In­vest­ment can re­duce poverty

The Star Early Edition - - OPINION & ANALYSIS - Frances Okosi, Part­ner in the Bank­ing & Fi­nance Prac­tice at Baker McKen­zie in Jo­han­nes­burg. Frances Okosi

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.

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