Infrastructure financing deficit in Africa: Glass half full or half empty?

Mr. Solomon Asamoah Infrastructure & Energy NEWS & ANALYSIS

Infrastructure plays a significant role in improving countries’ competitiveness, facilitating their domestic and international trade and enhancing their integration into the global economy. As Africa grows, so does its need for adequate infrastructure services to respond to the demands of a growing population, and an accelerated urbanization rate.

In many African countries, particularly in lower-income countries, lack of reliable and efficient infrastructure is cited as a major constraint of doing business. As a consequence, these countries have seen their national economic growth cut by two percentage points as well as reduced productivity by as much as 40% every year. Furthermore, the negative impact of deficient infrastructure on national economies has been estimated to be as great as those associated with corruption, crime, civil unrest and political instability.

Except for the higher road density, a comparison with other regions on the basis of income levels shows Africa to be lagging behind other regions in all other infrastructure indicators. Its position is only encouraging in the supply of clean water and sanitation facilities. A comprehensive regional analysis reveals Africa’s largest infrastructure deficit to be found in the power sector and being more severe among its low-income countries compared to middle-income countries.

Reports suggest that financing for infrastructure in Africa has more than tripled over the past decade, with many governments adopting innovative financing methods to catalyze private investment such as infrastructure and municipal bonds, pension funds and syndicated loans. In 2014, infrastructure investments accounted for over 55% of the African Development Bank’s (AfDB) operations with the bulk of the Bank’s resources being allocated to energy and transport projects.

Africa still has infrastructure needs estimated at $95 billion per annum; two thirds of this is for investments in new physical infrastructure, while the remaining third is for operations and maintenance of existing assets. To date, less than half of this amount is being mobilized, leaving a financing gap of $50 billion per annum.

The good news is that, as every challenge is an opportunity in disguise, the infrastructure financing gap also represents an opportunity for the continent to: 1) deepen regional integration and cooperation among countries; 2) further expand the scope of Public-Private Partnerships (PPPs); and 3) test out new and innovative financing strategies to raise capital for financing development projects in Africa.

An opportunity to deepen regional integration

Regional integration lowers the cost of infrastructure financing by giving small countries access to more efficient technologies and a larger scale of production. For example, many African countries have power systems that are too small to be able to generate power efficiently. However, through regional electricity integration cooperation, such as power pooling, those countries that can benefit from the larger countries’ systems stand to save over $40 billion per year in capital spending.

Bridging Africa’s infrastructure funding gap is as much about improving the performance of the relevant institutions as it is about raising additional finance. Closing Africa’s infrastructure financing gap will not only involve raising additional funds but also improving the capacity and efficiency of the organizations (public and private) in charge of managing these infrastructure assets.

As the continent’s middle class grows, so too will its regional markets. Investors from all over the world are starting to acknowledge this latent opportunity, which is leading to a rise in foreign direct investment (FDI) in Africa. Well-prepared first movers will reap the benefits of this opportunity, as they have in other emerging regions around the world.

Expanding private investment for financing African infrastructure

In the past, public sector actors dominated the financing of Africa’s infrastructure, while private investors generally focused on the information and telecommunications sector. The landscape of infrastructure financing in Africa has since changed to include more domestic private investors and emerging foreign partners, particularly in power and transport assets.

Nonetheless, there still exists a huge deficit in private funding for infrastructure projects in Africa and this deficit is often attributed to a lack of awareness amongst investors, particularly those who are able and willing to take long-term investment risks associated with huge and complex projects.

To address this issue, African leaders and their private sector counterparts met in June 2014 in Dakar, Senegal and adopted the Dakar Agenda for Action: a plan of action designed to promote public-private partnerships (PPPs) that will mobilize finance for infrastructure development in Africa.

Recognizing the continent’s need for both soft and hard infrastructure, as well as targeted support for fragile states, the AfDB aims to increase finance for sustainable infrastructure projects and PPPs across Africa’s 54 countries, as well as focussing on regional integration opportunities. It is in this context that AfDB provides direct financing for corporate entities and projects, as well as through specialized intermediaries such as private equity and venture capital funds.

Private Equity (PE) funds are increasingly playing an important role in financing infrastructure in Africa. PE funds have the distinctive advantage of being able to invest in various infrastructure sectors including upstream industries, with national, regional or pan-African geographic reach and to make use of a mix of financing instruments – equity, senior debt, subordinated debt or mezzanine finance. The AfDB has supported the rise of PE in Africa and is currently invested in over 41 different PE funds.

A new regional fund to reduce Africa’s infrastructure gap

The AfDB infrastructure strategy includes financing for critical areas such as energy, irrigation, information and communications technology, roads and ports, among others.

Understanding the need for adequate funding to finance African infrastructure projects, the AfDB established Africa50 in 2012, a new fund specifically designed to help accelerate infrastructure development in Africa.

Africa50 is a fund for financing infrastructure in Africa that focuses on high-impact national and regional projects in the energy, transport, ICT and water sectors. Twenty African countries and the AfDB have already subscribed for an initial aggregate amount of $830 million in share capital.

Africa50 seeks to shorten the time between project idea and financial close, bringing the seven-year average down to under three years, thereby delivering a critical mass of infrastructure in Africa in the short to medium term.

The fund builds on AfDB’s past successes in overcoming early-stage bottlenecks to infrastructure projects, mobilizing political support for necessary reforms, and deploying skilled experts to work alongside government. If properly executed and managed, Africa50 has the potential to act as an exemplary model for financing transformational projects in Africa.

The way forward

Infrastructure development is one of the prerequisites for unlocking Africa’s full productive potential. In recent years, several African countries have employed different strategies for raising additional capital to finance infrastructure projects. Innovative financing methods for closing the infrastructure gap that have emerged across Africa in recent years include local and foreign currency bonds, private equity and sovereign wealth funds.

Indeed, narrowing the infrastructure financing gap in Africa remains a high priority for African governments and their development partners because of its potential to narrow the development gaps among African economies, enable the efficient use of regional infrastructure and ultimately reduce costs associated with the users’ consumption of these goods and services.

Achieving Africa’s sustainable development goals and fulfilling the economic and social promise of Africa will depend on the ability of African governments and development institutions to catalyze and leverage larger investment flows and promote stronger regional infrastructure connectivity in Africa. More specifically, national governments need to enact laws designed to attract and protect private investments in cross-border projects and harmonize regional rules and regulations.

Given the limits of what the private sector can do in closing the infrastructure gap, especially in rural areas, the role of the public sector in strengthening domestic resources and catalyzing private investments cannot be stressed enough. African governments should invest much of their resources on developing stable and inviting business environments to attract top-notch foreign investors.

Lastly, since infrastructure investments on the continent continue to be perceived as ‘high-risk’, risk mitigation instruments adapted to Africa’s context ‒ such as partial credit guarantee with concessional resources ‒ should be employed in transactions whenever possible.

Written by

Mr. Solomon Asamoah currently serves as Vice President for Infrastructure, Private Sector and Regional Integration at the African Development Bank, where his responsibilities include the Bank’s Private Sector Operations; development and funding of Financial Markets and Private Equity Funds; NEPAD and Regional Integration; as well as the implementation of sustainable infrastructure programs throughout Africa. Mr. Asamoah is an investment professional with over 25 years of experience originating and executing transactions in both developed and developing markets.