The rise of African economies is offering American and European financial firms a blank cheque in commissions as they seek to borrow from the global debt market to fund their investments in infrastructure.

Foreign financial advisors with access to vast amounts of capital and technical expertise are taking up this opportunity and raking in millions in the process.

In previous years, African governments could easily borrow from their local market through local banks, pension funds and insurance firms, while large development projects were mainly taken up in partnership with foreign governments through aid.

But as economies grow buoyed by a rising consumer class and a windfall from boom years in commodity prices, there has been a huge demand for credit by large and small companies.

To avoid starving businesses of this much needed credit, there has been a need to go shopping for capital in the major financial centers of New York, London, Singapore and Dubai.

A World Bank paper titled Africa’s Infrastructure: A Time for Transformation of 2010 stated that the continent needed $93 billion every year to build new roads, dams, power stations as well as maintain those it has.

Transaction Fees

Listing rules by regulators such as the Securities and Exchange Commission mean that only its licensees can shepherd the deals and by extension the only ones who will earn transaction fees.

And this is where major investment banks, credit rating agencies, PR, law and accounting firms are finding their new revenue streams.

To raise capital in New York or London means that African governments have to rely on foreign firms.

“If funds are issued in international markets, especially because of the marketing angle, but obviously because of the regulatory angle, the main guys in those markets are the ones who will make money there,” Johnson Nderi, corporate finance and advisory manager at Nairobi-based ABC Capital told AFKInsider.

American firms JP Morgan Chase was the lead transaction advisor on the Kenya’s recent $2 billion sovereign bond while the Arnold & Porter LLP was the lead counsel and Fitch was the rating agency.

Arrangers normally earn a commission which is between 1 to 5 percent and the last couple of sovereign issues over the past five years means that the firms could have earned hundreds of millions of dollars.

Ghana, South Africa, Zambia, Senegal and Rwanda, Kenya have all borrowed a combined $5.7 billion from international markets over the last five years.

BNP Paribus, Citi and Morgan Stanley are other firms that have raked in commissions from sovereign bond issues.

Other Fringe Benefits

Revenues do not stop there since there are other fringe benefits that come with being advisors for the billion dollar deals.

“You will notice that the leading investment firms even in terms of market turnover are those that have an element of transaction advisory not to mention placement commission for the transaction they advise generally,” Grace Ndegwa, associate for transaction services at Genghis Capital told AFKInsider.

“If a firm is advising on an IPO or bond offer they will likely earn the highest placement commission even if other stockbrokers get the same percentage. By law the commission is usually 1.5 percent of the value they place for equities (in East Africa),” she added.

The free publicity associated with being in charge of such deals also helps Ndegwa explained.

More business for these specialised firms is also in the offing due to the massive amounts governments have to borrow to finance their grand infrastructure projects.

In 2013 Uganda announced that it was going to invest $3.2 billion in Karuma and Isimba hydropower dams.

Neighboring Kenya is planning to spend $16.8 billion in the High Grand Falls dam (700 MW), the Magwagwa dam (120 MW), the Arror dam (60 MW) and the Nandi Forest dam (50 MW).

Another $8.7 billion will be spent on the Olkaria, Menengai and Silali-Bogoria geothermal power plants.

All projects should be completed in 2018 and will be financed through public-private partnerships (PPPs).

Even state-owned banks are not missing out on the action.

US state-owned Ex-Im bank is financing General Electric, which is supplying Angola with rail equipment worth $350 million and power equipment worth $650 million.

In June the sovereign bond issue saw the Kenyan government officials go for marketing roadshows in Los Angeles, Boston, New York, London and Dubai directly benefiting tour organizers in the respective cities.