5 March 2012

Africa: Going Long On Diaspora Bonds

Photo: Graeme Williams/MediaClubSouthAfrica
The diaspora fund aims to improve Africa's infrastructure needs.

Keen to harness the full potential of migrant communities, African governments are looking for ways to tap their savings as a source of finance. Diaspora bonds are an increasingly popular choice.

In 2010, African migrants sent $40bn back to their home countries. For a continent supposedly dependent on official aid, that is more than ODA receipts - and the figure only accounts for formal flows. Undocumented migration and informal channels mean many remittances are hard to trace, and country figures dwarf official estimates. Nigeria's central bank reports $20bn of inflows every year - double the World Bank's estimates.

Representing more than 2 percent of Africa's combined GDP, remittances generate foreign exchange and offer a crucial lifeline for millions. But with cash generally used for consumption, rather than fixed capital expenditure, it adds relatively little on a sustained developmental basis. With Africa facing huge external financing needs, it is the additional $53bn that diaspora members are estimated to save in their destination countries every year that countries are increasingly looking to attract.

"Governments in Africa think they can do better than remittances by tapping into this potential revenue source, but through investment," argues Zemedeneh Negatu, Ernst & Young's managing partner in Ethiopia. "Remittances are a good source of hard currency, but not as long-term as equity or bond financing."

For a number of countries looking to harness migrant savings alongside remittance flows, diaspora bonds have provided a compelling opportunity. Structured like normal bonds, and targeted specifically at migrant communities, these have raised billions for the handful of countries - among them India and Israel - which have utilised them for decades. They work well as a source of alternative financing, advocates say, because risk perception tends to be lower among diaspora communities.

With international perspectives improving, migrant communities are more interested now that ever before, argues Mthuli Ncube, the African Development Bank's chief economist. The opportunity for African countries to raise debt from the diaspora is huge. "If only a fraction of the African diaspora's annual savings could be tapped through diaspora bonds, we could realistically estimate somewhere between $5bn and $10bn as the potential size of funds that could be raised," argues Dilip Ratha, manager of the World Bank's migration and remittances unit.

Yet among those who have already issued diaspora bonds, success has been limited. Ethiopia's first - the Millennium Corporate Bond, which was used to raise funds for the country's Electric Power Corporation - failed to ignite interest. The story was similar in Kenya, where part of an infrastructure bond issued last year was marketed at diaspora communities. Their failure has been pinned on anything from a lack of trust in the countries' governments and the ability of projects to meet repayments, to political risk and - particularly in Kenya's case - high inflation. Emotional affiliation does not negate the need to make a financial return.

Learning from its mistakes, Ethiopia's second diaspora bond - issued last year - seems to be faring better. The so-called Renaissance Diaspora Bond addresses some of the structural failings of its predecessor - smaller denominations, for instance. And raising capital for the construction of the continent's biggest hydroelectric dam, the Grand Renaissance Dam, it targets a project that resonates with Ethiopians. The government managed to raise over $425m from the domestic market over six months last year.

"The first diaspora bond was just a plain vanilla bond where you were funding a power company, and people were making financial calculations and deciding that they could get a better deal in the US or Europe," says Mr Negatu at Ernst & Young. "This time, the government has been very smart, tapping into a positive emotional sentiment about the Nile. For Ethiopians, there is an emotional level to this: we have been constantly told that Egyptians are the major beneficiaries of this river, and being asked what we can do about it. So this time, investors will do the financial calculations, but there is a sentimental element to it."

The issuance will not raise as much as the government would like, he argues, "but to be able to raise $400m plus from the domestic market in less than 6 months is an amazing result and they should be able to match if not exceed that".

Other countries are taking note. The African Development Bank has said that it will help Nigeria and Rwanda with issuances, while the World Bank is also currently assisting both Nigeria and Kenya with pilots. A successful issuance from Nigeria, the continent's second biggest economy and most populous nation, could be a bell-weather for others. "Ghana and Nigeria have both gone out to the bond market to raise [sovereign] financing, and they have been successful in raising significant sums of money. They have big migrant communities, so diaspora bonds should not be any different. Billion dollar issuances are quite achievable," says the World Bank's Mr Ratha.

Meanwhile, the Bank of Uganda announced this January that it plans to issue a diaspora bond within the next 18 months. Stephen Kaboyo, director of financial markets at the Bank, said that the proceeds could be used to develop the real estate sector, though plans are not finalised.

But serious success in raising finance from emigrants will require governments to reinvigorate relationships with diaspora communities, which have often been sidelined. "Only recently is the diaspora's potential being noticed by countries from an economic development point of view," Mr Ratha argues. "So now there are the beginnings of efforts to understand the diaspora: where they are, what they do, how they feel about us. As soon as you understand their ability and willingness to invest at home, you can accordingly design the bond and a marketing strategy."

The challenge remains accessing these communities, adds the AfDB's Mr Ncube, and "governments need to be using every possible entry point - whether that's embassies, media, social networks, universities - because getting to the diaspora is the difficult bit".

Emerging platforms such as Homestrings - an online portal that gives diaspora members access to investment opportunities in Africa - are offering just this opportunity. As of late last year, Homestrings offers a diaspora bond investment option, which allows members to invest in Kenya's infrastructure bond - and going forward, others too. Since the platform launched its diaspora bond option, the number of Kenyans registering for the site has doubled, says Eric-Vincent Guichard, Homestring's CEO, without giving numbers.

"The distribution end has always failed African governments issuing diaspora bonds, often because they didn't know how to reach out to the diaspora," he says. "We are able to tell governments where the diaspora are, what their average commitment is, and going forward we will be able to give those individuals the chance to speak with policy-makers and governments."

While most look at debt as the best option for securing diaspora investment, other innovative approaches are emerging on the continent. Ernst & Young is currently structuring a country-specific private equity fund for Ethiopia. It hopes to raise $100m in retail financing from migrants across the US, before bringing in institutional investors as co-financers.

"This is a purely private sector initiative and people like that because they see it's a business - not a charity and not public sector," argues Mr Negatu. The approach should work particularly well in the Ethiopian context, where a number of sectors - among them, real estate - remain closed to foreign investment.

"This will change in the next five or so years, so we are saying to the diaspora: 'You don't have to compete with the Chinese or Indians in some of these sectors, so get a foothold in here while you can.'" The approach seems to have resonated, with almost $30m pledged in the provisional fundraising roadshows that have already taken place. Ernst & Young hopes to have pledges amounting to the target $100m by the summer.

"If you look at the rest of Africa, nobody has done this - the private equity funds don't take these kinds of retail investors, so we wanted to take it from a different angle," says Mr Negatu.

"By framing it in terms of the mega-trends which are shaping the continent - food security, commodities, and a rising China and India - we are asking diaspora members if they want foreign investors to be the only ones to benefit from the country's growth. We are tapping into their desire to own the investments that are taking place. We are saying: continue to send the remittance, but also participate in the economic growth."

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