Investment can reduce poverty

IF THE GAP between the quality and quantity of sub-Saharan Africa’s infrastructure and the infrastructure in the rest of the developing world could be narrowed, the growth of gross domestic product per capita for the region would be increased by around 1.7 percent per year. This is according to the latest edition of the World Bank report – Africa’s Pulse.

It has been estimated that development of Africa’s infrastructure will require investment of $93 billion (R1.23 trillion) per year for the next decade. As noted in the World Bank’s report, to-date less than half that amount is being invested annually, with only 50 percent of the amount invested being provided by regional governments. This leaves a funding gap of $48bn a year and an increasing need for the private sector to play a significant role.

Incentivising the private sector to invest in Africa’s infrastructure is proving challenging. Among the most oft-cited obstacles to increasing private sector participation are (i) whether real or perceived, elevated levels of risk, particularly political risk driven by macroeconomic instability in many African countries (ii) in the power sector, poor credit utility off-takers, (iii) inadequate institutional and regulatory frameworks, particularly for public private partnership arrangements and (iv) a lack of “bankable” projects.

Many development finance institutions (DFIs) are at the forefront of addressing these and other risks that deter investment across the continent and are making it their mission to catalyse investment from institutional investors, commercial banks and other private sector participants.

Guarantees and insurance provided by DFIs and export credit agencies (ECAs) are the most obvious example of explicit risk mitigation available to support infrastructure projects across the region.

For example, the financing for the construction of the 450 megawatts Azura-Edo independent power plant in Nigeria was supported by $237 million World Bank partial risk guarantees. These guarantees served to leverage a total investment in the Azura power plant of more than $900m, made by a set of 20 international banks and equity finance institutions that are drawn from nine different countries. Obtaining the World Bank guarantees was crucial to the success of the financing.

Risk mitigation

The presence of DFIs and ECAs also provides implicit risk mitigation through the so-called “umbrella effect”: DFIs have influence and leverage that makes it more likely that governments and state-owned entities will ensure that debt repayment and other terms and conditions associated with a project are met.

DFIs are also actively engaged in creating enabling environments to address regulatory and institutional challenges to private sector investment.

The IFC’s Scaling Solar programme in Zambia, Senegal, Madagascar and Ethiopia is a good example.

Under the Scaling Solar programmes, not only does the IFC provide financing support, but it has developed a package of bankable project documentation and a simplified tendering process all designed to increase transparency, reduce transaction risk and speed negotiations.

Key to developing an enabling environment is capacity building within the public sector. For example, many governments in emerging markets have limited capacity to manage, structure and negotiate private power concessions and can find themselves up against deep-pocketed, international investors that have the experience and the resources to take the upper hand in negotiations.

Here again, DFIs are playing a major role. The African Legal Support Facility (ASLF), hosted by the African Development Bank (AfDB), is an organisation established to provide legal advice and technical assistance to African countries to redress these negotiating imbalances.

To help increase the number of “bankable” projects across the continent, Nepad’s Infrastructure Project Preparation Facility (IPPF), again hosted by the AfDB, provides grants to African governments, Regional Economic Communities and African infrastructure-related institutions to prepare high-quality viable transboundary projects in energy, transboundary water resources, transport and ICT. Other stakeholders are lending support to leveraging private sector investment across the continent.

If the private sector can successfully be incentivised to invest in infrastructure projects in Africa, the continent will take a major step forwards in reducing poverty and improving African lives.