Financial Mail

SA lags behind African countries

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

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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 instrument­s) 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
Kannan Lakmeehara­n: More funding required to achieve UN developmen­t goals

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