SA lags be­hind African coun­tries

An ef­fec­tive state is needed to roll out large projects on time and within bud­get

Financial Mail - Investors Monthly - - Special Report Infrastructure - David van Biljon

Though there has been sig­nif­i­cant progress with fund­ing in­fra­struc­ture projects across Africa, there re­mains a huge fi­nanc­ing gap. Opin­ions dif­fer as to what the ex­act fund­ing short­ages are to ad­e­quately ad­dress Africa’s in­fra­struc­ture back­log. The African Union (AU) es­ti­mates the fund­ing gap to be US$50bn/year while the con­sult­ing firm, McKin­sey, cal­cu­lates the fund­ing need at about $150bn/year un­til 2025, while cur­rent fi­nanc­ing com­mit­ments are at $80bn and will only po­ten­tially ramp up to $110-$120bn by 2025 if noth­ing changes.

Kannan Lak­mee­ha­ran, part­ner at McKin­sey, says the fund­ing gap es­ti­mate is based on African govern­ment’s aim to build up an in­fra­struc­ture stock level of about 70% of GDP in the next 10 years, that pro­jec­tions for GDP growth rates pan out and mul­ti­lat­eral agen­cies and de­vel­op­ment part­ners are able to con­tinue to main­tain their lev­els of sup­port for African in­fra­struc­ture.

“We es­ti­mate that in the pe­riod from 2012 to 2015, African govern­ments have pro­vided 30% of the fi­nanc­ing (from their bud­gets), while de­vel­op­ment fi­nance in­sti­tu­tions, mul­ti­lat­eral and bi­lat­eral banks and de­vel­op­ment part­ners have pro­vided 47% of the fi­nanc­ing, China-based in­sti­tu­tions pro­vided 15% of the fi­nanc­ing and the pri­vate sec­tor the re­main­ing 9%,” Lak­mee­ha­ran says. He notes that achiev­ing the UN’s Sus­tain­able De­vel­op­ment Goals will re­quire more fund­ing, par­tic­u­larly in Africa, South Asia, and other low-in­come re­gions where ac­cess to ba­sic in­fra­struc­ture is lack­ing.

“The UN Con­fer­ence on Trade & De­vel­op­ment es­ti­mates that cur­rent spend­ing on eco­nomic in­fra­struc­ture will need to in­crease by a fur­ther $1.1 tril­lion per year to ful­fil the UN’s goals in de­vel­op­ing economies and sup­port­ing growth.

“This roughly triples the size of the spend­ing gap we ob­tain from com­par­ing cur­rent in­vest­ment pat­terns against ex­pected rates of eco­nomic growth alone,” he says.

Par­tic­i­pants in the field of de­vel­op­ment fi­nance of­ten be­moan the dearth of pri­vate sec­tor in­vest­ment. A re­port by the In­ter­na­tional In­fra­struc­ture Con­sor­tium (ICA), “In­fra­struc­ture Fi­nanc­ing Trends in Africa — 2015” bears this out. Of the to­tal of $83.4bn com­mit­ted to Africa’s in­fras­truc­tural de­vel­op­ment in 2015, only $7.4bn was com­mit­ted to en­ergy in­fra­struc­ture by the pri­vate sec­tor.

Lak­mee­ha­ran stresses the role that govern­ments can play to in­crease pri­vate sec­tor par­tic­i­pa­tion.

“Cur­rently the re­turn pro­files for Africa in­fra­struc­ture funds are in the range of 17% to 18%. This is based on per­cep­tion of higher lev­els of risk. Govern­ments can re­duce this by fo­cus­ing on good gov­er­nance, cre­at­ing trans­parency on deal flow and fo­cus­ing public bud­gets on crit­i­cal in­fra­struc­ture projects that are less at­trac­tive to pri­vate in­vestors,” says Lak­mee­ha­ran.

On the po­ten­tial for pri­vate sec­tor fund­ing of in­fra­struc­ture, Lak­mee­ha­ran says that McKin­sey looked at the amount of as­sets un­der in­vest­ment glob­ally that may have an al­lo­ca­tion to in­fra­struc­ture and Africa.

“Based on that we came to a po­ten­tial pool of at least $550bn that could be avail­able for in­vest­ing in the right projects,” he says.

“Full trans­parency on the ac­tual re­turns and ma­te­ri­alised risks of in­fra­struc­ture in­vest­ment, in­clud­ing, but not lim­ited to, de­faults, is a pre­con­di­tion for giv­ing in­vestors greater clarity, de­vel­op­ing in­dexes and other in­vest­ment prod­ucts, and jus­ti­fy­ing changes to reg­u­la­tory treat­ment.”

Lak­mee­ha­ran be­lieves that de­vel­op­ment fi­nance in­sti­tu­tions could take the lead in pre­par­ing plat­forms and pre-ar­ranged blended fi­nance struc­tures (cou­pled with risk mit­i­ga­tion in­stru- ments) that speed up the process for pri­vate sec­tor play­ers.

“De­vel­op­ment banks can pro­vide mez­za­nine fi­nance as first­loss ab­sorber or de­ploy other tools for credit en­hance­ment, as well as in­sure against po­lit­i­cal risk. For ex­am­ple, this can be ac­com­plished via the Mul­ti­lat­eral In­vest­ment Guar­an­tee Agency,” he says.

Mar­tyn Davies, MD for emerg­ing mar­kets and Africa at Deloitte, be­lieves that a pre­req­ui­site for at­tract­ing more pri­vate cap­i­tal is a track record of suc­cess­ful in­fra­struc­ture de­vel­op­ment. “It re­quires an ef­fec­tive state — one that can roll out large projects on time and within bud­get, with a min­i­mum of ‘rent seek­ing’ (cor­rup­tion),” he says.

Davies says Ethiopia stands out for its size­able and con­sis­tent GFCF spend. “In the past decade; on av­er­age, it has spent the equiv­a­lent of 32.8% of its GDP on in­fra­struc­ture. In con­trast, SA and Nige­ria, the con­ti­nent’s two largest economies, have con­sis­tently un­der­spent on in­fra­struc­ture, spend­ing on av­er­age the equiv­a­lent of 19.9% and 11.9% of GDP re­spec­tively.”

Nena Stoiljkovic, vice-pres­i­dent of Blended Fi­nance & Part­ner­ships at the In­ter­na­tional Fi­nance Corp, says: “Our blended cli­mate fi­nance unit uses con­ces­sional fi­nan­cial in­stru­ments such as soft loans and guar­an­tees along­side our own com­mer­cial funds to catal­yse projects that would oth­er­wise not hap­pen.”

Kannan Lak­mee­ha­ran: More fund­ing re­quired to achieve UN de­vel­op­ment goals

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