Financing Infrastructure in Africa: The Role of the Private Sector

Quality infrastructure is a contributor to economic growth. Despite a recent increase in the flow into the stock of Africa infrastructure ($100 billion committed in 2018 – ICA), the infrastructure financing gap remains large. It is estimated at $93 billion a year (World bank), that’s nearly $1.9 trillion for the next 20 years.

1. African governments’ inability to close the gap

African governments are already contributing the largest share towards financing infrastructure in Africa ($37.5 billion in 2018 or 37% of total commitments that same year – ICA). They are unable to close this gap because of among other things, the Covid-19’s adverse effects on the economy (e.g., the fall in oil price, currently around $40 a barrel); the risk of crowding out priority spending for education & health; and a corruption infested infrastructure sector. Africa loses $50 billion (half the amount of money needed to close the gap) to corruption annually according to Transparency international. More than half of recorded corruption cases are related to industries with large infrastructure investments, such as construction, mineral extraction and transport (OECD).

2. Creating an enabling environment and conditions for the private sector to close the gap

Private sector participation is associated with improved management and transfer of technology (Deloitte). Moreover, assets under management by institutional investors and commercial banks globally is estimated at $120 trillion (AfDB). However, access to these savings is not easy for African countries because of the Basel III rules, that do not allow for excess leveraging (World Bank). Thirteen African countries have a debt to GDP ratio of 70% or more (IMF data). There is also a vast untapped potential of local pension funds and insurance companies which can contribute partially but significantly to infrastructure development (OECD).

Currently, the private sector participation focuses almost entirely on ICT because of greater returns (IFC-World bank). Attracting large private sector investments in energy, transport and water projects (three key infrastructures) will require improving their economic returns; and reducing the risk associated with these infrastructure projects.

3. Private sector’s reluctance to invest: political & legal risk, currency risk and credit risk

Sadly, 1/3 of African countries are in conflict. Moreover, a new government can suddenly add legal constraints to an infrastructure partnership, already signed with the private sector, such as unilaterally increasing government’s equity in a project (Brookings). Currency risk is due in part to the fact that loans for infrastructure are usually made in U.S. dollar or Euro whereas the user charges are in local currency (e.g., electricity and toll-roads) (AfDB). As regards credit risk, 13 African countries are at risk of default as suggested above.

4. Risk mitigation policies and products to attract more funding

These include blended finance approach/structure that supports SDG, especially #9 related to quality and resilient infrastructure by 2030; political risk insurance, enforcing legislation on land requisition for public interest, training more public servants with relevant skills needed for infrastructure projects, issue local infrastructure bonds, collateral security cession, promotion of infrastructure as an asset class and good governance (Pwc & Deloitte). These risk mitigation tools have contributed in part to the increased support from China (China’s commitment in 2018 increased by 65% over the 2015-2017 average to $25.7 billion or 25% of total commitments; second to African governments – ICA). The private sector committed only about 12% of total commitments in 2018 according to the same report.

5. Improving on the private sector participation: some policy prescriptions

a) Collect data on infrastructure locally for fresh & innovative ideas, and the promotion of evidence-informed decisions to reduce present and perceived risks associated with a lack of relevant information.

b) Fully implement existing legislation on one-stop for acquiring all the necessary permits and licences.

c) Promote transparency and accountability: the civil society should be a permanent member in the committees in charge of monitoring and evaluation of State budget allocated to infrastructure.

 

The above was written for ABiQ by Hugue Nkoutchou.

For more information on the above or to find out more about project opportunities in Africa or access to finance, please reach out to us.

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