New finance models could boost Africa

THE Organisation for Economic Co-operation and Development report on Infrastructure to 2030 estimates global infrastructure requirements by 2030 for transport, power generation, transmission and distribution, water and telecommunications to be in the order of $71-trillion (about R1 125-trillion).

According to the African Development Bank, Africa requires infrastructure financing of more than $100billion annually to 2020 to meet its development targets. Such amounts cannot be financed by traditional sources of public finance alone, and the private sector has to play a role.

The financial sector plays an essential role in providing and channelling financing for investment, both short-term and long-term financing. However, the traditional banking model is evolving. Disintermediation and the growth of capital markets have led to a shift in the structure of the financial sector, with institutional investors such as pension funds, insurance companies, mutual funds and, most recently, sovereign wealth funds, becoming providers of long-term capital.

Private sector participation in infrastructure can reduce pressure on public finances and increase the portfolio of projects in the public sector investment space. With more than $75-trillion in assets held by institutional investors globally, and more than R6.5-trillion in South Africa, institutional investors can and should play a big role in bridging the infrastructure gap.

Infrastructure investments should be attractive to institutional investors as they can assist with liability-driven investments and provide duration hedging. These investments can generate attractive yields in excess of those obtained in the fixed income market but with potentially higher volatility.

Since listed infrastructure tends to move in line with broader market trends, it is a commonly held view that investing in unlisted infrastructure, although illiquid, can be beneficial to ensure proper diversification.

Although growing rapidly, institutional investment in infrastructure is still limited. Globally, pension fund investment represents about 1% of total assets and in South Africa it is around 0.3%.

Before 2006, South Africa was the only sub-Saharan country to issue a foreign currency-denominated bond.

From 2006 to 2015 more than 14 other African countries issued international sovereign bonds. This rise in borrowing was mainly due to rapid economic growth, higher commodity prices, improved economic policies, low global interest rates and increased global liquidity.

In 2012, Zambia issued a successful bond, which was 15 times oversubscribed. The $750-million bond was used to develop power projects and the national rail network. Rwanda raised $400-million in 2013, mainly to develop a

The private sector has to play a role

hydropower plant, national carrier RwandAir, and the construction of a convention centre. Senegal plans to raise $1-billion in 2016.

Falling commodity prices and slow growth will make it challenging for issuing countries. Record low interest rates in the US may be a thing of the past, and risk appetites of foreign investors are starting to wane. Oilproducing countries will face higher borrowing costs, which could lead many countries to postpone issuance or reduce the amount of issuance.

The difficulty is that failure to make significant progress towards bridging the infrastructure gap could prove costly in terms of slower economic growth and loss of international competitiveness.

Leoka is an economist at Argon Asset Management