b. ODA

This section discusses the role of Official Development Assistance (ODA) from the OECD countries to African infrastructure development. These countries have predominantly given infrastructure investment assistance indirectly via capital contributions to the World Bank and the African Development Bank. Bilateral assistance on a country-by-country basis has continued but here the focus has generally been away from the traditional infrastructure sectors of telecoms, transport, energy, water and sanitation. A recent Overseas Development Institute (ODI) report found that ODA remains the largest single source of external development finance at country level and its flows are growing, even in MICs.'n Of these flows it is estimated that just under half goes to infrastructure spend. '

Via the World Bank and the AfDB, support for large scale infrastructure investment projects remains an important contribution by OECD countries.

At the World Bank, infrastructure lending represented 47% of all global lending in 1980. Over time, however, infrastructure as a target sector for such aid has varied. During the late 1990s and early 2000s, the Bank’s emphasis on policy lending and human development funding left infrastructure to the regional banks and the private sector, which lowered infrastructure as a share of lending to below 30%. That downward trend ended around 2005, as infrastructure’s importance to growth and poverty alleviation received greater recognition, and the role of multilateral assistance, in particular, began to be considered essential.'7

The clear advantage of ODA, WB and AfDB funding is that the loans and grants go to areas where private sector interest is low. Whereas the private sector tends to stick to countries and sectors where they perceive the risk to be low, governance to be strong and where the ease of doing business is high, ODA is spread more evenly amongst SSA. Further the ODA community can operate in fragile states.

c. China

China has a large and visible presence on the African continent when it comes to infrastructure financing. However, determining the scale of its commitment and projects under implementation remains difficult, as the country does not participate in any formal data recording processes like other OECD donors under the DAC. It is also clear that there has been a marked slow-down in Chinese investment on the continent, partly due to the slowdown of the Chinese economy, but the ICA in 2014 also reported a slow-down in road and rail projects that would normally have attracted Chinese investment. In 2014 it invested USS3.9 billion, which is a massive drop from an average USS13 billion per annum the three years prior. The projects of choice remain in road and rail, although China’s two largest investments in 2014 went to a port and airport development, which could indicate a change in China’s sector choice for the foreseeable future. It is clear, though, that China is involved where the private sector fears to tread.

Ghana and Ethiopia have emerged as the highest recent recipients of Chinese infrastructure finance, followed by Nigeria, Cameroon and Zambia. It has generally been understood that Chinese funding follows resource extraction, which was confirmed in reports by the ICA and the World Bank. However, Brookings found that while

Chinese financing in resource-rich countries is still double the average volume of those flowing to non-resource-rich countries, this gap has sharply diminished over time. The cumulative average of Chinese financing to resource-rich countries doubled from $300 million to over S622 million between 2005-2008 and 2009-2012. But over the same period, Chinese commitments to the non-resource-rich countries leapt from S43 million to $285 million—a 550 percent increase!

A trend that has emerged from Chinese lending to African countries is that lending does not merely focus on financing, but also includes technical assistance that accompanies these loans — particularly infrastructure loans. This illustrates that increasingly MDBs no longer have the sole mandate on development knowledge, eroding one of their key competitive advantages.

A positive change has been a cooperation agreement signed between the AfDB and China establishing a ‘Growing Africa Together Fund’, which has resulted in a joint financing project of Tanzania’s Bus Rapid Transport System. The direction and volume of Chinese investment will have to be followed with interest in coming months and years as the slow-down reveals Chinese priorities in times of limited resource availability.

d. Local development finance institutions

In Africa alone there is estimated to be more than 140 DFIs, comprising national and multinational institutions, as well as those with different mandates (e.g., universal, sectoral, import—export, etc.).19 National Development Finance Institute (NDFIs) play an important role not only in domestic resource mobilisation but also in building partnerships towards more effective onwards lending from the MDBs. NDFIs often have particular niches that MDBs can leverage — for example, the Development Bank of Southern Africa (DBSA) has a particular focus on project preparation, including the technical skills, procedures, etc. to undertake this.

Generally speaking, NDFIs understand the environment and business culture within which a project is planned better, largely due to their on-the-ground presence and being staffed with locals, ultimately allowing an improved assessment of risks for various projects. Where NDFIs are involved, the project oversight role can be shared between the national DFI as well as the MDB concerned although this does not always seem to work well.

There is a significant precedent of MDBs leveraging the expertise of NDFIs -for example, the AfDB has over the years extended numerous lines of credit (LOC) to the DBSA, which the DBSA in turn used to fund infrastructure projects in the region.20 Equally, one of the first loans extended by the NDB to Brazil was similarly a LOC to its NDFI, the Brazilian Development Bank (BNDES21), to fund renewable energy projects in the country.

e. MDBs' important role

Despite the structural challenges faced by MDBs (political economy constraints, business processes, etc.) and the plethora of alternative financing options available to countries, this is not to say that MDBs have become irrelevant. MDB’s main competitive advantage over other sources of financing remains the extremely low cost at which they can provide financing. Whereas concessional loans from MDBs can attract less than 1% interest, a grace period of 10 years, and a maturity of 20—50 years, an equivalent loan from private financiers can carry interest rates as high as 7% with maturities of below ten years. Such expensive loans further compound a debilitating characteristic of African countries: indebtedness. Across Africa, numerous countries found reprieve from unsustainable debt following the World Bank and IMF’s Highly Indebted Poor Country (HIPC) initiative that saw debts being cancelled to assist countries to return to more sustainable debt levels. Nevertheless, following the abundance of external financing options and increased capacity to service debts many countries have again become highly indebted. The case of Nigeria is illustrative (see Figure 3.1 below):

Nigeria’s external debt

FIGURE 3.1 Nigeria’s external debt.

Source: CSEA analysis using data from Debt Management Office (2015).

Note: "Others” include: bilateral and commercial (eurobonds) debts.

Following the Paris club debt cancellation, which constituted a major portion of Nigeria’s external debt pre-2006, the country’s external debt profile has been largely dominated by debts from multilateral creditors since 2005. After the dip in 2006, Nigeria’s external debts have been rising steadily since 2007, reaching 78% of the 2005 level in 2015. Besides multilateral creditors, bilateral and commercial (Eurobonds) creditors (‘others’ in Figure 3.1) have increasingly played key roles in Nigeria’s borrowing patterns since 2011.

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