#B20SouthAfrica summit : Win-win Growth: Smarter Rules, More Investment in EMDEs

Have a seat. Thanks so much. Great. So to kick things off, Sim, we'll turn to you. And thinking about the report that you have published, there's a huge number of recommendations. You've done a lot of very detailed background research. In that you've I think gone into a lot of depth around blockages in the global investment economy, but obviously especially related to Africa. From your vantage point as Africa's largest bank and having done all this work in the task team, what are some of the key barriers to capital flowing globally and particularly into African markets have you seen and you want to highlight and you're making recommendations about?

Thank you very much Peter and it's wonderful to be here. The first proposition is that Africa has an infrastructure gap of about a hundred billion dollars a year. We can raise 65 billion from African resources and the balance has to be found elsewhere, and the same applies to other emerging markets and it applies globally as well. The barriers include without limitation fragmented data and not sufficient publicly available information about projects which can put investors together with projects. Secondly, fragmentation in the nature of laws and regulations. Thirdly, fragmentation. 54 countries, many of which are pretty small. If you're going to be building roads, bridges, and indeed ports, it's very difficult to be able to do that with countries that have different sets of rules, different sets of laws. There's also data sovereignty, and it's difficult to move data around. And lastly, what people are calling the Africa perception risk premium which has a material negative impact on the cost of capital for Africa, and related to that the way in which the Basel rules are applied in the determination of capital for banks and as well as insurance companies. There's been a lot of work in G20 as well around some of the same themes.

What are some of the key things you want the G20 to be picking up from your report?

We've got three recommendations and I'm sure my colleagues will expand on them. The first one is you've got to stimulate transformative infrastructure on the continent, and you've got to put investors together with these projects. The statistics suggest that nine out of 10 projects die before they get to draw down. So how do you build project preparation facilities for the purposes of reducing that rate? Secondly, how do you put together private, public and philanthropic money, blended finance, to close the gap? And then thirdly, how do you move this money from the investors into the economy and into the hands of businesses? What platforms do you need to get this money to flow right through the economy? And that 10,000-word paper deals with those three recommendations.

Daniel, we often talk about competition maybe between markets, between the north and the south, but in a global bank like JP Morgan, of course, there's competition for capital to go into different areas, different perceptions of risks that go on in a global bank like JP Morgan. What do you think the role is that private banks can play in building confidence in emerging markets, but how also can reforms and change make some of those conversations inside a big bank like JP Morgan easier to allocate capital into emerging markets?

Thanks very much. Benjamin, Standard Chartered is obviously a very interesting bank as a global south banker which has a base in the UK but operates between Asia and Africa. What sort of lessons come out of your experience in Asia for Africa for deploying more capital here? There's obviously a lot of increased interest diplomatically between the two regions that's going on. I think there's a lot of hunt for capital flows between the two regions. What are some of the lessons that you can bring from the way Standard Chartered operates?

Yeah, obviously we operate in many of the emerging markets around the world. I do think the whole digital and technology advancement has increased significantly around financial accessibility and inclusion, particularly in my view the most populous markets benefit the most. India one and a half billion, China 1.4 billion, ASEAN 700 million, of course Africa itself as a continent is also one and a half billion. So two things that I think we can learn a little bit from some of the Asian development. One is the establishment of public digital infrastructure, particularly around national identity. A good example would be India's Aadhaar, which allows the storage and access of 1.5 billion people easily, and Singapore's SingPass does exactly the same thing. That is thematically one area. Another area is private and public participation, particularly around the private side. UPI in India is phenomenal in terms of enablement of payments. But nothing to me beats China in terms of the whole ecosystem. It's just one big digital wallet, lending, wealth management, insurance, everything in one. And it has gone in literally 10 years from still very cash-based to being so ubiquitous that even beggars do not accept cash. They take a QR code, scan here, that's it. That is something that is very profound. There's another element we worked on, which is usage of blockchain to do deep tier financing. That enables a lot of the seventh, eighth, ninth tier of that supply chain, which the bottom bit being SMEs, to have credit linked back to the original anchor so that they can borrow a lot cheaper. That is financial inclusion. So the technology is there and Africa can also learn from it and apply. The trick is to apply standardization across the 50 odd markets in Africa to allow for interoperability. Indeed, we might get there in the end on AFCFTA integration obviously in terms of regulation. But we've seen regulators in Africa have actually leapfrogged in some cases from pretty early on.

Back to the sort of south-south point, where do you think are some of the really interesting marginal flows that might develop between Asia and Africa? People focus on China and Africa, but where are some of the others?

Well, I think the world is shifting very quickly from what was an east-west corridor to now a south-south corridor. 20 years ago, south-south corridor accounted for roughly 5% of global trade. Now it's around 20% and rising very fast, particularly between Asia and Africa. That is one corridor I see growing very fast. However, right now from an African standpoint, it's still somewhat more commodities. We need to evolve that into more of the whole entire supply chain manufacturing, and that is incumbent upon infrastructure being available to connect the dots. That'll be in the next chapter. And if you fast forward, I would even say the trade within the south-south corridor can evolve into different currencies being applied, not just using the dollar but other currencies including RMB and other forms of payments.

Exactly. That's a really interesting point that some of the other task team pick up, particularly where the value add is dealt with around the global south and with investment. Something that Sim mentioned earlier, British, was around partnerships being a key part of the recommendations that came out of the task team report. We've seen in South Africa with the just energy transition actually this bringing together of philanthropies, private and public capital. But in your work, can you maybe just talk to us a little bit about structuring these partnerships, how we can get maximum financial returns and social returns at the same time, and how maybe more of a global south view on these things can give a fresh perspective.

Yeah, thanks and wonderful to be here. Again, congratulations to the government of South Africa for this extraordinary work that's been done and an honor to be part of this moment in time. In my previous role, just really simply put, I think it's important. I know we'll pull the string a little bit later, but first and foremost, investors that we dealt with when we were de-risking deals, at the end of the day, they were looking for attractive growth. They wanted market rate returns. They wanted to see the impact as well. And I think here to four, we've seen institutional investors even the retail investors say, 'Oh, I just do social impact.' Well, it's not one or the other, it's both. So I think in the last few years we're seeing that trend. What we've done in the paper, particularly when you look at recommendation number two, we said we've got to stack all of this capital together. We've got to look at local capital, we have to look at local partners which are absolutely critical to preparation, to due diligence, to understanding what's going on the ground. So you get that value, you get that market rate return, but you also get impact. And what's key is African banks, AFC, Afri50, AfDB, some of our colleagues at BII, in my former role doing that concessional financing, doing the loan guarantees, getting ahead of it, so it makes that investor feel more comfortable, feel that safety, reduce the risk because we know that the risk is much more perceived than the actual fundamentals. So that's absolutely critical. The second piece I'll add is that you cannot go it alone. And I feel like we're in a moment where people are figuring that out. It's not just the DFIs or just the donors or just philanthropy. A big thread in the paper and in the recommendations is now not only is it concessional financing, we need pension funds, we need sovereign wealth funds. But we are calling upon philanthropy to be a part of the capital stack, not as charity but actual real investors who are looking for a return on their money. And we even offer and say start doing grants that are recoverable grants so that you're recycling the capital. That really hasn't been done at scale here to four. And that's the opportunity when we look at blended finance is to actually the fundamentals and the tools are there but we're not at scale. We need more partners. We need the local capital to actually help us move to that scale. And I think when you look at the paper, that's something that we're drawing out, bringing in the new actors, but also saying you can't do it without local capital for it to ultimately be sustainable.

Can we just drill into some of the specifics because obviously the term blended finance is thrown around a lot and sometimes I cheekily say it doesn't exist in the sense of it's actually very hard to do properly, right? To make it work at scale. There's obviously been a lot of work going on around various reviews of blended finance and the World Bank and elsewhere. What are some of the specific things that can actually start to really move this forward in practical steps?

Yeah. So if you think about infrastructure projects alone, oftentimes they never reach financial close. They don't reach financial close because you may have on paper a lovely deal but it turns out the project preparation was poor. So the work upfront, a lot of times I'll go back to philanthropy. If some of the large foundations, there's a great deal that was done a couple of months ago with MacArthur and Align. If philanthropy as well as some of the DFIs or AFC or Afri50 is actually doing the technical assistance upfront before you get to close, then we see that success. When you don't do that upfront or you miss pieces, whether it's the due diligence, whether it's the support, whether it's a regulatory issue, it turns out everything's ready to go but the permitting is stuck, right? So we also have to deal with the policy and the regulatory issues. So I think the issue is that blended finance is a good tool. The problem is we don't have enough people to engage in it. So where do we want to draw? We want to draw on that philanthropy. We want to draw on the local sovereign wealth funds and the pension funds and even the insurers to be a part of the capital stack. And we think if more people are in it, we balance it out, we can actually get the blended finance model, which is not a bad model. We talked a lot about it at Seville at FFD4, but the issue is scale because we don't have all the actors playing and frankly we haven't done all the prep work. And that's where the paper tells you the prep work has got to be done upfront also so that the bigger financiers will come in and feel more comfortable.

Exactly. And the scale is the key word. I often tell my staff, we don't want to do things that aren't at scale. We want to solve these big problems. That's what ultimately B20 is for. Maybe Sim, you could just reflect on that. Partnerships, you're obviously one of the largest banks in Africa. How do you find these partnerships and trying to form blended finance works or doesn't work? There's obviously a rise of new development institutions in Africa as well who have more capital. How do you find this evolving landscape and the ability to do business and de-risk that comes from it?

Perhaps a couple of examples would be helpful. You have Africa50. It is basically a platform involving 30 countries with the view to using project preparation and project development together with asset management to deliver on projects. One major platform and project is the Kigali Innovation City, which again is a public-private partnership with a view to producing universities, putting in resources to build innovation in Rwanda. So that is one example. The second example is the World Bank public sector investment lab led by Ajay Banga, and they have done a couple of very interesting things. One of the outputs from that is a change in the mandate of MIGA so that they can now provide guarantees to countries that are less than triple-B minus, which as it happens is the whole of the African continent, most of the African continent in that context. We've been arguing as I've said that the rating agencies rate African sovereigns at least four rungs worse than they ought to rate them. You can imagine then how difficult it is to get funding and guarantees through MIGA by virtue of that rule. So they're going to change that rule. The second thing that they're going to do is they're going to do originate to distribute. So they're going to distribute some of their assets to asset managers and pension funds with a view to recycling their capital so that they can do more for emerging markets. And thirdly, another example along similar lines is the M300 where they have gotten 12 African countries to sign up to putting in place the laws and regulations, the contractual arrangements, the procurement processes to improve the energy situation in these countries and again using PPPs in that context.

Just to maybe push back a tiny bit on this ratings adjustment issue. How much of the problem of doing business in Africa as a banker is the cost of capital versus everything else?

The cost of capital is such that you can wipe off between 1 and 2% of African GDP by virtue of the additional cost associated with the ratings and the prices that people pay as a consequence of those ratings. So it is significant. Secondly, we've got statistically available and valid data that suggests that the suggested default and the actual defaults are a mismatch and in fact sub-Saharan Africa has the best performance and they pay dearly for it. So it is not a small matter. It is significant and it is not just African countries by the way. South Asia has a similar problem and in fact their problem is bigger than Africa's based on the data. I would say to you in the case of South Africa we're paying 50 to 60 billion rand more per annum than we should. Imagine how many schools, bridges, hospitals we could build with that money. So it is significant.

Switching on to the regulatory point more broadly, Daniel, there's been a growing debate in South Africa around the role of Basel gold plating maybe by regulators here around those sorts of issues. But it's also a global debate that's been increasing about basically how private sector banks can be unlocked further. How can we balance maybe more or less regulation with innovation at the same time to ensure that we're getting more capital to the right places? We've seen obviously some extremes in some places, I once obviously looked at the US in terms of crypto regulation that sort of stuff, but maybe focusing a bit more on infrastructure and the hard investment side of things.

Something we often say in South Africa around the needs of the country, we have plenty of capital in the banks, in the private sector pension funds, etc. It's the machine we're trying to build, right? To get the capital to where it needs to go. Going to the World Bank IMF annual meetings for many years, the civil society used to be in the buildings talking about all this stuff for a long time, but it feels like the debate is maturing on this sort of issue. The B20 is talking more about this. Where do you see the sort of regulatory timeline maybe globally? If you can think of a slight opening of the taps on this sort of issue to get more money to the global south into infrastructure.

Indeed. I think it's important to remember with the B20 and G20 in the US next year, the UK maybe we're waiting for an announcement on that the year after. There's a lot of investors in these places, credit investors operating in these very interesting markets who are really looking for change on this front. Benjamin, turning to you on the regulatory question, looking across the different markets you operate in. How do you think regulators can learn from each other? Where are the sort of little bits of best practice in emerging markets maybe that you think are useful to highlight where people are getting things right?

Yeah, I mean in the simplest terms, any form of alignment, cooperation improves flows, reduces friction. So I do believe that where there are cases of mutual recognition or equivalents of frameworks, banks and companies will have only one standard to deal with and makes flows so much easier. Let me give you a couple examples. I do think recently the alignment on payments through ISO 20022 basically harmonized payments messaging so that globally everyone adopts the same standard. That makes things so much easier. That's a good example. I do think there's now a greater alignment when it comes to money laundering in terms of cross-border sharing of data and information, because data otherwise is not sharable. Right now it's a more common approach towards attacking illicit money flows. That is a good thing. Recently we also saw in ASEAN the creation of a digital economy framework agreement to allow for greater alignment of flows between 10 countries. Fantastic. Now where there is still work to be done, I do think globally around sustainability taxonomies, the kinds of standards, the kinds of reporting, the performance. Investors would love to be able to track and hopefully manage and measure performance on a standardized basis. It improves flows and the comparability between different countries can be improved. And I do think around capital rules, I think Daniel mentioned a little bit about capital rules. I do think particularly in the space of infrastructure, the rules can be accommodated better for infrastructure as an asset class. Because right now as banks we find it extremely punitive to allocate capital to term financing. To the extent that we can find ways to ring fence it so that we can demonstrate the kind of risk mitigation that can actually be a good asset class for all of us to invest in. So these are the things that we can share and a lot more areas to work on.

Interesting. So whose job is it, do you think, to drive this coordination? The IMF has FSAPs where they go into countries and they look at some of these issues, but who can push the agenda?

It's hard to say there's one single party. Collectively as the business community, we can flag, we can voice, and we can hopefully frame solutions which are pragmatic to all. We can only frame it to those who set rules. I do think this opportunity in B20 into G20 is a good way to offer some of our views to the government.

Peter, could I jump in if you don't mind just briefly on this one? So the paper makes a strong case in recommendation two for a change in the Basel rules relating to infrastructure, and that is backed up by data including the IFC which has just issued a paper that illustrates the performance of infrastructure on the African continent and emerging markets relative to AAA-rated corporates, which is very interesting and supports this proposition. The expert panel of the G20 makes similar recommendations. The central bank governor Lesetja Kganyago has made arguments similar to the arguments we are making, as has the central bank of Egypt and a number of other central bankers on the African continent. We humbly submit that the G20 can instruct the FSB and the BCBS to change the regulations and put in place rules that relate to treating infrastructure as an asset class and risk weighting at 50%, for example. Indeed, there's a lot more detail in the report including KPIs as well on some of the outcomes that would flow from this.

One of the things that the report also touches on, British, is obviously the need to think much more about inclusive capital and how we think about bankability of some of these concepts. You have three bankers on the stage here. What do you want to say to them about the bankability of this sort of concept of inclusive capital, how we can move it at scale?

Yeah, I think the idea of inclusive capital again goes back to what I said before. It also means impact and social returns, not one or the other. The second thing, I hate to sound like a broken record here, but we actually have the tools. Whether that's guarantees, whether that's political risk insurance, whether that's some of the de-risking with first loss, second loss, however you want to look at it, those tools are there. We're not totally packaging them. Everybody is sitting in silos. So again, the preparation and doing the work ahead of time so that these guys can feel comfortable investing, and we haven't totally done that work. The paper says we need to do the work, that we have the tools, and it's an execution issue. I think one of the things under Sim's leadership is that we are already talking about sort of legacy work. So there's a small task force that has been put together just bringing in some of the largest philanthropic foundations and actually their endowments. If endowments took x% off the top, funded that project preparation, helped package some of those deals using the various tools that are needed, then they would feel more comfortable and we would see the capital flowing at higher levels, and then we would finally hopefully at some point get to scale. But I think the other thing I want to pull on a thread from Seville, which is there was this sort of idea that we're the do-gooder people, we only do charity, not me, but in the philanthropy world, and these guys were the bad guys. They're not the bad guys. You don't get jobs, you don't get economic growth, you don't get social mobility without global capital markets. And that's where growth and that's where the future of this continent and the future of the globe working in partnership, working in concert. It's the only way we're going to do it. And I think there is a moment around that realization that the private sector can drive the good that people are seeking for people and planet.

That's a great rallying cry. I think as we start to wrap up, Daniel, just quickly in terms of thinking about the report, thinking about some of the most important bits as we get to the end of a year of the South African presidency, where do you think the work of the B20 and G20 in general through this year, but particularly this task team, is contributing to what happens next? The changes that can happen, the most important parts of the report you want to highlight.

Exactly. And I think we've seen that over time that detail in B20 reports over like a decade have increased massively. They are policy geekery now in some sense which as an analyst is always great to see. Sim, to give you the last word. You were fast out of the blocks last December I think in terms of your enthusiasm for this agenda for this task team. South Africa now joins this troika with the countries that come next. What's the legacy you think on this type of work as we reach the end of this South African presidency year?

Sorry Peter, what's the legacy on this type of work around infrastructure and investment at the end of this year? It's the three recommendations we've made, Peter. They are front and center of global discussion and debate. They're being executed upon. We're having deep discussions with people that impact on the cost of capital, the rating agencies. The discussions are rich. As Daniel says, countries need to improve the rule of law, strengthen institutions, improve monetary policy, improve the independence of central banks, let currencies float. In other words, countries themselves need to get their act together so that they can raise the money. And most importantly from an African perspective, more of a coordinated effort by Africans, harmonizing data, harmonizing laws and regulations, making it easier to move money, people and capital around. And all of these things are in train.

Great. Thank you very much to my panel for a really interesting discussion. The report is of course on the B20 website. I think it's 87 pages. Well worth a read this evening for everyone. I really want to thank my panel, Sim Chabala, the CEO of Standard Bank, Daniel Pinto, the vice chairman of JP Morgan, British Robinson, the chair of Africa at Milin, and Benjamin Hung from Standard Chartered. So, thank you very much to the panel. Let's give them a round of applause. Thank you.