“By 2022 I want the UK to be the G7’s number one investor in Africa, with Britain’s private sector companies taking the lead,” British Prime Minister (PM) Theresa May announced on her recent Africa visit.
This is a laudable goal for a post-Brexit “Global Britain”. Secretary of Trade Liam Fox has also highlighted growth opportunities in poorer countries. This article shows how the PM’s goals can be achieved by leveraging the UK’s competitive advantages and unleashing the power of its financial and industrial sectors, while improving the lives of the world’s poorest people.
The opportunity is vast for African and other poor countries. Many Commonwealth nations such as Nigeria, Kenya, Tanzania, Cameroon, Ghana, Malawi, Mozambique, Bangladesh and Pakistan fit the World Bank’s categories for low income or lower-middle income countries, with less than US$3,995 gross national income per capita (compared to the UK’s US$42,360). Excluding India, Commonwealth countries in these categories have a total population of almost 900 million.
By 2020, low-income countries (LICs) on average are expected to report an average 5.8% GDP growth compared to 1.8% for the EU and US. According to the World Bank, the top three global growth countries in 2017 were LICs: Ethiopia (8.6%), Uzbekistan (7.6%) and Nepal (7.5%). The world is ramping up to meet the United Nation’s (UN) estimated £1.3 trillion a year investment that all developing countries need to grow. Much of this will be invested in infrastructure, requiring goods and expertise from advanced economies.
The UK manages much of the world’s infrastructure funds, through pension/insurance funds and asset managers. Around them are high-quality firms that provide the goods and services required for design, financing, construction and operations. These include engineers, lawyers, financial services, contractors and equipment suppliers. It’s been estimated that for every £1 invested abroad, £0.20-0.30 is generated in UK exports due to this cluster effect. Now think of £1.3 trillion a year and do the maths!
Financing infrastructure in Africa
But there’s more to this than profits for UK investors and exporters. Efficient infrastructure is a necessary foundation for sustainable prosperity and reducing pollution in LICs. Electricity shortages and poor transportation hobble the prospects for local industry, education and, therefore, personal opportunities. LICs can leapfrog fossil fuels and jump straight to renewables. The good news is that UK fund managers are increasing their investments, which is having a positive impact on the UN’s Sustainable Development Goals, including poverty and climate change. Meeting LIC’s infrastructure demands will improve the environment for us all.
The UK’s advantage also lies in its government’s international reach. The Foreign and Commonwealth Office (FCO) has diplomatic relations that run long and deep, while the Department for International Development (DFID) is one of the largest bilateral donors in LICs. The UK government is already ahead of the curve. Mark Field, Minister of State for Asia, told me: “The opportunities for the UK are clear, and part of my role at the FCO, alongside our other priorities, is to drive cross-departmental support to help British business compete in low-income, high-growth markets around the world.” All of this builds the UK’s brand reputation.
By 2020, low-income countries (LICs) on average are expected to report an average 5.8% GDP growth compared to 1.8% for the EU and US.
Some of the largest UK fund managers show a strategic interest in LICs. Many have liquidity and seek higher returns to offset years of low interest rates in advanced economies. Infrastructure investments are of particular interest as they provide long-term yields that match the life of their liabilities (life insurance, pension policies etc.). Key risks of LIC investments include credit (will they pay?), political (expropriation) and currency shifts. These can be partially insured, or hedged in the market through innovative groups such as MIGA, GuarantCo and The Currency Exchange Fund (TCX).
It seems like a perfect match, but UK private sector investments into LICs remain insignificant. Why? Because these projects can’t be shielded from government delays or other uninsurable risks to which LICs are prone. Put it this way, would you want part of your pension dependent on Tanzania’s ability to license a power project on time? UK fund managers are doing their fiduciary duty, and sitting on the sidelines.
How can UK Government help unleash private sector funds and boost trade? Here are three suggestions:
1. Establish a “blended finance” government fund for LIC outward investments
Blended finance is concessional capital designed to take risks that are beyond the mandate of institutional private sector investors, thus attracting private sector capital. Blended finance instruments include investments, not just grants, and can be designed to receive a return. The difference between blended finance and the private sector alternative is that if a project suffers losses, blended capital takes a limited “first loss”. But when things go well, it shares profits with private sector investors. In finance terms, blended capital takes a lower risk-adjusted return than the market in exchange for achieving developmental outcomes.
For the UK, that would mean increased trade and investment and more jobs. DFID already invests in a number of multilateral blended funds, including through the World Bank and Green Climate Fund. But these are notoriously difficult to access for the private sector, according to international investors and former Development Secretary Priti Patel, who makes no secret of her frustration with multilateral inefficiency.
Such a bilateral UK blended finance fund could potentially be co-financed and managed by DFID, FCO and the Department of International Trade (DIT), as it hits the following core objectives: generating sustainable international development while promoting British trade and the UK's interests overseas. It would be complementary to UK Export Finance managed by DIT. It need not be a permanent fund, as successful LIC investments will reduce perceived risk over time, making private sector investments sustainable standalone.
2. Establish aligned trust, not tied aid
The DIT and UK embassies often recommend UK firms for international bids. Imagine the credibility boost if the UK government was sharing the risk of a project. Tender committees would perceive such recommendations with a high level of confidence as the UK government has “skin in the game”, and stands to win or lose depending on the ability of recommended firms.
The City of London Corporation is also involved in promoting social and environmental outcomes arising from investments by London-based investors, not least through its Green Finance Initiative. Moreover, it’s always ready to introduce both UK fund managers and financial services firms to such projects. These projects will still issue international tenders, open to all. But a UK government stake creates aligned trust, not tied aid!
3. Firm up the UK’s presence in low-income nations
UK embassies, DFID offices and other UK government activities in LICs can offer invaluable support to infrastructure projects. This presence can help mitigate uninsurable risks. Embassies facilitate high-level meetings and help UK companies to understand local procedures, while DFID’s funding improves local regulations and supports positive infrastructure projects, whether or not UK investors are involved.
Britain should embrace this opportunity, which plays to its strengths of infrastructure expertise, a leading financial sector, a broad international reach and a reputation for helping those less well off. These competitive advantages could turn the markets of the future into the markets of today.
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