Development Finance Institutions: Infrastructure Financing in Africa
Infrastructure is vital to sustain the rapid economic growth Africa has been experiencing over the last decade and to support poverty reduction efforts. Existing infrastructure in telecommunication, transport, energy, and water is still seriously underprovided, hindering regional economic integration and private sector development. According to the World Bank, Africa needs to spend $93bn annually until 2020 to bridge its infrastructure gap. With an annual financing shortfall estimated at $48bn and serious constraints on public finance both in Africa and in donor countries, unlocking private investment, which represented less than 9% of the total committed funding in 2013, is of utmost importance. To date, private investment has been limited both in terms of geography and sectoral focus. Currently, such investment is mostly concentrated on projects in South Africa, Nigeria, Kenya, Tanzania and Ghana. In term of sectors, telecommunications and electricity alone represent 83% of total private investment in African infrastructure.
Development Finance Institutions (DFI), which represent 35% of external financing in infrastructure projects on the continent, can play a critical role in leveraging private funding. Intervention from DFIs can significantly improve the bankability of projects and increase the flow of private funding into African infrastructure.
The value added DFIs can bring to a project can be broken down into four different categories:
- Policy Additionality: Increases both the quantityand quality of investment by creating an “enabling environment” that is attractive to investors. DFIs can notably contribute to the development of local government capacities, conduct feasibility studies, and assist in the reform and design of legal and regulatory frameworks.
- Financial Additionality: Raises the total quantityof investment, both in terms of DFI resources (equity, mezzanine debt, long term loans, etc.) and the private investment they can leverage as co-investors (syndications that benefit from IFC’s preferred creditor status, for example). Innovative financial structures as well as guarantees and other risk mitigation mechanisms are also key components of financial additionality.
- Demonstration Effects: Increases the quantity of investment by demonstrating to private investors that the risks are lower than they had perceived. A successful DFI-supported project should provide a stimulus for subsequent private sector projects that do not involve DFIs.
- Design Additionality: Increases the qualityof investment by amplifying the development impacts of a project through knowledge sharing, local staff training, or technology transfer.
The impact of DFIs can be especially decisive in early-stage greenfield projects characterized by a high degree of risk and uncertainty, and in which developers and commercial lenders are reluctant to invest. Their ability to provide cheaper, longer term financing and to mitigate financial, regulatory, and sovereign risks is often a key determinant of a project’s viability. DFIs can also improve the “social output” of infrastructure projects through their emphasis on strict ESG (environmental, social and governance) criteria.
DFIs can also help bring private investment to new sectors and geographies. They can notably attract more investment in low-income, fragile countries, which represent 18 of the 54 states in Sub-Saharan Africa. They can also help bridge the important financing gap in water and sanitation as well as in transport (road, railway and airports), which represent particularly underserved sectors.
Over the last five years, several DFIs have launched initiatives to reduce the existing infrastructure gap on the continent. The European Investment Bank and the Development Bank of Southern Africa launched a joint assistance program to improve the preparation and implementation of infrastructure projects. The IFC invested $100M in Macquarie’s Africa Infrastructure Investment Fund 2, which invests in toll roads, thermal power generation, wind power farms, ports, water, and sewerage utilities. The IFC also launched a $150M InfraVentures fund and a $1.2bn Global Infrastructure Project Development Fund to finance public-private partnerships (PPPs) and infrastructure projects in developing countries. These initiatives will provide early-stage risk capital and actively participate in the project development phase with the objective of improving bankability and accelerating financial close. Since 2009, the African Development Bank (AfDB) has delivered over $5.4bn of infrastructure investments on the continent, notably through private sector and PPP financing. The Africa50 Infrastructure Fund that the AfDB launched in 2014, along with the Made In Africa Foundation, will not only finance projects but also helps to improve their bankability. One of the key objectives of this initiative is to reduce the time between project preparation and project development from seven to less than three years.
DFIs, especially the World Bank Group and the AfDB, will continue to represent an important source of finance especially in lower-income countries and underfinanced sectors. Perhaps more important than their direct role in financing, DFIs have a unique ability to improve projects’ bankability through the mitigation of sovereign risks and the improvement of business environment. If fully realized, this “enabling” capacity will have a determinant impact on the reduction of the infrastructure gap in Sub-Saharan Africa.
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