Q&A: German-African Business Association on incentivizing investment

One of the German government’s top development priorities for its G-20 presidency was increasing private investment in Africa. Chancellor Angela Merkel’s government championed a Compact with Africa to help African governments improve their investment climates. The full G-20 adopted this plan during the leaders summit last weekend in Hamburg.

Dr. Stefan Liebing, the chairman of the German-African Business Association, said there are still more steps the German government can take to facilitate investment in Africa — especially for companies working in the area of sustainable energy infrastructure.

The Association, which was founded in 1934, tries to bridge connections between its more than 600 members and opportunities in Africa. Liebing also works with the German government to try to create safety nets for those companies looking to do business on the continent.

In one recent policy victory, the German government in June agreed to reduce the deductible for Hermes guarantees — a cover that protects German businesses in case a foreign purchaser defaults — from 10 to 5 percent in African countries looking to undertake financial reforms.

Liebing spoke to Devex about what else the German government can do to help businesses — especially small- and medium-sized enterprises — move into African markets. The interview has been edited for length and clarity.

What do you see as the German government’s role in helping create business opportunities in Africa?

I’m not asking for subsidies for Germans going to Africa. However, I think there are a few specifics one needs to take into account. In Germany, we have this structure of SMEs, family-owned businesses, world market leaders in a niche technology. But they are very conservative, very hesitant, and they will make intuitive decisions about new markets. A lot of them will be driven by what’s on the TV news, so you might decide not to go to Africa. They don’t have analysts who develop a story for them about why they should go.

That is why I think it’s important to offer mechanisms to share the risk of initially going. To me that is key. I’m not asking for any subsidies, but if something goes wrong, the German government needs to support and take a share of that risk. And that is about to change now with that cabinet decision [on Hermes guarantees].

What areas of investment are most promising for German businesses?

The next sector that is going to take off in Africa is infrastructure, and here I think German businesses can make a difference. Each and every president from Africa who comes to see us has on their agenda, “I want the German education system and I want renewable energy like Germany.” It seems we have a special reputation for that. In my organization, I have 60 companies in renewable energy that want to do something in Africa. And still, I don’t have one single wind or solar park that’s been built and operated and invested in by a German player.

Why is that?

If you want to do a solar park, financial investors — conservative German banks — expect you to have a guarantee for a certain tariff to be paid for the next 20 or 30 years. If I walk into Deutsche Bank and show them my security is a letter signed by the electricity company of Guinea, they wouldn’t even admit me to the lobby. What we need is government guarantees, sovereign guarantees, to [further] guarantee these letters. The government of Guinea itself might not be strong enough. Either they can’t issue more guarantees because of their debt ratio and International Monetary Fund regulations or their guarantees are not strong enough.

What I suggest is developed countries issue these guarantees on behalf of African countries. It might not cost a single dollar or euro, because they might not be used. It’s just a guarantee for Deutsche Bank so project investors can go and set up a solar park. I think it’s justifiable for a government to step in with a guarantee when we talk about something that is useful for the development of these countries.

What are some of the other challenges the companies you work with face?

Imagine we have a shop here that used to do wind parks in eastern Germany. And now I am telling them to do wind parks in Ethiopia. To bring this from an idea to financial close, in a company that has maybe never done such an investment, might take you three, four or five years. You need to buy the land. You need to agree on grid connection and to deal with the local utility. You need to negotiate an off-take contract for the electricity. You need to do all the financial arrangements and guarantees and whatever it is. In the end, what you do for five years is to develop a pile of contracts, and once they are all in place, you find so much private money. But this early stage phase might cost you 4-5 million euros ($4.56-$5.7 million) over four or five years.

Is there a way to offset these costs in the event the project doesn’t move forward?

Why don’t we go for an insurance model for these German mid-sized companies? In case the project works, and their five years’ effort leads to a project, you invest 200 million euros ($228 million), you have a good return. Then it’s very easy to pay an insurance fee. If the whole thing crashes, which is maybe a 50 percent chance in Africa, you get reimbursed maybe half of your cost. Then these small German companies can do double as many projects as before on the same budget.

These are some of the things we have tried to discuss with the German government. The fact that Angela Merkel has decided she finds this topic important helps a lot.

Considering the attention investment in Africa has received from the German government this year, what is the likelihood that some of these measures could be adopted and implemented?

I’m positive about the fact that people are changing their thinking and their approach. I’m not so positive about where we stand on implementation. We’re going to have a lot of meetings with the German government over the next few weeks. One [initiative] has been implemented, the Hermes conditions. We will try to identify two or three more of these instruments where we can at least start implementation over the summer.

If promises or announcements are kept and implemented, we are really living in exciting times. This could be the best thing since the last 20 years.

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