Company: Investec Asset Management

HQ: South Africa

Category: Real World Impact Initiative of the Year (shortlisted)

In the spirit of showcasing leadership and raising standards of responsible investment among all our signatories, we are pleased to publish case studies of all the winning and shortlisted entries for the PRI Awards 2019.

See the full list

Project overview, objectives, and reasons for undertaking it

Investec Asset Management has been managing the Emerging Africa Infrastructure Fund (EAIF) since winning the mandate in 2016. EAIF is a pioneer in investing in developmental infrastructure projects that would otherwise be overlooked by commercial investors. The fund looks specifically at developing clean, renewable energy facilities in Africa. These projects are crucial for transforming African economies and communities, particularly in rural areas.

The Kigali Bulk Water Supply Project (KBW) forms part of Rwanda’s national strategic economic development and poverty reduction programme. It is fundamental to the government’s aim of 100% water availability and one of the first public-private partnership water supply and treatment projects to be undertaken in sub-Saharan Africa. In common with countries across the world, Rwanda is experiencing rapid urbanisation, so the demand for water in its cities will keep rising. Meeting the global need for water is not only vital to human health and economic progress but also to social and political stability.

The EAIF arranged the debt finance for the KBW project, which is now under construction and on track to be operational in mid 2020.

Modernising Rwanda’s water infrastructure, most of which is four-to-five decades old, will take many years. While Rwanda is an increasingly successful economy that has had a decade of GDP growth of up to 9%, the scale of capital needed to finance vital infrastructure improvements can realistically only be accessed by raising private capital in tandem with public money through public-private partnerships.

While Rwanda is rapidly developing its services sector, it remains a predominantly agriculture-based economy. As agricultural output grows, the availability of clean water is essential to the country building a food processing sector and moving its produce up the value chain.

The EAIF is one of several funds that belong to the Private Infrastructure Development Group (PIDG).

Financial scale of the project and impact

Delivering up to 40 million litres of water a day, the new plant is expected to grow Kigali’s existing water capacity by one third. The project represents sub-Saharan Africa’s largest known build, operate and supply water deal. Located southeast of Kigali at Kanzenze, the plant will draw water from the Nyaborongo River. Part of the headwaters of the Nile, the Nyaborongo is the country’s longest river at 297km. The water is free of claims by any other state and river management is solely in Rwanda’s hands.

EAIF won the mandate as lead arranger of the Kigali Water project’s debt finance, lending US$19m of senior debt and US$2.6m of junior debt to Kigali Water Limited (KWL). The African Development Bank provided another US$19m of senior debt, with all loans being for an 18-year term. The lenders are covering US$40.6m of the capital cost of the US$60.8m project. The balance in equity finance was provided by KWL’s ultimate owner, Metito.

The project has huge social and economic impact potential. At the most basic of levels, clean water is at the heart of fighting and preventing disease and promoting public hygiene. Put simply, human life is better, living conditions greatly enhanced and society better able to build sustainable economies. One of the social benefits of modern water facilities is the reduction and, sometimes, complete elimination of the daily drudgery women and girls face when carrying great weights of water, often over long distances.

Project delivery and challenges overcome

Making infrastructure happen is never straightforward. By the very nature of the enterprise of building large-scale infrastructure the human, cultural, environmental, legal, commercial and financial challenges are many and complex. Like all projects, the first task was to evaluate the business case and risk assessment. Subsequently, the original concept was modified in scope and structure to optimise the economics and affordability of the project.

It was at this stage that a US$6.25m grant from PIDG’s Technical Assistance Facility came into play. This capital grant was critical in reducing the project’s capital cost, which in turn made the project bankable and allowed the water tariff to be kept as low as possible. The affordability of tariffs to businesses and households versus the need for a return on investment is a particularly testing element of project financing in emerging markets. GDP per head in Rwanda remains under US$1,000 per annum. If the majority of the population is to access water, and investment in water-dependent enterprises stimulated, the retail price of water is of fundamental importance. Once the project became bankable, EAIF was confident that all the other risk factors were within acceptable and manageable parameters. The contract structure between KWL and Rwanda’s Water and Sanitation Corporation has sound risk allocation and incentives. Cash flows are forecast to be stable, robust and predicable, producing sufficient revenues for debt servicing, plant operations and return on investment to the owners.

The two-year construction phase will see up to 160 people employed. On completion, the plant will employ around 60 permanent staff, with at least 30% being women.

Measuring success and lessons learned

EAIF considers this project to be successful for several reasons, firstly Kigali Water is contributing to the EAIF funds key goals, mobilising private capital into infrastructure projects across the African continent. EAIF plays a pivotal role in bringing to life infrastructure projects that have the potential to stimulate economic development, create direct and indirect jobs, improve technical and management skills in the countries in which it operates and help combat poverty.

The project clearly demonstrates the value of using blended finance - with investment from both public and private sources. The Kigali project is also a prime example of the importance of blended teams of government, sponsor and finance arranger. It pools experience, expertise and tenacity to create something of lasting value.

Due to the construction of the project and the financing provided by EAIF several additional developmental factors can be measured. As a result of EAIFs involvement the project company has been commissioned to collect, monitor and evaluate the water levels and rain patterns within the Nyaborongo River basin. Information gathered by the company on a daily, weekly and seasonal basis will increase the knowledge of Rwanda’s greatest natural water resource. As is the case in many emerging countries, data and technical skills remain insufficient, especially for climate-related matters. This supplementary activity will help Rwanda understand its natural resources for future generations.

More generally, EAIF is rapidly approaching 45 active projects in its portfolio, making it one of the leading suppliers of debt finance to private sector infrastructure projects in sub-Saharan Africa. Projects like Kigali Water exemplify the gains to be made from PIDG’s blended finance approach, which accelerates economic development and social progress