By Alper Kilic
One of the obstacles to growth in sub-Saharan Africa is lack of infrastructure, which limits the economic prospects of individuals, communities and entire countries. Access to sustainable financing is key to addressing this challenge and unlocking economic potential. Given the scale and long-term nature of these projects, together with their wider environmental and social implications, governments in Africa have found it extremely difficult to obtain the right level of financing for the right tenor, from investors with shared objectives.
The financing transaction co-ordinated by Standard Chartered Bank comprises US$1.46bn in export credit agency (ECA)-backed long-term financing, including commercial and development finance investors, to fund the new Tanzania railway. This will be the longest and fastest in East Africa, and a flagship project that overcomes the common financing challenges experienced by many governments in the region. It is also a clear demonstration of the bank’s ‘here for good’ strategy, combining economic, social and environmental sustainability. By sourcing expertise from around the globe, and bringing together international and domestic investors with complementary objectives, including ECAs, the $1.46bn deal is a blueprint for other major infrastructure investment projects, both in sub-Saharan Africa and other developing regions.
The value of the railway in Tanzania and beyond
Economic development in the interior of Tanzania, including around the capital Dodoma, is highly restricted by its lack of reliable and efficient transport links to Dar es Salaam. The existing railway between Dodoma and Dar es Salaam was constructed in the early 1920s, with limited speed and capacity, and runs alongside a 1-2 lane highway. The highway is often gridlocked with trucks, cars, cycles and pedestrians, creating hazardous conditions and long delays. The Tanzania government is keen to leverage major investments in infrastructure to become a medium-income country and boost economic growth, whilst also demonstrating high social and environmental standards.
The new Tanzania standard gauge railway project (SGR), the country’s biggest ever infrastructure project, will provide essential connectivity between capital Dodoma, Morogoro and Dar es Salaam. Lots 1 and 2 extend 550kms, while subsequent lots will extend the SGR to 1,224kms, linking Tanzania with Rwanda, Uganda and Democratic Republic of Congo, providing landlocked countries in Central and East Africa with coastal access, opening new opportunities for commerce, economic development and new infrastructure projects.
The project brings enormous benefits to the people of Tanzania and its neighbours. Freight costs are estimated to reduce by 40 per cent. Every train takes 500 lorries from the road, significantly cutting pollution, congestion and risk to people and vehicles using the highway. More than 8,000 new jobs have already been created as a direct result of the project.1 Furthermore, by connecting the interior of the country with the coast, communities along the length of the railway benefit from better access to social services, healthcare, education and commerce.
Standard Chartered engaged in early discussions with Yapi Merkezi in early 2018. Having reviewed the economic, social, environmental, credit and other risk considerations, expert teams across its Dar es Salaam, Istanbul, Dubai and London structured a proposal. A key consideration was that the project needed to be conducted in accordance with international best practices, and demonstrate the highest standards of social and environmental responsibility. With a presence in both Tanzania and Turkey, and existing relationships with Tanzania’s Ministry of Finance (MoF) and Turkey-headquartered Yapi Merkezi, the railway contractor, the bank recognised that the railway project fitted perfectly with its ‘here for good’ strengths and strategy. The project has only been made possible with competitively priced, long-term financing co-ordinated by Standard Chartered, and is grounded in the combination of the bank’s deep, established presence and relationships in Tanzania, specialist expertise in London and Dubai, and close relationships with investors, including ECAs.
Unique project characteristics
There were a variety of unique elements to the bank’s proposal that ultimately drove the MoF’s decision to select Standard Chartered as sole global co-ordinator and structuring bank:
- Long term financing. The bank’s long-term financing proposal, backed with ECA guarantees and a diverse investment community, gave the MoF the assurance it needed to embark on a major infrastructure project without the need to source additional sources of financing as the project progressed.
- Project discipline. Both the MoF and investors respected the bank’s and ECAs’ insistence on regular and rigorous project monitoring to ensure that it was constructed in line with the project plan, and met its social and environmental objectives.
- Sector expertise and relationships. The bank offered a combination of a strong local presence in Tanzania, specialist expertise in Dubai and London, and excellent contacts with both European and African investors. Standard Chartered was the only bank to bridge developing and developed markets and leverage its strengths across each.
- Senior management commitment. Standard Chartered involved senior management throughout the process, who spent significant time with MoF, Yap Merkezi, ECAs and other investors, and ensured that the right resources were mobilised across the bank to support the project upfront and on an ongoing basis.
- Unique co-ordination role. Perhaps most significant of all was the unique structuring of the financing arrangement. Rather than proposing that Standard Chartered co-ordinated part of the transaction, the bank would co-ordinate from end-to-end, across all participating lenders, including ECAs and institutional investors. Traditionally, banks and other investors provide funding, with ECAs guaranteeing 90-95 per cent of the investment amount. With multiple ECAs engaged in this project, including those from Sweden (EKN) and Denmark (EKF), it would have been difficult to achieve separate ECA-backed deals under the same contract. Instead, we identified EKN and EKF as the fronting ECAs, which co-ordinated other ECA participants. This has kept the terms of the transaction consistent, providing greater transparency and simplicity, and has made communication across stakeholders easier.
In addition to co-ordinating ECA relationships, Standard Chartered has also acted as co-ordinator of commercial and development finance investors. Again, this has been a unique arrangement, and generally these investors would not wish to be disintermediated; however, these investors already had strong, trusted relationships with Standard Chartered, so they were supportive of the arrangement. As with the ECA relationships, the bank’s role as a single point of co-ordination, with aligned terms and no subordination, gave stakeholders greater transparency, simplicity and confidence.
In reality, given the number and diversity of stakeholders, the scale and complexity of the project, and highly structured decision-making protocols within the government, it is highly likely that the deal would not have been concluded without Standard Chartered’s sole global co-ordinator role.
Here for Good in practice
The project’s social and environmental credentials were key to investors’ decision-making, particularly ECAs, who established critical conditions for the SGR project, including livelihood restoration, indigenous people, biodiversity and community engagement. The MoF has been proactive in strengthening capacity and prioritized compliance with international law for this project, including commissioning independent monitoring, to become a regional leader in environmental and social sustainability.
Linear infrastructure projects, such as rail and road, bring specific environmental and social challenges. In Brazil, for example, 95 per cent of deforestation takes place within 3.5 miles of highways2. Therefore, it is always important to establish strong environmental and social safeguards that ensure the sustainable future of such projects. With respects to SGR, the project extends 550kms across urban, rural and natural settings where communities and environments coexist. Through the establishment of these environmental and social safeguards the project has strengthened community engagement to protect people’s livelihoods, including continued access to water sources, schools, markets and workplaces. Further, it has been designed to make a positive contribution to biodiversity and conservation, such as the continuity for animals to migrate throughout the landscape.
A blueprint for sub-Saharan Africa and beyond
This has been the largest syndicated transaction in sub-Saharan Africa outside the oil and gas sector to date, but more importantly, it has changed the accepted norms on how such deals are structured, how risks are managed effectively, and how to balance economic, social and environmental objectives. This has significant implications for future infrastructure projects in Africa and beyond. With heavy oversubscription, it has emphasised that there is investor appetite for well-planned, well-executed projects that meet international standards and create demonstrable economic value to communities, whilst protecting community and conservation interests. The project has cemented Standard Chartered’s leadership position in Africa, demonstrating the value of the bank’s ‘here for good’ commitment and its long-term trusted relationships with governments, private sector, investor communities and ECAs.
- Kilic is the Managing Director, Global Head of Project and Export Finance