Growing pains - Trade & Forfaiting Review

Feature

posted 23 Feb 2005 in Volume 8 Issue 4

In the past, few banks have been willing to finance transactions in Sub-Saharan African without some form of multilateral or export-credit-agency support. But is this changing? Erika Morphy reports on the latest developments and assesses agency finance in the region.

A few years ago the US Export Import Bank’s funding authorisation specially included a clause for it to prioritise its lending and credit-support efforts in Sub-Saharan Africa. The subsequent activities – the naming of a Sub-Saharan Africa advisory committee, a concerted push to educate both bankers and corporates as to the bank’s programmes and policies in the area – quickly made an impact.

“Our business in the region grew to the point where fiscal year 2004 was our best year ever in terms of number of transactions,” says Joseph Grandmaison, a member of Ex-Im Bank’s board of directors who helps co-ordinate the bank’s business-development initiative in Sub-Saharan Africa (Ex-Im’s fiscal year 2004 ended September 30, 2004).

That is good news for companies and bankers that operate in the region. Even though there has been a growing interest in investment and trade opportunities with Sub-Saharan Africa over the past three years, it is unfathomable – with a few exceptions, say, a telecom project in Nigeria or Ghana — that such projects would get off the ground without the support of multilateral development institutions such as the World Bank and the European, American and African export credit agencies.

Symbiotic requirements?

But the relationship between African countries and these institutions – not to mention the bankers and corporates that must interact with them – is not always symbiotic. At certain junctures, in fact, the various factions often find themselves at odds with one another.

Consider, says one banker, the World Bank/IMF’s push to abolish state marketing boards for various export commodities as one of the conditions of support. “This has seriously eroded the credit access of individual producers in these countries,” the banker says.

“One of the most successful and cheapest financing mechanisms in Africa today is Ghana’s cocoa marketing board, which has been able to achieve fine rates on behalf of the Ghanaian farmer. But those rates are denied to the Nigerian farmer because its cocoa marketing board was broken up [by the IMF] in 1988.”

This banker says the World Bank model is seriously flawed because it creates dependencies and seeks to eliminate the one successful structure the farmers have.

Environmental regulations are another sore point, with many local officials, deeming them luxuries – for want of a better word – in the face of overwhelming need. “Some of the governments have a hard time understanding the environmental mandates that come with agency financing,” says one executive active in the region. “They might say, ‘Well most of my people are completely without electricity and we have decided those needs come before the environment.’ But, of course, it doesn’t work that way.”

Such pressures are sure to intensify as export credit agencies continue their push to unify their environmental regulations under the auspices of an OECD initiative launched a little over a year ago. Also, many commercial banks automatically follow suit, automatically adopting World Bank environmental standards when deciding to participate in a project.

Conversely, banks and agency executives have their fair share of complaints – namely the notorious problem of corruption and lack of transparency. One sign of progress in this area is the success of the Extractive Industries Initiative, which was launched by UK Prime Minister Tony Blair to improve the transparency of payment flows to countries by such projects. One observer believes that there will be pressure in the extractive industries to publish payment information – what is received in royalties and taxes – on an aggregate basis as a result.

“Many of these markets have problematic reputations,” says the source, “and both lenders and borrowers are very sensitive about that.”

The good news is governments are becoming more understanding of this issue. “I am cautiously optimistic that there will be less and less friction going forwards because governments are realising the importance of transparency.” The source points to an ad the Nigerian government ran recently seeking an auditor to help it comply with the Extractive Industries Initiative as one example.