SA lags behind African countries
An effective state is needed to roll out large projects on time and within budget
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