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Development financiers filling key African infrastructure gap – report

12th February 2016

By: Schalk Burger

Creamer Media Senior Deputy Editor

  

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Development finance institutions and export credit agencies, the largest funders of African infrastructure projects, are creating an environment for more investment in the continent’s infrastructure, says global law firm Baker & McKenzie South Africa banking and finance partner Jen Stolp.

“Part of their work involves providing funding to get projects though the prefeasibility and feasibility stages to a bankable phase, when other institutions, such as commercial banks, can provide some of the funding.

“These institutions invest in high-impact infrastructure projects, typically power genera-tion and transport projects, as well as sponsor projects to develop the regulatory frameworks and policies in countries to improve the investment environment,” she adds.

Development finance institutions and export credit agencies are able to fulfil this role – despite retaining their mandate to fund projects that provide returns – because they have a mandate for social upliftment that enables them to fulfil broader strategic goals and ensure the credit worthiness of projects for sponsors, which boosts the investment case for other financial institutions, she explains.

Stolp refers to the Baker & McKenzie and The Economist ‘Spanning Africa’s Infrastructure Gap’ report, which investigated infrastructure spending patterns according to the categories of power, transport, water and sanitation, commodities (including extractives) and a general infrastructure category of 22 African countries from 2009 to 2014 using information from leaders in private-sector organisations and from multilateral and bilateral institutions.

The largest funders of African infrastructure projects are the World Bank (22%), the Develop-ment Bank of Southern Africa (DBSA, 18%), the Asian Development Bank (18%), the French Development Agency (10%) and the US Export-Import Bank (7%).

“We are surprised, and pleased, by how much the DBSA contributes to funding infrastructure development in Africa,” says Baker & McKenzie South Africa partner Kieran Whyte.

However, private and development capital constitutes only 72.3% of the required funding of these five infrastructure categories, and a 27.7% gap remains. About $90-billion a year of infrastructure funding is required to enable the continent to catch up with the level of development in developed countries.

“The $25.6-billion-a-year infrastructure funding gap can potentially be addressed by tapping unused sources of funding, including institutional funds from asset managers, insurers and others,” says Whyte.

These sources are typically encouraged by the involvement of development finance institutions and export credit agencies in a particular sector. Their involvement also helps with the pricing of senior debt in such projects, especially if these institutions provide a goodly portion of the junior debt for projects, typically granted upfront to get projects to the bankability stage, concurs Stolp.

However, there is lower investment in less profitable, but socially important, projects, such as water and sanitation, with such projects receiving only 60% of the funding that transport receives and less than half of what power projects receive. Governments will typically invest in these projects, owing to pressure from civil society, she notes.

Investments in power projects will remain dominant in terms of funding because of increas-ing demand, as well as offtake agreements and utility or government guarantees improving the investment case for power, she says.

Further, transport is also expected to retain its propor-tion of the funding, as transport corridor develop-ments are continuing, concludes Whyte.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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