The Nairobi Solution: Ch.6

‘Don’t stare at his ear’ Erik told himself.

It was early evening at a bed and breakfast in Harare, Zimbabwe and an older white farmer was recounting war stories from the infamous farm invasions of the early 2000’s. The farmer was telling about the part where his farmhouse had been completely surrounded, and he had had to make a run for it. But one of the invaders caught him, pushed him to the ground, stood over him, and swung an axe towards his head. The blade almost split the farmer’s head open, but instead clipped his ear. After the axe swing missed he had got up and made a run for it. He had survived, but his ear ended in a straight line just above his eardrum.

While listening to the farmer Erik drank his Castle Lager and reflected on how he never expected this to be his finance career. He was supposed to be an MD at Goldman. Instead he was sitting in Harare drinking beer with a farmer with half an ear. What twists and turns had led to this?

In an unpredictable chain of events Erik could not have predicted, he was on a wild goose chase to Zimbabwe to meet with a business partner of Dwight’s, who supposedly had a locomotive manufacturing business, which would save the railway project in Kenya, which would save the bank Dwight’s hedge fund, Belway Capital, had invested in. And Erik was supposed to meet Dwight’s Zimbabwean business partner tomorrow.

It turned out that Dwight, in one of his other ventures, had been working on a deal to sell wheat from Belway’s farm in South Africa to a major grain distributor in neighbouring Zimbabwe. The owner of the grain distributor was a successful businessman who also owned a lot of other businesses. One of these other businesses was a struggling manufacturer of railway locomotives. This seemed an unbelievable coincidence at first, that there would be a train manufacturing company Zimbabwe, but he learned subsequently that Zimbabwe had a strong history in manufacturing which dated back to the Rhodesian War.

During the Rhodesian War with Mugabe’s National Liberation Army the country had been sanctioned and cut off from the rest of the world. Without access to manufactured goods from Europe the Rhodesians had had to learn to manufacture their own cars, tanks, weapons and aircraft. Which had created a diverse manufacturing industry in the middle of Africa. This manufacturing heritage from the Rhodesian War still continued on, but was slowly dying out.

Dwight’s business partner, Mr. Niko Mavropoulos, was of Cypriot heritage and rumoured to be worth over $100 million with money deposited offshore in Switzerland. Erik didn’t really care how much money this Niko guy had, or where he hid it. He just hoped this story about a train manufacturing business here in Zimbabwe was true, because right now listening to the half-eared farmer it felt highly unlikely.

Erik thanked his host for the fascinating stories, dinner and the beer and excused himself to go to bed.

The next morning Erik took a taxi the B&B had arranged for him a short distance to the address Dwight had emailed him. When the taxi came to a stop Erik asked the driver to double check the address was correct.

“Are you sure this is the place?”

This looked like a house not an office. It was a 1 level suburban house surrounded by a large garden in both the front and back. Like something out of 1950’s California.

“No this is correct. This is Mr. Niko’s office,” the driver assured him.

Erik got out of the taxi with his Orvis computer bag and walked up the driveway to the house. Erik noticed a brown, beaten-up 1970’s Datsun parked at the top of the driveway. This couldn’t be right.

The front door was already open and led into what appeared to be a craft store full of candles and locally made leather handbags. There was a middle-aged white woman behind the desk.

“Hi. I’m sorry to bother you. I’m not sure I’m in the right place, but I’m here to see a Mr. Niko Mavropoulos. My name is Erik.”

“Yes. Please wait just a minute. I’ll tell Niko you’re here,” whereupon she came out from behind the desk and disappeared down a hallway.

Erik wandered around the room looking at the candles. Maybe he should buy one for Nicole he thought. The books say you are supposed to buy things when you are on trips. Would she like a candle, or would she say it was useless clutter?

“Erik! Nice to meet you!”

He snapped out of his candle pondering to see a 50-year-old balding man in a worn out T-shirt and baggy pants smiling and walking towards him with his hand out. Erik shook his hand automatically, but was having a hard time processing that this was Niko the multi-millionaire tycoon. But Niko’s immediate impression was engaging and friendly. It was hard not to smile in return.

“Follow me. Have you had breakfast? Can I offer you anything? Tea or coffee?” Niko was talking rapid fire as he led them down the hallway, through a back room and out into the garden behind his house. They continued walking across the grass to a table and chairs surrounded by bushes and trees. A private garden meeting room. As soon as they sat down someone came out and asked them how they would like their coffee.

“So how is Dwight?” Niko asked? “That guy is something isn’t he?”

“Dwight’s good,” Erik replied not nothing how to respond to the second part.

“I like doing business with him. Love how direct he is.” Niko went on. “So how can I help? Dwight said you might be in the market for some trains?”

“Most likely, yes. I’m not sure how much Dwight told you, but we are heavily involved in the East Africa Rail project up in Kenya. And we’ve had a misunderstanding of sorts with one of our Chinese suppliers and so exploring alternatives. Dwight said you might have a potential solution.”

“I do. Let me explain. One of my companies is EcoRail. It used to be a big business. Not so much now. But back in the day, it built most of the locomotives and rolling stock for National Railway of Zimbabwe. Over time NRZ deteriorated, like everything in Zim, and so did EcoRail. NRZ has fallen into disrepair and barely operates anymore. To keep EcoRail going we pivoted to mining and have been building trains for the copper mines up in Zambia.”

They took a break as their coffees were served.

“They ship copper out of Zambia by train?” Erik asked. “I somehow thought it was by truck.”

“They do both. There is no easy way to get copper out of Zambia. It’s a long way to the coast in any direction. It’s worse for the DRC, but at least Zambia has three rail routes. There is the TAZARA line which heads east out of Zambia to the port of Dar es Salaam in Tanzania. TAZARA was built by the Chinese in the 1970’s. Interestingly, there are discussions going on with the Chinese right now to modernise it. It would be a big project. Then there is the main route south through Zimbabwe to Durban, which is over 3,000 km. Then the route west to Angola using the new Lobito railway.”

African rail logistics was increasingly interesting to Erik. Travelling around Africa for Turkana Trust and working on the East Africa Rail project he’d learned to appreciate the incredible distances in Africa and the importance of better railroads to the continent’s economic development.

“Could EcoRail potentially supply rolling stock for the Kenya project? It’s a big project. And you’d be contracting with the East Africa Rail SPV. It’s an IFC backed venture. They are looking for 8 locomotives, 40 passenger coaches and 80 intermodal container wagons. I imagine they could stage it in tranches. But can EcoRail handle something of this scale?

“Theoretically, yes. But the business has been in a state of semi—hibernation. We would need to buy new tools, expand our manufacturing facilities and bring on new workers, but yes, we could do it.”

“So it’s doable?”

“Yes. Don’t worry. We will find a way. It’s what we are famous for in Zimbabwe. There might be a few financial matters we would need help with though. And East Africa Rail will need to be patient with us as we ramp up. But the answer is ‘yes’, we can build your trains for you. And think about it. For the IFC it will be great PR to switch to EcoRail. They can spin it as ‘African trains’ for an ‘African railroad’.”

Erik could care less about the IFC’s PR.

“What do you mean by ‘financial matters you need help with’?” Erik asked, feeling like he was about to hear the catch to this amazing solution to his problem.

“Well as you may understand Zimbabwe is not in the best of graces with the international financial community. As a Zimbabwean company EcoRail has a hard time getting US$ financing. We did a deal 7 years ago to borrow money from Standard Bank in South Africa. This was to finance for our train leasing service for the mines in Zambia. Rather than buy trains we offer that the mines can lease them from us. It’s back-to-back. We take in the lease payments and pay back Standard Bank. It was a 7-year loan and now they don’t want to roll it. They want their money back, so we need refinancing. If we can’t refinance the loan, EcoRail can’t stay in business.”

“How much are we talking?”

“Not too much. $10 million. $10 million for the lease deal. But then we probably also need $1-2 million to fix up the business to accommodate such a big order. We would need to buy new equipment, new heavy lift cranes, and expand the workshop. That would get us started. Then we will negotiate with East Africa Rail for the main purchase terms.”

This was the catch. Niko wanted a loan for his struggling train leasing business and another $2 million for EcoRail. All before he was about to get a life changing order from East Africa Rail.

Erik thought back to his meeting with the Kenyan bank regulators. They had been clear that Turkana was on strict probation. The bank was prohibited from growing the loan book or adding new risk assets. The regulators in Nairobi would flip their lid if they saw he’d made $12 million in new loans to a company in Zimbabwe. But Erik was stuck between a rock and a hard place.

Niko was looking down pretending to be focused on his coffee. Erik assumed he was trying to hide his smile.

“OK. Here’s the deal. Turkana Trust will lend the $12 million, but two things. First, you have to wait until mid-July. I need to print the June financials. The bank cannot have this loan on the books for the half year filings. After June we can disburse the money. Second. You need to set up a Mauritian company for this. If I lend directly to a Zimbabwean entity, it will be an immediate red flag.”

“We can do that. Totally acceptable. This is going to work out great for both of us.”

Erik was less sure. It was always like this in Africa. You solve one problem and it creates another. He had the rolling stock problem potentially solved, but now had figure out how to accommodate a $12 million Zimbabwe loan in Turkana’s balance sheet in a way which wasn’t going to show up in the regulatory filings. He would have to find a way to reduce exposures elsewhere in the bank. But at least he had a few months to figure it out. It was like spinning plates.

“Would you like to take a drive? I can show you the EcoRail workshop and give you a quick tour of Harare on the way.”

They finished their coffees and Niko led them back through the house and out to the driveway where he gestured to the 1970’s Datsun.

“So that is his car!” Erik thought. “A Zimbabwean multi-millionaire dresses in a ratty T-shirt and drives a 70’s Datsun.”

On their way to the train workshop Niko explained why Harare was unlike other African cities. The early Rhodesians had called it Salisbury. They had planned the city to be like back home in England with wide streets, nice residential neighbourhoods and lots of parks and golf courses.

Erik saw what Niko was saying. Harare was more spread out, and greener than Nairobi. It did have a lot of potential.

As they drove Niko pointed to the large green campus of the University of Zimbabwe. “You won’t see a university campus like that anywhere else in Africa. One day that will be the Harvard of Africa.”

They started to leave the leafy suburbs and entered an industrial area on the south end of town. As they drove Erik stared out the window at the people walking along the side of the road, and jammed into white passenger vans. It looked tough. Walking long distances everywhere along the side of the road in the dust. Or being one of 10 people jammed into a van meant to carry 6 people with your face smashed against the window.

Erik realised why Niko wore T-shirts and drove around in a 70’s Datsun. It was smart. He wanted to keep both his ears.

Eventually, the Datsun pulled up to large industrial building partially obscured behind a metal fence. Niko said this whole area was the National Railways of Zimbabwe switching yard. Surrounding them were numerous rail spurs running in different directions. One rail line led through the front gate and into the main EcoRail workshop. These rail lines must be how the finished trains left the workshop and were delivered to the mines in Zambia.

The front gate was open and they could hear clanking and banging noises coming from inside a large, corrugated metal building. Like the other buildings in Harare it appeared to date from the 1980’s and needed investment.

In the middle of the workshop was a semi-finished locomotive. Next to the locomotive was a welder with his torch attaching a metal plate to its side. The locomotive wasn’t sleek, modern or beautiful, Erik thought, but if it could move copper out of Zambia, then it could move a 20-foot shipping container.

Erik could see why Niko needed the $2 million loan. In order to work on multiple locomotives at once EcoRail would have to expand the workshop plus use some of the abandoned facilities at the back of the property. For EcoRail it would be a big change to go from tinkering away on 1 locomotive at a time to building 10 locomotives plus coaches and intermodal container wagons. Looking at the sleepy operation in front of him Erik was slightly worried how it would work out. But that was Niko’s problem. For now, he had confirmed EcoRail existed and had a functioning train workshop. They would have to go with it.

“Thanks Niko. Thank you for the tour. I see what you mean about needing to reinvest in the business for such a large order. I should probably get back to the B&B to pick up my luggage then get to the airport. Let’s get past June then I can get you the loan. In meantime set up your Mauritian entity. Claire at East Africa Rail will contact you and start work on the procurement order. It’s the IFC so expect tons of paperwork and bureaucracy, but it will happen.”

Later at the airport while waiting for his flight, Erik reflected that he had really liked his visit to Zimbabwe. It was better than its reputation.

Now back to Nairobi and next week’s meeting with the regulator.