Investing in the Middle East and Africa has never been for the timid. If you are looking for outstanding opportunities to create value for your limited partners and shareholders, I can think of no better geography for a bold investor to consider than Africa.
Dr Ahmed Heikal, Founder and Chairman of Citadel Capital, one of Africa’s most successful private equity firms, talks about the recent successful closing for the Egyptian Refining Company, and emphasises Africa’s abundance of opportunities and untapped growth.
You have to be able to structure things properly though. You have to be able to readjust and you have to be able to navigate a very treacherous environment as far as governments are concerned. You have to be able to argue forcibly at certain points in time and be able to readjust in other periods of time. You have to be flexible; you cannot be rigid in this part of the world.
However, at the risk of sounding glib, Africa is no more risky than any other frontier market - provided you know the geography and the players. This is where being an African GP is key: our partners (from the IFC to DEG, from PROPARCO to Gulf-based investors) trust us to structure large, complex transactions in Africa because we know how to get things done. This is how we reached financial close on the Egyptian Refining Company (ERC), which is building a $3.7 billion greenfield petroleum refinery - a transaction that was met with very strong appetites from development finance institutions, export credit agencies, strategic investors and niche investors alike.
The ERC Project
The ERC project is a public-private partnership with the private sector investing alongside the government to address a critical national requirement for infrastructure. Developed by our team at Citadel Capital, it is an import substitution project to address Egypt’s growing demand for products such as diesel that are currently imported in rising quantities.
The state-of-the-art facility will produce over 4.1 million tons of refined products and high-quality oil derivatives per year, including more than 2.3 million tons of Euro V diesel — the cleanest-burning diesel fuel in the world. In fact, ERC will enable Egypt to reduce its current level of diesel imports by approximately 50 per cent.
But ERC is more than one of Africa’s largest-ever project finance deals, it is also a transformative development for the Egyptian economy. The financial close of ERC confirms to international investors and the global community that Egypt is open for business, and forms a key component of the country’s energy security going forward.
In terms of benefits, this landmark investment, simultaneously one of the largest ever project financing transactions led by Citadel Capital, top Egyptian, Gulf and international investors, global export credit agencies and development finance institutions, will reduce present-day diesel import needs by 50%, improve air quality in the Greater Cairo Area, help reduce Egypt’s annual subsidy bill, and spur job creation.
In addition, ERC will result in more than $300 million in direct annual benefits through avoided transportation and insurance costs, the elimination of product shipment losses, and revenues generated from storage and processing fees.
Environmentally, ERC will use proven, latest-generation technologies to meet the environmental standards of the International Finance Corporation (World Bank) and the European Union, as well as Egyptian environmental laws, to ensure that operations do not result in any form of environmental degradation.
The project’s refining process will, in fact, result in substantial environmental benefits to Egypt by annually preventing the release of 186,000 tons of SO2 (sulfur dioxide) that are currently emitted into the atmosphere. This represents a 29.1 per cent reduction in Egypt’s present-day SO2 emissions (from the burning of sulfur-containing diesel and fuel-oil) and will result in the much-needed improvement in air quality in the Greater Cairo Area.
Furthermore, the ERC project will have positive social impacts - contractors will require 10,000 employees at the peak of construction work. During the operations phase, ERC’s operations and maintenance contractor will create permanent jobs for more than 700 staff. And although activity on the project has not started, more than 500 welders, pipefitters, mechanics and electricians have already received vocational training to prepare people in the nearby communities to obtain jobs.
ERC’s financial close was initially expected in what became the early days of the Egyptian Revolution last year. After a delay in close, the partners worked through the headwinds economic-political environment of the past 18 months to keep ERC on track.
Despite the regional instability, we led the raising of hundreds of millions of dollars in new capital throughout 2011 from leading international institutions; including $150m from US Overseas Private Investment Corporation.
Our successful financing package for ERC included the participation of leading development finance institutions and has proven that sophisticated institutions are willing to consider African opportunities if the financing, political and execution risk can be adjusted on an opportunity-by-opportunity basis.
I believe that this vote of confidence by the investors has been brought about by two key factors: Africa’s appetite for large investments for transformational projects coupled by the better macro-economic fundamentals on the basis on the re-amalgamation of trade blocs, and Africa also provides ready natural resource and skilled human capital.