African construction Issuof Sanogo/Getty Images

Banking on African Infrastructure

Africa faces a yawning gap between its infrastructure needs and its ability to attract the foreign investment required to finance projects. The continent's leaders must recommit to creating a more favorable investment climate, one that can attract capital while limiting investors’ risk exposure.

JOHANNESBURG – As the US Federal Reserve embarks on the “great unwinding” of the stimulus program it began nearly a decade ago, emerging economies are growing anxious that a stronger dollar will adversely affect their ability to service dollar-denominated debt. This is a particular concern for Africa, where, since the Seychelles issued its debut Eurobond in 2006, the total value of outstanding Eurobonds has grown to nearly $35 billion.

The Year Ahead 2018

The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.

Order now

But if the Fed’s ongoing withdrawal of stimulus has frayed African nerves, it has also spurred recognition that there are smarter ways to finance development than borrowing in dollars. Of the available options, one specific asset class stands out: infrastructure.

Africa, which by 2050 will be home to an estimated 2.6 billion people, is in dire need of funds to build and maintain roads, ports, power grids, and so on. According to the World Bank, Africa must spend a staggering $93 billion annually to upgrade its current infrastructure; the vast majority of these funds – some 87% – are needed for improvements to basic services like energy, water, sanitation, and transportation.

Yet, if the recent past is any guide, the capital needed will be difficult to secure. Between 2004 and 2013, African states closed just 158 financing deals for infrastructure or industrial projects, valued at $59 billion – just 5% of the total needed. Given this track record, how will Africa fund even a fraction of the World Bank’s projected requirements?

The obvious source is institutional and foreign investment. But, to date, many factors, including poor profit projections and political uncertainty, have limited such financing for infrastructure projects on the continent. Investment in African infrastructure is perceived as simply being too risky.

Fortunately, with work, this perception can be overcome, as some investors – such as the African Development Bank, the Development Bank of Southern Africa, and the Trade & Development Bank – have already demonstrated. Companies from the private sector are also profitably financing projects on the continent. For example, Black Rhino, a fund set up by Blackstone, one of the world’s largest multinational private equity firms, focuses on the development and acquisition of energy projects, such as fuel storage, pipelines, and transmission networks.

But these are the exceptions, not the rule. Fully funding Africa’s infrastructure shortfall will require attracting many more investors – and swiftly.

To succeed, Africa must develop a more coherent and coordinated approach to courting capital, while at the same time working to mitigate investors’ risk exposure. Public-private sector collaborations are one possibility. For example, in the energy sector, independent power producers are working with governments to provide electricity to 620 million Africans living off the grid. Privately funded but government regulated, these producers operate through power purchase agreements, whereby public utilities and regulators agree to purchase electricity at a predetermined price. There are approximately 130 such producers in Sub-Saharan Africa, valued at more than $8 billion. In South Africa alone, 47 projects are underway, accounting for 7,000 megawatts of additional power production.

Similar private-public partnerships are emerging in other sectors, too, such as transportation. Among the most promising are toll roads built with private money, a model that began in South Africa. Not only are these projects, which are slowly appearing elsewhere on the continent, more profitable than most financial market investments; they are also literally paving the way for future growth.

Clearly, Africa needs more of these ventures to overcome its infrastructure challenges. That is why I, along with other African business leaders and policymakers, have called on Africa’s institutional investors to commit 5% of their funds to local infrastructure. We believe that with the right incentives, infrastructure can be an innovative and attractive asset class for those with long-term liabilities. One sector that could lead the way on this commitment is the continent’s pension funds, which, together, possess a balance sheet of about $3 trillion.

The 5% Agenda campaign, launched in New York last month, underscores the belief that only a collaborative public-private approach can redress Africa’s infrastructure shortfall. For years, a lack of bankable projects deterred international financing. But in 2012, the African Union adopted the Program for Infrastructure Development in Africa, which kick-started more than 400 energy, transportation, water, and communications projects. It was a solid start – one that the 5% Agenda seeks to build upon.

But some key reforms will be needed. A high priority of the 5% Agenda is to assist in updating the national and regional regulatory frameworks that guide institutional investment in Africa. Similarly, new financial products must be developed to give asset owners the ability to allocate capital directly to infrastructure projects.

Unlocking new pools of capital will help create jobs, encourage regional integration, and ensure that Africa has the facilities to accommodate the needs of future generations. But all of this depends on persuading investors to put their money into African projects. As business leaders and policymakers, we must ensure that the conditions for profitability and social impact are not mutually exclusive. When development goals and profits align, everyone wins.

http://prosyn.org/S9hNonQ;

Handpicked to read next

  1. Chris J Ratcliffe/Getty Images

    The Brexit Surrender

    European Union leaders meeting in Brussels have given the go-ahead to talks with Britain on post-Brexit trade relations. But, as European Council President Donald Tusk has said, the most difficult challenge – forging a workable deal that secures broad political support on both sides – still lies ahead.

  2. The Great US Tax Debate

    ROBERT J. BARRO vs. JASON FURMAN & LAWRENCE H. SUMMERS on the impact of the GOP tax  overhaul.


    • Congressional Republicans are finalizing a tax-reform package that will reshape the business environment by lowering the corporate-tax rate and overhauling deductions. 

    • But will the plan's far-reaching changes provide the boost to investment and growth that its backers promise?


    ROBERT J. BARRO | How US Corporate Tax Reform Will Boost Growth

    JASON FURMAN & LAWRENCE H. SUMMERS | Robert Barro's Tax Reform Advocacy: A Response

  3. Murdoch's Last Stand?

    Rupert Murdoch’s sale of 21st Century Fox’s entertainment assets to Disney for $66 billion may mark the end of the media mogul’s career, which will long be remembered for its corrosive effect on democratic discourse on both sides of the Atlantic. 

    From enabling the rise of Donald Trump to hacking the telephone of a murdered British schoolgirl, Murdoch’s media empire has staked its success on stoking populist rage.

  4. Bank of England Leon Neal/Getty Images

    The Dangerous Delusion of Price Stability

    Since the hyperinflation of the 1970s, which central banks were right to combat by whatever means necessary, maintaining positive but low inflation has become a monetary-policy obsession. But, because the world economy has changed dramatically since then, central bankers have started to miss the monetary-policy forest for the trees.

  5. Harvard’s Jeffrey Frankel Measures the GOP’s Tax Plan

    Jeffrey Frankel, a professor at Harvard University’s Kennedy School of Government and a former member of President Bill Clinton’s Council of Economic Advisers, outlines the five criteria he uses to judge the efficacy of tax reform efforts. And in his view, the US Republicans’ most recent offering fails miserably.

  6. A box containing viles of human embryonic Stem Cell cultures Sandy Huffaker/Getty Images

    The Holy Grail of Genetic Engineering

    CRISPR-Cas – a gene-editing technique that is far more precise and efficient than any that has come before it – is poised to change the world. But ensuring that those changes are positive – helping to fight tumors and mosquito-borne illnesses, for example – will require scientists to apply the utmost caution.

  7. The Year Ahead 2018

    The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.

    Order now