It’s the ultimate investment goal – but how much is your emerging market portfolio actually improving lives in developing nations? At a discussion in Britain’s Parliament, Frontera’s Managing Editor Gavin Serkin asked three leading investors for their tips on making an impact.
Neil Brown is the Head of Investor Development at Actis, which manages over $6 billion in Africa, Asia and Latin America:
There’s no better example from my perspective than Umeme, the Ugandan electricity distribution system. We took on a company in which about a third of the electricity generated was being lost. We estimate around 20 people were dying from accidental electrocutions every year. Only 4% of the population was connected to electricity. Part of what we brought to the process was expertise about running network businesses. We refurbished the network, educated the community on the dangers of electricity, and by doing so took the network-related fatalities down to zero. We then listed the company on the Nairobi and Kampala exchanges. Now, Uganda has a functioning electricity system.
The way to look at impact is through a sector rather than a country lens. Within Africa, Nigeria is a relatively advanced economy, and so you might argue that there’s less impact from investing in Nigeria than there is in, say, Zambia or elsewhere. But, actually, if you look at a power investment in Nigeria, the sector has been considerably under-invested, so there is a real opportunity to make a difference in that sector.
There are a number of opportunities in emerging markets where you can make an impact and an acceptable rate of return. Power, particularly renewables, is one example. If you look at auctions in emerging markets for power purchase agreements, they’re as competitive, if not more competitive, for renewables than for fossil fuels. Coal-fired power stations and even gas, unless it’s stranded onshore gas, just can’t compete. So unlike Europe and the US, where you might rely on subsidies for renewables, in emerging markets you don’t need to. They’re actually stand-alone cost-competitive.
As for providing credit, it’s a complete fallacy that it’s always riskier in emerging markets. Just look at project financing default rates in the last 10 or 15 years – in the US, it’s 8.8%. Guess what it is in Africa? 1.1%. This is partly driven by the degree of leverage but also by the fact that you don’t have complicated covenant-lite financing products, you have relatively bog-standard debt packages. You’ve got to understand what your enforcement rights are in each country, but it doesn’t mean that because it’s in emerging markets it’s necessarily more risky – there are different risks and each project is specific.
Brooks Preston is Vice President for Investment Funds at the Overseas Private Investment Corp., the US government’s development finance institution:
Micro-finance and financial services have the potential to generate high risk-adjusted returns and therefore capital is flowing. Infrastructure has lower returns, and it is hard to attract sufficient capital in emerging markets. There are a billion people who don’t have access to an all-weather road. Building these roads in emerging markets is very difficult: it’s capital intensive, labor intensive; the regulation is nascent and untested. But the indirect economic impact is huge. So, infrastructure is one of the most developmental things you can do.
There are all sorts of impact sectors that you can choose to invest either in a developed market or an emerging market. However, you’re going to get multiple times more impact for your dollar invested in emerging markets. If you compare the cost of providing solar to a home in the US with the cost in Africa, there’s a magnitude of difference in impact investment terms. The payback time for a home in New Jersey or California would be 10 to 15 years and cost $30,000 at least. In Africa, companies that sell distributed solar home solutions are bringing electricity to homes that currently don’t have electricity and are instead using kerosene and other carbon intensive fuels. The payback period there can be closer to seven months or a year. Likewise in healthcare, building a hospital bed in Africa can be in the $15,000-20,000 range; in America it can cost about $1 million.
Jaap Reinking is Director of Private Equity for FMO, the Dutch development bank:
An area that is not that developed but needs developing in emerging markets is the water sector. There is not a lot of attention to it yet. This will be a real challenge in the years to come, in terms of how we can bring solutions from the market to provide sufficient access not only to healthy drinking water but also for agricultural purposes.
We have focused ourselves on agriculture as well as energy and financial institutions. By investing in these sectors we hope to achieve our goal: to double the impact and halve the footprint. FMO actually measures the creation of employment as an impact indicator as well as the avoidance of greenhouse gas emissions.