Alternative infrastructure financing sources

There are a variety of reasons why countries have increasingly been able to draw financing from other sources. Combinations of strong growth and sound macroeconomic management have made these countries, especially MICs, attractive for foreign investors or commercial lenders. Equally, some of these MICs in Africa have been able to tap into global debt capital markets.4 The following section highlights a number of key alternative sources of financing in Africa, including private sector financing, official development aid (ODA), local development finance institutions, as well as direct engagement from countries like China.

a. Private funding

The private sector has become a critical investor in infrastructure financing on the continent, accounting for more than half of total external financing. Over the last decade or so, private investment into infrastructure in Sub-Saharan Africa (SSA) grew by 9.5% per annum, whereas it declined significantly during the same period in countries like Brazil and India. In fact, SSA is the fourth largest recipient of private sector funding. In SSA, the top ten recipients include South Africa, Nigeria, Kenya, Tanzania, Ghana, Sudan, Ivory Coast, the DRC, Benin and Uganda.1’ However, in 2013 of the US$17 billion in private sector investment in SSA, less than 2% went to countries other than South Africa and Nigeria and to sectors other than telecoms.

Whereas the telecom sector has been receiving almost all of the private sector investment in SSA in recent years, there seems to be a definite levelling off since 2012, with interest growing in the electricity sector. Within the electricity sector, private sector interest lies almost exclusively in generation capacity with distribution and transmission functions being left entirely to national governments.

The reasons for private sector interest in the past in telecoms are four-fold, namely the clear costs associated with such projects, the low risk exposure during development and construction, the easy securitisation of revenue streams as well as the private sector’s control over the management of the investment. With growing saturation levels in the telecoms sectors, investors are now exploring opportunities in land fibre optic technologies, establishing internet exchange points and connecting SSA states to sub-marine cables.7

According to the Infrastructure Consortium for Africa (ICA) 2014 Survey of private sector investors, more than 50% of respondents said that they would continue to invest in those sectors where they are already active. This implies low prospects for attracting private sector investment into areas outside of telecoms and electricity. Within the electricity sector, 88% of investors indicated that they would be increasing their investments. The most attractive countries identified, included the larger MICs, South Africa, Kenya and Nigeria.

However, the World Bank reports that investors are increasingly looking beyond the traditional recipients as opportunities abound in SSA countries with sound macro-economic policies that have remained stable despite the commodity price slump.1"

From the ICA and other surveys conducted on the private sector in their choice of investment destination in infrastructure projects, four key elements emerged as critical to their investment commitment, including the project feasibility, the country political risk, profitability and legal and regulatory framework. “Constraints such as bureaucratic delays, policy uncertainty, lack of transparency and insufficient institutional capacity remain a challenge.”11 According to a McKinsey report,12 three-quarters ofSSA do not have a large enough GDP to support projects that are larger than USS100 million.

Project feasibility and the project preparation phase come up repeatedly as a key inhibiting factor to investment as the costs associated are high with no guarantee of eventual profits. “The shortage of adequately prepared or bankable projects was a much bigger challenge than finding project finance.” 3 If governments or MDBs are not facilitating investment by completing the project preparation phase, it is very rare for a private sector investor to take on this responsibility.

Under the African Union’s New Partnership for Africa’s Development (NE-PAD), the NEPAD Business Foundation (NBF) works actively to attract the private sector to invest in infrastructure projects. Basing its work on the Programme for Infrastructure Development in Africa that has identified the gaps in infrastructure financing on the continent, the NBF launched the Africa Infrastructure Desk (Afri-ID)

to support the efforts of PIDA by coordinating the private sector and mobilising their resources to implement infrastructure projects that present commercial opportunities for members of the desk. The Afri-ID is therefore a multi-stakeholder platform bringing together the private and public sectors, multilateral finance/development agencies and other stakeholders with the common purpose of accelerating regional infrastructure development in Africa.14

The Afri-ID has managed to attract private sector investment to five port and rail projects on the continent, predominantly in Southern and Eastern Africa, but is actively seeking additional projects for public private partnerships. The real success factor here is that the private sector was attracted to projects outside of telecoms and energy, showing that with multi-stakeholder collaboration under a strong coordinating body any sector can be made attractive to the private sector.

However, regional projects rarely involve private sector investors as the challenge of working with multiple governments and project directors prove too uncertain.

 
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