Facilitating private-sector investment
G20 Summit

Facilitating private-sector investment

The African Development Bank (AfDB) has initiated several innovative regional infrastructure projects in Africa in recent years. A consortium of multilateral development banks, including the AfDB, has estimated that Africa needs to invest about $93 billion a year in infrastructure to meet current demand. However, current investments, financed mostly from public sources, cover only about $45 billion annually, leaving a deficit of some $48 billion. About a third of this could be reduced by eliminating inefficiencies, but a gap of $31 billion – some five per cent of Africa’s gross domestic product (GDP) – would remain. This gap will need to be financed mostly by the private sector.

The high infrastructure deficit has imposed major costs on the continent in terms of foregone growth and missed opportunities for poverty reduction. Various studies and estimates suggest that if sub-Saharan Africa were to reach the level of infrastructure of Mauritius, its growth of real GDP per capita would increase by about 2.3 percentage points a year. Generating new and innovative sources of finance, especially from the private sector, is thus a key development challenge.

Risk mitigation
However, private capital does not flow easily into infrastructure. The reasons are well known: high transaction costs, political risks and the lack of bankable projects, among others. Still, where sound policy and regulatory frameworks are in place, public-private partnerships (PPPs) and ‘smart’ subsidies can help attract private investors. The AfDB has had risk-mitigation instruments in place for some time, and is developing new ones. The institution, which commits 60 per cent of its annual total lending to infrastructure, estimates its leveraging capacity to be about one to six.

In 2012, at the 18th Summit of the African Union, African leaders endorsed priority energy projects to be implemented by 2020 as part of the Programme for Infrastructure Development in Africa. Nine hydropower projects were identified. To date, the AfDB has been involved in five of them, including the Inga hydropower projects in the Democratic Republic of Congo (DRC) and the Ruzizi III Regional Hydroelectric Project currently promoted by Energies des Grand Lacs, an organisation fostering regional cooperation in energy projects.

The Ruzizi III project, which benefited from cross-border facilitation, will provide additional electricity capacity in Rwanda, Burundi and the DRC. It is the first regional PPP power project in Africa and a model of successful implementation. Transparency and focus on the technical, legal and economic problems that must be overcome were key to success. The project has also benefited from the support of development finance institutions, which financed the initial steps in its development, and are likely to offer political risk guarantees against the risk of sovereign defaults.

Finding private partners for transformational projects, such as the Inga III project, requires innovative approaches to mitigating the key risks. One way of doing this on large infrastructure projects is to utilise political risk guarantees, which have become a common feature of regional PPPs on the continent. In the case of Inga III, preparation costs are estimated to be $1.5 billion. The AfDB, the World Bank, the Agence Française de Développement (AFD), the European Investment Bank and the Development Bank of Southern Africa have all shown interest in financing the project. In the case of the West African Gas Pipeline, equity and shareholder loans were used rather than debt finance.

Overall, though, infrastructure PPPs – broadly defined as contractual agreements between the public and private sectors geared towards developing infrastructure assets and encouraging service delivery – have been much less common in Africa than in other regions of the world. The AfDB cites the lack of skills, in particular investment, financial planning and coordination capacity, as the major constraints on the successful implementation of PPPs in Africa.

In a bid to address some of these challenges, in 2010 the Nigerian Government launched a $31 million capacity-building programme, which is partly funded by the AfDB. Its objectives include providing specialised training to key public-sector personnel in areas such as project feasibility studies, procurement processes and hands-on project management training.

Channelling investment into energy
The launch of the African Renewable Energy Fund (AREF) is an example of how private investment can be channelled into the energy sector. AREF, focused on Africa, committed $100 million to support small- to medium-scale independent power producers (IPPs). AREF will be managed by Berkeley Energy, a fund manager focused on developing and investing in renewable energy projects in emerging markets.

Finally, the AfDB, with the Dutch development bank FMO, the Development Bank of Southern Africa and France’s Proparco, recently signed the $142 million project-financing facility for the development of the 120MW Itezhi Tezhi power project. This project is the first PPP in the energy sector in Zambia and is being developed jointly by Tata Africa and ZESCO as an IPP and the Itezhi Tezhi Power Company.

Launching a successful PPP requires governments to find the political will to make critical decisions quickly and transparently. This challenge can be addressed with the help of quality advisors such as the AfDB’s forthcoming PPP advisory hubs in the South African Resource Centre and North Africa.

The AfDB as investor and founder recently established Africa50, a $100 billion infrastructure fund, to fast-track the continent’s industrial development. This one-stop shop and special vehicle for African institutional investors, endorsed by African leaders, will prepare transformational infrastructure projects and sell bonds to raise funding for project investment. With the critical objective of reducing the time required to develop infrastructure projects in Africa, Africa50 is the result of experience and innovation. It will require African countries to undertake the requisite reforms geared towards facilitating the private sector to invest in infrastructure development and maintenance.

For more information click here