BY DR AKINWUMI ADESINA
The Department for International Development (DFID) is a key strategic partner of the African Development Bank. Since joining the bank in 1983, the DFID has been a lead supporter of the African Development Bank. Its strong and consistent support for the African Development Fund has helped us to support the development of low-income states, especially the fragile ones.
And just think of the impact that our work has had on infrastructure alone in the past four years. The African Development Bank, through its operations, has helped to connect 18 million people to electricity, 101 million people with access to improved transport and 60 million people with access to improved water and sanitation.
Without any doubt, DFID and the UK Government’s investment in the African Development Bank pays off and delivers huge
impacts in Africa.
There’s much talk about the infrastructure-financing gap. But we should now be framing this differently, as the infrastructure demand opportunity for financing. And the opportunities are many: from railways to ports, airports, water, sanitation, ICT and energy.
That’s a $68 -108 billion annual investment opportunity.
Investors tapped early into information and communications technology infrastructure in Africa. Those investments became game changers for Africa.
Just under two decades ago, Africa had fewer telephones than Manhattan in New York. Today Africa has over 440 million cell phone subscribers. Returns on digital infrastructure are very high as the continent expands broadband infrastructure to boost connectivity and improve services.
Take the case of energy. Unmet demand is for some 600 million people for electricity. Huge opportunities exist for investments in renewable energy, especially for hydropower, wind, solar, thermal and geothermal.
But many of these opportunities can’t be realized unless we invest a lot more in project preparation to make projects bankable. The African Development Bank through its New Partnership for Africa’s Development (NEPAD) infrastructure project preparation facility has helped to mobilize financing for $8.5 billion of infrastructure projects. That’s a leverage ratio of 1:525.
We helped to establish Africa 50, an institution to support infrastructure project preparation and financing. It has raised over $860 million and will now be establishing a $1 billion third-party private fund to finance infrastructure investments by private sector on a commercial basis.
The Sustainable Energy Fund for Africa (SEFA) based at the Bank, has supported investments in excess of $800m in renewable energy. And I was delighted yesterday to announce the partnership of DFID with the African Development Bank for £80 million to further support project preparation for infrastructure. There’s definitely need for more resources for project preparation facilities in Africa.
The largest share of infrastructure finance is done by governments. Some $37.5 billion annually. There’s a need to improve the efficiency of public financing for infrastructure through better, more efficient, and competitive procurement processes, quality design, timely execution and better maintenance culture. Equally important is the need to focus on quality infrastructure, and move beyond the least-cost projects, and focus more on life cycle costs for infrastructure.
Many countries are borrowing to finance infrastructure. While such financing, especially if concessional, can help, greater focus should also be put on ensuring that governments attract the private sector into infrastructure financing. More focus is also needed to improve the policy, legal and regulatory environment to support greater private sector investments in infrastructure.
With global climate change, and increasing frequency and intensity of extreme weather events, there’s an urgent need to climate proof infrastructure investments. The devastating cyclones in Mozambique, Malawi and Zimbabwe led to massive destruction of critical infrastructure. The same applies for coastal states, which are more vulnerable to coastal erosion and floods. Infrastructure investments must now be climate-resilient.
Institutional investors hold a large pool of capital that need to be mobilized and channeled into financing of infrastructure. Total assets under management alone by pension funds, sovereign wealth funds and the insurance sector in Africa is about $1.8 trillion. Tapping just a fraction of this into infrastructure will go a long way to close the infrastructure-financing gap. Many reforms are needed. One is to designate infrastructure as an asset class for institutional investors. Meeting their infrastructure allocation targets would require them to hire quality staff that understand infrastructure.
Multilateral development banks like the African Development Bank and others should take early-stage investment risk in the project development phase. When cash-flow streams are stable, these brown-field projects can be rolled off to institutional investors.
The African Development Bank launched a $1 billion synthetic securitization that it used to transfer risks on its private sector portfolio assets to the private sector, the first time this has been done by a multilateral development bank. The African Development Bank was able to free up $600 million for its balance sheet, which it is using towards renewable energy investments.
We are currently exploring with the DFID the use of synthetic securitization for the sovereign portfolio of the African Development Bank. This will be used to transfer sovereign risk to the market, working with insurers and reinsurers in the UK. This could be a huge game changer for how governments can transfer their sovereign risks on infrastructure to the market.
Because the bulk of infrastructure is financed through foreign loans, and the revenue streams are in local currency, it introduces high financial and forex risks to investors. Using swaps and hedging are effective, no doubt, but more can be achieved by focusing on local currency financing. This will also help with debt sustainability as the bulk of Africa’s external debt is on infrastructure.
That’s why the African Development Bank launched the African Domestic Bond Fund to support the development of infrastructure debt markets in Africa. This helps in crowding in international investors and improving cross-border investments in Africa. The development of capital markets is also critical to create the liquidity and exists to encourage more investors into infrastructure in Africa.
A critical constraint to investments in infrastructure is the high level of risks, ranging from project risks, financial risks, operational risks, and political risks. De-risking instruments such as partial risk and partial credit guarantees are quite effective in leveraging private sector investments.
The African Development Bank used a partial risk guarantee to support the Lake Turkana wind power project in Kenya, the largest wind power generation project in Africa, which will produce 300 MW of electricity. The African Development Bank’s €20 million Partial Risk Guarantee essentially backstopped the government of Kenya’s obligations to developers against delays in the construction of transmission lines.
The African Development Bank also has a Private Sector Credit Enhancement Facility, which it uses to reduce risks of financing private infrastructure projects in fragile states. And it works: so far with $500 million in credit guarantees, provided through the African Development Fund, it has leveraged $2.5 billion of financing into fragile states.
And the default rate is zero.
To attract even more infrastructure investments, two years ago, the African Development Bank launched the Africa Investment Forum, to advance bankable projects, secure financing and accelerating financial closure for projects. In 2019, at the fully transactional forum, investor interest was secured for projects worth $40.1 billion in less than 72 hours. The African Development Bank and its partners have formed a formidable financial alliance that pools together development finance institutions, commercial banks and insurers, with a co-guarantee platform to de-risk
infrastructure projects at scale.
There’s so much to do to help close the infrastructure-financing gap in Africa. Progress is being made as Africa witnessed an increase in infrastructure financing to $100 billion in 2018, an increase of 24% over 2017 and 38% over 2015-2017 on average.
As we develop and deploy innovative instruments for infrastructure, mobilize domestic resources, support governments to do the right things, and create more opportunities for greater private sector investments, we will fully meet Africa’s infrastructure financing demand.
Together let’s do more to accelerate sustainable infrastructure investments in Africa.
Abridged version of speech delivered at the UK-Africa Investment Summit, London, January 21, 2020