Funding From The East: Strategic Choice For Africa?

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By Roland Ohaeri

Lingering Challenge

Africa’s major challenge over the years has been the paucity of funding and lack of conducive operating environment for aviation development, though other challenges persist. There are efforts to create a friendlier operating environment in Africa which appear to be slowly gaining traction currently.

These steps mainly include the establishment of the Single African Air Transport Market (SAATM) and its related African Civil Aviation Policy (AFCAP) which aim to establish harmonized aviation policies and entrench liberalization of the air transport market in Africa. There are also efforts by the Economic Community of African States (ECOWAS) and the International Air Transport Association to uncover evidence of outrageous taxes, charges and fees facing aviation in West Africa. Such studies are expected to be carried out Africa-wide to demonstrate the reality of the cost-burden choking African airlines and aviation in Africa; so that governments in Africa can be better convinced on why they must cut costs (taxes, charges and fees) for airlines and aviation.

ALSO READ: Aviation Financing: What Response From African Institutions?

In fact, the high cost of doing aviation business in Africa, which threatens profitability and sustainability of airlines and other capital-intensive aviation-based businesses, tend to discourage funding sources from increasing support to operators on the continent. Thus, Africa is erroneously labeled a high-risk environment, even though many aviation businesses on the continent including airlines show the capacity to be sustainable given the right funding support.

Source: Boeing

Africa’s Alluring Benefits

The improvements in the economy and on-going and projected growth in Africa’s aviation and tourism make the continent more attractive for investors in aviation and related businesses. And more investors are being attracted into the continent; so the new benefits are expected in the near- and longer-terms.

In specificity, Africa’s aviation transformation requires sustained funding running into hundreds of billions of US Dollars over the next four decades to align with the AU Agenda 2063 objective.

Various sources of funding can actually benefit Africa’s emerging aviation industry. And a 2018 Boeing Capital report broke down these funding sources as leasing, capital markets, commercial banks, export credit agencies, private equity and hedge funds, tax equity, insurance, new sources of funding as well as airframe & engine manufacturers.

“Additionally, growth by more passive funding sources, such as large pension and sovereign wealth funds, continues to be driven by a growing understanding of aviation’s strong growth potential and the industry’s attractive returns.”

New Funding Sources – From The East

Over the years, funding institutions in Europe and the US had dominated the funding support to African operators. Today, there is growing attention to investment in Africa from sources of funding in Asia, particularly.

In fact, funding support from Chinese and Japanese sources has become more evident and rising in multiple sectors of the African economy including aviation.  Boeing specifies also that “Taiwanese and Korean investors are increasingly active in this space, and Japan, with its more than 100 regional banks, continues to participate in cross-border transactions due to the country’s extremely low interest rate environment.”

With these new funding sources showing strength, to potentially fund aviation globally, there is need to channel more of such funds into aviation in Africa, to prop up airlines, aviation professionals and importantly essential ATM and Airport facilities that are needed.

Some African airlines get support from Asia

Though a number of African airlines have recently taken delivery of aircraft, for instance, it appears that outright purchase of aircraft among African carriers has been low compared to leasing, because of the paucity of funds among African carriers. What is important in this regard, however, is for African airlines to get aircraft to provide essential services to Africa’s emerging economy, through any means that supports successful and profitable business.

Because of the disturbing funding gap in Africa, the seeming readily available funding from Asia has become almost irresistible, even though there are strong opinions for Africa to be circumspect in accepting the conditionalities attached to such funds from the East.

Given that Boeing notes that “US Ex-Im usage has fallen sharply since 2012,” new funding sources from Asia are good for the industry so long as the conditions are favourable for Africa. What is quite interesting is that there have been continued strengthening of special frameworks created by Asian leading economies, such s China and Japan, to build thriving socio-economic relationships with Africa.

ALSO READ: Embraer, NAC, Stanbic IBTC Partnership For West Africa’s Development?

China has made remarkable inputs in Africa’s airports industry, funding several airports and other economic projects in Africa’s biggest and small economies. China has also delved into African airlines space, taking partnerships opportunities. Currently, China is equally striving to push more of its new aircraft brands into Africa. China is also inclined to continue expanding its purse dedicated to Africa.

Small African airlines which face the challenge in aircraft acquisition – nearly all African airlines are small and face aircraft challenge – may be more attractive to Chinese aircraft manufacturers expected to focus on emerging markets like Africa. African airlines need aircraft that are affordable to acquire and maintain.

According to Mr. Xavier Masule, Interim CEO of Air Namibia: “We are an African airline and we also feel the pressure. Availability and willingness to supply aircraft is not a problem at all. What we seem to have as a disadvantage is our small size, whereby due to poor economies of scale, we are not able to get competitive rates or pricing as those our peers from other regions are able to get. Smallness comes with a penalty you pay.”

“With higher lease rates come also unfavorable aircraft maintenance rates, once again due to not being in a leverage position to have pricing power.”

Air Namibia’s case is the microcosm of the larger African airlines situation.

Besides China, Japan has leveraged on vehicles like the TICAD (Tokyo International Conference on African Development) to pursue its investment objectives in Africa. Moreso, Japan plans to deepen its involvement in Africa with a proposed joint council with African governments reportedly to be launched at the 7th TICAD conference in Yokohama August 2019. It is believed that aviation will benefit from Japan’s new focus on Africa.

Call For Global Funding For Africa

Third ICAO World Aviation Forum held in Abuja drew global attention to the benefits of developed aviation industry to Africa’s and global economy; and also sought the collaboration of global funding institutions as well as home-grown African institutions to re-dedicate themselves to the provision of increased funding to power up aviation development in Africa.

Cape Town Convention

Whether Africa’s needed funds come from Asia or the usual European and American sources, which is vital is that such funds are urgently channeled into Africa for the benefits that will accrue to Africa and the world aviation and economy in general. All African States should sign and domesticate the Cape Town Convention as a way to encourage especially aircraft supply into Africa. And the cost of acquisition must also not be tilted to shortchange African airlines.

Importantly, the Cape Town Convention is an instrument created to make funding and repossession of aircraft easy, among other benefits. About 76 States globally have ratified this Convention; and a number of African States have also ratified and domesticated the Convention. The effect of the Convention was demonstrated in Nigeria recently when the Civil Aviation Authority evoked the powers of the Convention to return an aircraft to a lessor after a default by a Nigerian-based lessee. More States would create greater chances of aircraft acquisition for their airlines if they can ratify and domesticate the Convention.

Unified Focus

Sources of funding Africa’s aviation development should not become a means to dismember the continent along any misguided lines or neo-blocs. The enthusiasm towards Africa should be driven by the spirit of the win-win, where Africa and its aviation industry will become better-off with these investments, than worse-off.

It is vital that Africa’s aviation development should be coordinated, cooperative and above all focused on the AU Agenda 2063 programme – to achieve economic transformation in Africa where aviation plays the catalytic role in the economy.

Overall, Africa should embrace the funding from the East in a way as not to shortchange the future of the continent. The conditions must not verge on neo-colonialism or other such buzz-words now being associated by analysts with funding from sources like China.

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