunity we see coming out of the pandemic era is in the power generation space. We see African economies become increasingly connected to one another, increasing the power requirement even further. The challenge for us and our partners is to look ahead at a disrupted power market and ensure that the end user experiences better, more reliable delivery.

I do not believe we have yet seen the full impact the pandemic will have on the public-private partnerships that are a key feature of the infrastructure investment space we operate in. We expect severe disruptions and challenges to be seen across revenue generation — from both user fees and availability payments, day-to-day operations and management of projects due to staffing issues, risk assurance and bankability for future projects.

At the level we are operating at, partnerships are, and always will be, critical, and it is clear to us that the failure of public private partnership projects in the Covid-19 era is not an option. Infrastructure investment will need solid policy responses from governments, who will need to continue to proactively engage with private sector partners, and recovery plans for PPP projects must be harmonised with national strategic priorities.

The scope of impacts and recovery plans must have short, medium and long-term strategies that mitigate the risks of today, next month, and the coming months. These recovery plans must also focus on a win-win output inclusive of the needs of both the public and private sectors.

The World Bank has suggested that governments create blanket financial guarantees for lenders to finance critical infrastructure projects, supported by clear parameters for what qualifies by sector, project size, and type of financing. This would help calm lenders’ nerves while the details of direct support to project owners are worked out.

We can only applaud initiatives such as the African Development Bank’s rapid response facility to provide fast, flexible and effective responses to lessen the effect of Covid-19 on its member countries, including those in the private sector.

It is in times of great change and crisis that the principle of open and frequent communication with staff, investors, partners and stakeholders becomes key to how businesses operate. What this crisis, and many others, have taught us is the value of structuring yourself, and your investments, in a manner that allows you to survive lows and highs.

This resilience and ability to adapt will need to become hard-wired into our lives if we are to succeed in an environment that never ceases to offer new challenges.

Tshepo Mahloele is CEO of pan-African fund manager Harith General Partners and chairs Arena Holdings, which owns Business Day.

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