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Deal making slows across sub-Saharan Africa, but post-pandemic opportunities look interesting

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Deal making activity in sub-Saharan Africa (SSA) dropped in the second half of 2020 (H2 2020), when compared to the second half of 2019 (H2 2019) and year-on-year, deals were also down in both volume and value compared to 2019. As the continent gears up for post-pandemic recovery in 2021, the opportunities presented by free trade across the continent, foreign investment opportunities due to new partnerships and trade relationships, as well as the post-pandemic focus on technology, healthcare and renewable energy, will be key factors in attracting valuable mergers and acquisition (M&A) activity to the region.

Further, South Africa’s deal volume and value both dropped in 2020, with the industrials and healthcare sector attracting the biggest investments. Ghana stood out as a country that attracted more and higher value M&A deals in 2020 than it did in 2019, with China being the primary inbound investor in the country. And Kenya recorded a good increase in deal value for 2020, although volume decreased, with the financial sector being the primary target for inbound investors.

Sub-Saharan Africa

According to Baker McKenzie’s analysis of Refinitiv data, M&A transactions dropped in SSA in H2 2020, down 4% compared to H2 2019, with 329 deals in the period. Deal value fell by 17% to USD8.9 billion in the second half of 2020, compared to the same period in 2019. For the full year 2020, transactions dropped by 8%, with 625 deals in 2020, and deal value dropped by 33%, with deals valued at USD17.4 billion in total for 2020. 

Cross-border activity in SSA remained much the same in the second half of 2020, with 210 deals in H2 2020 compared to 209 in H2 2019. This was due to an uptick in outbound interregional deals, which were up 28% year-on-year. The total value of cross-border M&A deals in the second half of 2020, however, dropped by 21% to USD6.5 billion when compared to H2 2019. For the full year 2020 (FY 2020), the number of cross-border deals dropped by 8% and deal value by 27% compared to 2019. United States-based Mylan NV’s acquisition of the Aspen Pharmacare-Thrombosis business in South Africa for USD759 million was the biggest cross-border deal in the period.

Companies in the materials sector remained the top target for investors in sub-Saharan Africa, with 29 deals in H2 2020, though the biggest value deals came from the energy and power sector, with deals amounting to USD1.7 billion in H2 2020.

The United Kingdom was the most active investor in the SSA region for the second straight year, with 29 deals announced in the second half of 2020. There were also 29 deals from the UK for the full year 2020.

For outbound transactions from SSA, the primary target companies for African investors were in the industrial sector, which announced seven deals for H2 2020 and 17 in total for the full year. The high technology sector announced 12 deals in H2 2020, and 17 deals altogether in FY 2020. Further, India was the primary target for African outbound investors in the region, with 11 deals in H2 2020 and 20 for the full year 2020.

Analysis

Wildu du Plessis, Head of Africa for Baker McKenzie, noted, “While deal making has slowed across Africa, all is not lost and there are still plenty of  opportunities to benefit from good deals on the continent. For the next while, we believe that deal activity across Africa in general will mostly be in the form of take-private transactions, distressed M&A opportunities, restructurings, disposals; and corporates looking for investment opportunities in offshore markets.

“Usually viable businesses are experiencing continued challenges due to the pandemic, leading them to turn to M&A as a way to raise funds. However, the lack of available capital and acquisition finance, as well as the difficulty in pricing deals in an uncertain market, are proving to be big issues for investors and this is slowing down the pace of deal making. For those who have capital, there are plenty of bargains to be had in Africa in the next few years, particularly in those sectors that have been badly affected by the pandemic, as well as in those industries where demand has dramatically increased,” he notes.

“Sectors in SSA that have clearly flourished during the pandemic include healthcare, technology media and telecommunications (TMT) and renewable energy,  with the materials and the financial sectors also attracting interest. Industries such as aviation, retail, oil and gas, and tourism/hospitality will take longer to recover and are more likely to result in distressed M&A activity,” du Plessis says.

Du Plessis says that the good news is that the start of trading for numerous member states of the African Continental Free Trade Area (AfCFTA) is expected to provide a huge boost in investment in post-pandemic Africa.  The AfCFTA has done a great deal to bolster investor interest in the region and dealmakers are taking notice of the agreement’s first movers. After Brexit, big African investors in the United Kingdom and countries in the European Union will continue to target African sectors, hoping to capitalise on new economic partnership agreements, and the launch of free trade in Africa. Investors from the United States will also continue to be strong M&A players in key African countries, with a Biden administration expected to further encourage investment and trade between the US and African countries.

“We can also expect to see heightened scrutiny of environmental, social and governance issues, with companies that have sound ESG strategies leading the pack in terms of investment and growth on the continent.”

Country data

 

South Africa

M&A activity in South Africa decreased as a result of the COVID-19 pandemic. The number of transactions dropped by 6% to 186 deals in H2 2020, and the value of the deals shrunk by 36%, down to USD4.9 billion from H2 2019. The full year 2020 activity was down 6% to 337 deals, while deal value fell by 46% year-on-year to USD8.5 billion. Monthly figures rebounded in H2 2020 and were more comparable to those in 2019.

Cross-border transactions dropped 2% year-on-year to 164, with deal value dropping by 47% to USD4.3 billion. The industrial sector was the primary target for inbound deals with 14 transactions in 2020, up 133% year-on-year.  However, these deals were small in value, yielding a total for 2020 of USD37 million. The largest inbound deal completed in 2020 was in the healthcare sector, with Aspen Pharmacare-Thrombosis acquired by Mylan NV (US) for USD759 million.

The United Kingdom remained one of the primary investors for South African companies, with 25 deals, up 25% year-on-year. However, the biggest deals were brought in by US investors, with total deal value amounting to USD871 million. This was largely driven by the Aspen Pharmacare-Thrombosis acquisition.

Analysis

Morne van der Merwe, Managing Partner and Head of the Corporate M&A Practice at Baker McKenzie, says, “The pandemic has clearly affected both the volume and value of deals announced in the country in 2020. However, South Africa remains attractive to foreign investors who have long considered the country a key gateway into Africa, even more so now that AfCFTA trading has begun, and the country has been singled out as one of the early beneficiaries of intra-African free trade.

“South Africa’s infrastructure, automotive, healthcare and renewable energy sectors have seen large investments in recent years, and this looks set to continue, despite short-term pandemic lows. Government policy has focused on boosting investor interest in these sectors and the country’s special economic zones (SEZs) have been successful in facilitating foreign investment inflows. SEZs are areas in the country that are set aside for specific economic activities. For example the Tshwane Automotive SEZ was launched to attract automotive component manufacturing companies and related services, boost investment in the sector and support black economic empowerment initiatives.

“However, the uncertainty in the country with regards to onerous policy and legislation, junk status announcements by rating agencies, currency volatility, social unrest, electricity and water challenges, skills shortages, the performance of state-owned enterprises, the security of property rights, and serious governance issues in both the public and private sector, continues to make investors nervous.

“To address these challenges, the South African government announced its Economic Reconstruction and Recovery plan in 2020, which outlined deliverables such as energy security, job creation and a trillion rand infrastructure plan. The National Economic Development and Labour Council (Nedlac) also outlined its Plan of Action last year and provided more detail on the infrastructure and energy plan, the creation of a more enabling regulatory framework and a commitment to fighting corruption.

“Despite recent challenges, foreign investors in the UK, Europe and the US have long been valuable M&A investors in South Africa, and this is likely to be further boosted by South Africa being able to maximise the benefits of AfCFTA, due to strong connections across the continent and well-established manufacturing base,” adds van der Merwe.

 

Ethiopia

Ethiopia recorded eight M&A deals in 2020, totaling USD1 million. Of the eight deals in 2020, two of them happened during the second half of the year. The majority of the deals were inbound and cross-border in nature, with seven deals in total in 2020, six of which were announced during the first half of 2020. The country did not announce any outbound transactions in 2020.

The retail sector has the highest number of inbound transactions in Ethiopia, two in all. Eritrea made most investments into the country, with two transactions in 2020.Tigray Ethiopia’s acquisition by Yanchang Petroleum of Hong Kong for USD1 million was the sole transaction with a disclosed deal value.

“Deal making in Ethiopia slowed due to the pandemic in 2020, exacerbated by foreign exchange shortages, electricity supply issues and security concerns, among other things. The country’s industrial parks have attracted the interest of foreign investors and look set to assist the country in its post-pandemic recovery. The parks are providing a boost to Ethiopia’s manufacturing sector and will assist in the creation of jobs,” says du Plessis.

 

Ghana

Ghana exhibited a solid M&A performance, despite the slow pace of dealmaking in H1 2020. It recorded 10 deals in H2 2020, representing 100% growth from H1 2020, and 14 deals in total for the full year, reflecting a growth of 17% year-on-year. Total deal value soared by 11607% to USD818 million and 3369% to USD832 million in the second half of 2020 and the full year, respectively.

Cross-border transactions contributed a huge portion of M&A activity in Ghana, recording a total deal value of USD793 million for both H2 2020 (seven deals) and the full year 2020 (nine deals).

The materials sector was the top target for inbound and outbound deals in H2 2020 and FY 2020. China was the primary investor in the country, with two inbound deals worth USD214 million for both H2 and FY 2020. For outbound transactions, Australia was the key target with two deals totaling USD 440 million, and one transaction worth USD439 million in H2 and FY 2020, respectively.

China’s acquisition of the Bibiani Gold Mining Project via Chifeng Jilong Gold Mining Co for USD 109 million was the largest inbound deal in H2 and FY 2020. Conversely, Engineers & Planners Co Ltd’s acquisition of Cardinal Resources Ltd in Australia for USD 439 million was the top outbound transaction for H2 and FY 2020.

Ghana, despite some ups and downs, appears to be getting it right in terms of striking the right balance between encouraging investment and protecting the rights of the country and its people. It has also been singled out as one of the countries that is ready to benefit early on from AfCFTA. This is due to existing favourable conditions in the country, such as having an open economy, good infrastructure, a supportive business environment and the ability to quickly ramp up its intracontinental exports. All this bodes well for Ghana’s future economic position in Africa,” says du Plessis.

 

Kenya

Deal making in Kenya dropped 28% with only 18 deals in H2 2020, but deal value increased by 224% to USD467 million. This was mainly due to Network International Holding Plc’s USD 288 million acquisition of Direct Pay Online Ltd. Activity for the full year 2020  was down 28% in volume terms, but value increased by 52% year-on-year to USD722 million. Monthly figures seem to have peaked in July with eight transactions and tailed off over the rest of the year.

France was the top M&A partner for Kenya, with five inbound deals from this country, up 25% year-on-year. Deals from France into Kenya were worth USD36 million for FY20, up 24% year-on-year. The UK had the highest deal value for inbound transactions due to the Direct Pay Online acquisition. Volume-wise, the financial sector was the primary focus, with seven inbound deals and three outbound transactions. For inbound value, deals in the financial sector increased to USD435 million, up an incredible 1697% year-on-year.

The Deal Drivers Africa Report, published by Mergermarket, ranked Kenya among Africa’s most sought-after countries for M&A transactions. Before the pandemic, M&A activity in the East Africa region had increased significantly, with Kenyan deals dominating the market. The East African regional economy (in which Kenya has the largest economy) continues to be a key driver for sub-Saharan Africa’s growth going forward.

“Kenya has long been considered East Africa’s investment hub, attracting some high-value M&A deals in the last few years. However, the country’s post-pandemic economy will take some time to reach previous levels. The country’s TMT sector, which has a well-developed market for mobile money services, and its bustling financial sector, are the ones to watch as the country gears up for its post-pandemic recovery,” says du Plessis.

 

Mozambique

In Mozambiquedeal making grew by a few deals, although the number overall was limited. There were six reported deals in H2 2020 compared with only one in H1 2019. The full year total for 2020 was 12 compared to four deals in 2019.Transactions in Mozambique were mostly inbound cross-border deals. There were six such deals in H2 2020, and 11 for the full year.

The real estate sector was the primary target for investors into Mozambique in H2 2020, with two deals announced, though for the full year, the materials sector was the most targeted, with four deals in total. The energy sector in Mozambique was the most prolific sector in terms of deal value, with USD145 million in deals announced in H2 2020. This is mainly due to the acquisition of Cetral Termica de Ressano Garcia by the UK’s Actis LLP, for the same amount.

Mauritius and Canada were the top two investors in Mozambique, with three deals each in 2020, although Canada did not make any acquisitions during the second half of the year. Two out of the three deals from Mauritius were announced in H2 2020. Mozambique announced no outbound transactions in 2020.

“Mozambique is one of the world’s largest holders of liquified natural gas, and its energy sector has been attracting global interest for some time. We expect interest in this sector to increase in future years, and possibly act as a catalyst to boost much-needed investment in other sectors in the country going forward,” notes du Plessis.

 

Nigeria

M&A activity in Nigeria in H2 2020 dropped by 25% to 24 deals compared to H2 2019.Tthe size of the deals shrunk by 68% down to just USD279 million. However, full year 2020 activity was up by 4% to 52 deals compared with 2019, but deal value was 42% lower year on year at USD 716 million.

Cross-border transactions dropped 8% year on year in 2020 to 33 deals, with deal value dropping by 36% to USD552 million. Domestic deals increased in 2020 by 36%, however, the value of the deals dropped by 57. This indicates a focus on smaller deals in the country in 2020.

The financial sector remained the primary target for both for inbound and outbound deals, with five and three deals respectively in 2020. Lagos, the capital of Nigeria, was cited in May 2020 as one of four cities in Africa to be emerging as FinTech hubs by The FinTech Times. The megacity of over 20 million inhabitants is home to the nation’s largest financial institutions such as First Bank of Nigeria (FBN), Access Bank, Ecobank and First City Monument Bank (FCMB) as well as international banks such as Citibank.

South Africa served as the primary investor for Nigerian companies with six deals in 2020. Multichoice Group Ltd.’s USD 83 million acquisition of Betking was the biggest deal in the country.

Du Plessis says, “The Nigerian economy was already impacted quite severely by the disruption in oil markets in recent years, and COVID-19 added extensive damage to the economy. The fintech and renewable energy sectors, however, look set to provide much needed investment impetus for economic recovery and the country has also stated it plans to boost its manufacturing capacity, which will enable it to take further advantage of free trade under AfCFTA.”

By: Baker McKenzie

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Economy

Tosin Eniolorunda: Fighting fraud related issues in financial ecosystem requires collaboration

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Nigeria’s financial system has come under renewed scrutiny against the backdrop of the increase in the value of electronic payment transactions in Q1 2023 and the challenges posed by bad faith actors who exploit gaps in the payment systems even as Nigerian financial institutions have reported ₦159 billion ($201.5 million) lost to fraud since 2020. There is a need for all players in the financial services sector to come together in tackling these challenges.

Group CEO, Moniepoint Inc., Tosin Eniolorunda during a courtesy visit to the Chief Executive Officer, Fidelity Bank, Nneka Onyeali-Ikpe in Lagos. Onyeali-Ikpe, who welcomed the Moniepoint boss, used the opportunity to reaffirm her bank’s appreciation for the patience and understanding demonstrated during its banking channel integration optimization which resulted in service disruptions and the inability of Moniepoint customers to receive financial inflow.

It will be recalled that Fidelity Bank had recently announced to its customers and the general public, the resumption of interbank transfers to all licensed financial institutions in the country. This was following speculative reports from various media publications that the bank had imposed transaction restrictions on some neo banks operating in the country.  

During conversations around the growth of the digital payments segment and contributions of the financial services to Nigeria’s socio-economic development, Tosin Eniolorunda used the occasion to stress the point that Moniepoint as a responsible and compliant organization takes customer KYC very seriously. “KYC is not merely an acronym but indeed a cornerstone in establishing trust, ensuring security, and complying with regulatory standards. All accounts created on our platform have BVN verification and in addition to this we perform a liveliness check at the point of onboarding. This is a comparison of the account holder’s life picture and the BVN image as a way to reduce impersonation,” Eniolorunda maintained.

He continued, “we have zero tolerance for fraud and typically go all out to ensure that we track fraudsters and fraudulent transactions on our platforms. We have deployed and utilize robust fraud detection systems and technologies that can analyze patterns, identify anomalies, and detect suspicious activities in the system. As such we are better empowered to identify potential fraud incidents and trigger alerts for further investigations and remedial actions.”

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As partners in deepening the CBN’s mandate of ensuring provision of adequate and convenient financial services to consumers and guaranteeing their protection as well as the various undercurrents in the financial services industry, Moniepoint and Fidelity agreed to work closely together to develop a tightly knit mechanism to stem the menace of fraudulent transactions and collaboratively push through in addressing payment challenges in the country.

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Angola becomes ATI’s 21st Member State, pays USD25m in capital subscription fees

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The Republic of Angola has become the 21st African Member State and the 1st Lusophone Member State of pan-African insurer, Africa Trade Insurance Agency – ATI, after paying a capital subscription of USD25 million. The membership was funded the Angolan National Treasury resources and proceeds from the landmark BITA water project – a strategic public investment for the construction of infrastructure for the treatment, supply and storage of drinking water that will benefit 2.5 million people in Angola.

Welcoming Angola’s membership, ATI’s Chief Executive Officer, Manuel Moses, noted the country’s demonstration of its commitment to diversify its economy through ATI’s trade and investment risk mitigation solutions.

“We are happy to support Angola in its quest to economic diversification and becoming an agricultural powerhouse on the African continent. Angola’s membership is timely as ATI’s risk mitigation and credit enhancement services will act as a catalyst for strengthening and diversifying Angola’s economy, supporting both increased investment, exports and trade under Africa’s continental framework of the AfCFTA,” Mr. Manuel said.

Under this one of a kind blended finance and guarantee innovative structure, the Republic of Angola – along with the lenders covered by ATI under the transaction – agreed for the use of proceeds under the syndicated loan to also include the financing for the purpose of Angola becoming a member of ATI. ATI provided guarantee and insurance support for this World Bank’s partially guaranteed facility to the Government of Angola for the expansion and improvement of water supply service in the urban and peri-urban belts of Luanda.

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Current exposure

ATI’s gross exposure in Angola, the largest country in Southern Africa Region, currently stands at USD467M mainly in construction, energy & gas, trade & transport, water supply and wholesale & retail sectors, with transactions valued at USD1.4B.

“This development was made possible because of ATI’s pan African mandate that allows the organization to cover transactions in Angola and beyond, despite ATI non-membership.  Now that Angola is a fully-fledged shareholder of ATI, the country can fully access more of ATI’s guarantee solutions to attract more Foreign Direct Investments and boost its internal and external trade across the region,” Mr. Manual explained.

Angola’s economy is mainly driven by its oil sector but the country seeks to pursue new growth models for economic diversification through the agricultural sector and private sector development.

With ATI’s support, Angola is on the path to fiscal consolidation, manage their debt ceiling, increase in public and private investment, in order to resume the ascending curve of sustainable and inclusive economic growth as well as human development.

ATI has grown from a small African start-up in 2001 into a pan-African institution with presence across Africa and with a significant global reach. Besides Angola, other member countries include Benin, Burundi, Cameroon, Côte d’Ivoire, Democratic Republic of Congo, Ethiopia, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Rwanda, Senegal, South Sudan, Tanzania, Togo, Uganda, Zambia, and Zimbabwe.

Institutional members include African Development Bank, African Reinsurance Corporation, Atradius Group, Chubb, CESCE (Spanish ECA), Ministry of Finance India (represented by ECGC), SACE SIMEST, The Common Market of Eastern and Southern Africa (COMESA), Trade and Development Bank (TDB), Kenya-Re, The PTA Reinsurance Company (Zep-Re), and the UK Export Finance.

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The Impact on G7’s multi-billion dollar plan on Africa’s infrastructure gap

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G7 Members (Photo: European Union)

In late June 2022, it was announced at the G7 Summit in Germany that a USD 600 billion lending initiative, the Partnership for Global Infrastructure Initiative (PGII), would be launched to fund infrastructure projects in the developing world, with a particular focus on Africa. The G7 countries – Canada, France, Germany, Italy, Japan, the United Kingdom (UK) and the United States (US) – explained the PGII would help address the infrastructure gap in developing countries.

The US

The US has recently renewed its focus on impact-building and financing strategic, long-term infrastructure projects in Africa, with the Export-Import Bank of the United States (EXIM) supporting infrastructure development on the continent. According to a 2020 report by McKinsey and Company – Solving Africa’s infrastructure paradox – the US accounts for 38% of global investors who have an appetite for African investment, by far the most of any country. In 2021, the US launched a refreshed “Prosper Africa initiative”, focusing on improving reciprocal trade and investments that create jobs and build infrastructure between the two regions. In 2022, the US announced it would mobilise USD 200 billion over the next five years as part of the PGII, in the form of grants, financing and private sector investments. Some deals have already been announced, including, for example, a USD 2 billion solar energy project in Angola, and the building of multiple hospitals in Côte d’Ivoire.

The EU

In February 2022, the European Commission announced investment funding for Africa worth EUR 150 billion. The funding package is part of the EU Global Gateway Investment Scheme and is said to be in the form of EU combined member funds, member state investments and capital from investment banks.

In early 2020, the European Commission published its Comprehensive Strategy with Africa, outlining the region’s plans for its new, stronger relationship with the continent. The strategy document laid out five top priorities for the EU in Africa: the green transition and improving access to energy; digital transformation; sustainable growth and jobs; peace and governance; and migration and mobility.

The UK

The UK is also making a strong play for influence, investment and trade with Africa, post-Brexit. Further to key summits in 2020 and 2021, finance is being redirected into Africa from the UK. In 2022, UK development finance institution (DFI), British International Investment (formerly CDC Group), announced it had exceeded its pledge to invest GBP 2 billion in Africa over the last two years. The UK’s Global Infrastructure Programme helps partner countries (including in the African continent) to build capacity to develop major infrastructure projects, setting up infrastructure projects for success and paving the way for UK companies to support these projects.

Further, in November 2021, it was announced that the governments of South Africa, France, Germany, the United Kingdom and the United States of America, along with the European Union, were in negotiations to form a long-term Just Energy Transition Partnership. The partnership focuses on boosting the decarbonisation of the South African economy, with a commitment of USD 8.5 billion for first round financing. It is expected that 1-1.5 gigatonnes of emissions will be prevented over the next 20 years, assisting South Africa to accelerate its just transition. Discussions are also currently taking place to establish a similar partnership in Senegal.

African solutions

The African Development Bank noted in early 2022 that Africa’s infrastructure investment gap is estimated at more than USD 100 billion per year.  

DFIs are increasingly anchoring the infrastructure ecosystem in Africa – serving a critical function for project finance as investment facilitator and a check on capital. DFIs can shoulder political risk and access government protections in a way that others cannot, enter markets others cannot and are uniquely capable of facilitating long-term lending. The large amount of capital needed to fill the infrastructure gap, however, means that DFIs cannot bridge it alone. Private equity, local and regional banks, debt finance and specialist infrastructure funds are primed to enter the market, and multi-finance and blended solutions are expected to grow in popularity as a way to de-risk deals.

The African Union’s 55 member states have stated that their primary funding needs include support in terms of safety and security on the continent, as well help in implementing the African Continental Free Trade Agreement (AfCFTA) and the massive infrastructure investment it needs to be successful. The development of supporting infrastructure is key to boosting AfCFTA’s free trade potential, especially in terms of transportation, energy provision, internet access and data services, education and healthcare infrastructure projects.

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Infrastructure projects in Africa now also have a heightened focus on improving Africa’s capacity for green, low-carbon and sustainable development, via, for example, clean energy, community healthcare and support, green transport, sustainable water, wildlife protection and low-carbon development projects. Funding such projects comes with responsibility –  projects must not only be bankable and yield attractive returns, but must also be sustainable and provide tangible benefits to local economies and communities. All of Africa’s major partners have noted they will prioritise projects that commit to Environmental, Social and Governance principles, and access to capital for large infrastructure projects is likely to contain sustainability requirements.

That the focus of the PGII is on the sustainability and the social impact of these projects in Africa is further evidenced in the White House briefing room statement issued at the launch in June 2022, where it was stated that the PGII will “mobilize hundreds of billions of dollars and deliver quality, sustainable infrastructure that makes a difference in people’s lives around the world…”

By: Michael Foundethakis, Baker McKenzie’s Global Head of Projects and Trade & Export Finance, and Africa Steering Committee Chair

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