Bid to break infrastructure-financing impasse in Africa

At the African Development Bank (AfDB) annual meeting in Kigali last week, delegates struck an upbeat note about international capital-market access for the public sector, but an all-too familiar challenge blighted the outlook: the continent’s huge infrastructure-financing gap.

Against this backdrop, the Africa50 fund, the AfDB’s dedicated infrastructure fund, was officially launched with a mandate to invest in development projects that are commercially viable.

At a panel on infrastructure investment during the meeting, Donald Kaberuka, AfDB president, said: “We have looked at infrastructure investing in Africa as a bank and I think we are coming to a plateau now where public resources are not going to increase dramatically and fill in the infrastructure gaps we have.

“So we have created a vehicle to fill the gap. The vehicle will be open to African and foreign investors, and will give the investors good returns.”

The Africa50 fund aims to raise $3 billion through the AfDB itself in equity. The next goal is to raise another equity investment of $10 billion, of local and global capital.

The fund’s main objective is to shorten the time between project idea and financial close from a current average of seven years to less than three years, delivering a critical mass of infrastructure in Africa in the short-to-medium term.

The AfDB has already played an important role in developing African infrastructure projects, including the financing and construction of toll roads in Cote d’Ivoire, Senegal and Nigeria, the Rift Valley Railway project – which will connect Mombasa to Kampala – and power projects in Rwanda, Cameroon and Kenya.

While funds such as Africa50 help, a lack of bankable infrastructure projects is a problem on the continent and remains an obstacle to filling the gap. As it stands, the region needs more than $93 billion each year for the next decade to fill the gap, but only half of that is provided.

It has also been estimated that the lack of infrastructure in the region cuts national economic growth by two percentage points every year and reduces productivity by as much as 40%.

In Nigeria, for example, there is an $8 billion to $10 billion infrastructure deficit each year, while there is a $25 billion asset base in terms of its local pension industry. Of that $25 billion, less than $1 billion is invested in the country’s infrastructure, simply because it’s precluded by the regulatory environment.

Power and electricity is lacking. According to statistics from the AfDB, only 30% of Africa’s population has access to electricity, compared to 70% to 90% in other parts of the developing world – and, according to the World Bank, the 48 countries that make up sub-Saharan Africa generate approximately the same amount of power as Spain. “Institutional investors, such as pension funds, are looking for opportunities, but the reality is that the market hasn’t really given them any,” says Hubert Danso, CEO of Africa Investor. “The format isn’t there.

“Investors say that they want secondary-style market opportunities – listed opportunities – to align with the regulatory environment that they need to manoeuvre within, but what they are being offered are early-stage greenfield projects which they cannot invest in because of rules and regulations.”

He adds: “They can go and invest in secondary-market infrastructure anywhere in the world and get anything from a 7% to 15% return. Should they come to Africa and invest in the highest-risk part of a project which could take four-to-eight years to bring to market? Few are likely to do this.

“For them to get involved, we need to de-risk the asset and including them on an index is part of this process.”

During the meeting, Danso’s investment holding business launched an index in a bid to provide a platform for African and international pension and sovereign wealth funds to access and increase their exposure to bankable infrastructure investment on the continent, in another attempt to bring the asset class to the fore and lower risk.

“Many institutions can only invest in listed securities, so we have worked closely with the capital markets in Africa to develop and create specific products for this to happen,” says Danso.

So far, the index has 50 listed companies covering sectors such as construction, telecommunications, energy and real estate, as well as some oil, gas and raw-material providers.

“These types of sectors are representative of the types of industries that are participating in and benefiting from the infrastructure growth on the continent,” says Danso.

Completed and operating infrastructure assets are ideally suited to pension funds as they generate a steady and somewhat predictable stream of income, which gives a higher yield than bonds at a low risk, explains Andrew Alli, CEO of the Africa Finance Corporation.

“The long-term nature of these types of projects match the long-term nature of pension funds,” he says. “Pension funds should be investing in infrastructure assets, but they are not geared to investing in the early stages. This is something that needs to be overcome.”

The negative perception attached to the asset class will remain an obstacle to overcome.

Kaberuka concluded at the meeting: “African assets have been undervalued because African risk has been exaggerated. As it stands, there is a gap between the need and the supply.

“But instead of focusing on what is not working, we should focus instead on how we can make things work.”