Mushtak Parker Saudi Gazette LONDON – South Africa, whose National Treasury this month appointed six institutions to advise it on its debut sovereign sukuk issuance, may be pioneering a new approach to sovereign sukuk origination which has a strong social inclusion element. The financial institutions appointed comprised Standard Bank of South Africa; Nova Capital from the US through its local subsidiary Nova Capital Africa; Liquidity Management House of Kuwait; BNP Paribas SA from France; Albaraka Bank (SA) in conjunction with its parent Saudi-owned Albaraka Banking Group which is incorporated in Bahrain; and the local Regiments Capital, an empowerment investment bank which says it is “inspired by the legacy of Zulu warfare with its inferences of leadership, innovative strategy, unity, training and timing." Of the above, only BNP Paribas and Liquidity Management House have experience in structuring and arranging sukuk in the international market. BNP Paribas for instance was one of six mandated lead arrangers (MLAs) for the sukuk offering last month - a $800 million Reg S sukuk - of the Jeddah-based Islamic Development Bank (IDB). Liquidity Management House on the other hand was the main MLA of the two pioneering sukuk issuances by Kuveyt Turk Participation Bank in Turkey - one in 2011 and the other earlier this year. It is the exception rather than the rule to have six MLAs, but according to Tshepiso Moahloli, senior analyst in Foreign Debt Management at the National Treasury of South Africa, “the thinking behind the appointment of as many advisers as we have is that we want to be able to issue a local and/or a foreign currency Sukuk and as you have correctly stated BNP Paribas, Liquidity Management House and Albaraka have experience in Islamic finance and can therefore transfer skills to our local institutions." The latter sentiment alludes to a social inclusion condition in the Request for Proposal (RFP) which was announced in December last year for financial institutions to submit proposals for advising the South African government on the structuring and issuance of its debut sovereign sukuk. Foreign bidders had to have a local financial institution as a bidding partner. Not surprisingly, one of the top two sukuk structuring investment banks in the world, Malaysia's CIMB Investment Bank, lost out on the bidding process because it was too late in partnering with a substantive local financial institution. The idea of the tie-up is to ensure that structuring skills are transferred to local South African partners and the structure is cognizant of the requirements of the strategic goals of South African Government's socio-economic and Black empowerment policies. Two of the advisers in the consortium appointed by the National Treasury, Nova Capital Africa and Regiments Capital indeed fall within the above category. Nova Capital is a subsidiary of Nova Capital Global Markets, LLC, which is an emerging markets investment bank headquartered in New York with additional offices in Johannesburg and Nairobi. According to the bank, it raises institutional debt and equity capital coupled with a full range of investment banking services including mergers and acquisition advisory, capital restructurings, and general corporate finance. Nova works with leading publicly traded and privately held companies in many sectors including financial services, energy, transportation, agriculture, telecommunications, and mining among others. Regiments Capital one the other hand specializes in social entrepreneurship through which private sector experience is harnessed to support and promote delivery in the public sector, and offers a combination of entrepreneurial experience, expertise and empowerment credentials. It also “caters for the complex needs of local, regional and provincial governments, state owned enterprises, corporations, institutions and entities responsible for infrastructure development." The National Treasury plans to raise $3 billion over the next three years and a substantial part of this may be in the form of sukuk, Eskom, which has traditionally been a regular issuer in the Eurobond market, even during the Apartheid years, alone may go to the market to raise up to $1.5 billion through a sukuk issuance. Infrastructure is a prime area to raise funds through the involvement of sukuk issuance. This would be both through the domestic and international markets. In his National Treasury Budget Vote speech to parliament in Cape Town in May 2012, South African Finance Minister Pravin Gordhan, a keen supporter of facilitating Islamic finance in the country, stressed that “we recognize that accelerating infrastructure investment and maintenance will require further shifts in the composition of expenditure in future years. Alongside the emphasis on transparency and performance measures in our budget process, we continue to work intensively on better value for money in government expenditure, combating corruption and improved procurement and supply chain management processes. The second phase in our review of procurement legislation will go ahead this year." The South African Government has also set up a Presidential Infrastructure Coordinating Commission, which has made considerable progress in identifying projects and clarifying long-term investment plans to drive economic change. According to the National Treasury, the Budget Review lists 43 major infrastructure projects, adding up to R3.2 trillion in expenditure. Over the MTEF period ahead, approved and budgeted infrastructure plans amount to R845 billion, of which just under R300 billion is in the energy sector and R262 billion in transport and logistics projects.
