Development capital is transforming Africa’s project build-out

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A NEW report from global law firm Baker & McKenzie in collaboration with the Economist Corporate Network, Spanning Africa’s Infrastructure Gap: How development capital is transforming Africa’s project build-out, reveals that development capital has been by far the predominant funder of African infrastructure since the financial crisis.

It paints a picture of through the cycle investment totalling hundreds of billions of dollars since 2009, with funding shifting to the power and transport sectors. It also reveals which institutions and countries have been the most active funder and the African countries benefiting most from the Development Capital boom.

Africa’s economic growth rate in the last few years has been significantly higher than the global
economic average. In 2015, for example, Africa’s economic rate of growth is expected to be 3.1 percent, compared to a global average of 2.6 percent. This notwithstanding, the region has a host of developmental challenges.

Among them is a yawning infrastructure gap: power, road density, water storage and
irrigation infrastructure, to name just a few aspects, are inadequate or non-existent. Mobile phone
penetration and growth of available bandwidth are bright spots. Nonetheless, according to the
International Telecommunications Union (ITU), at around 27 percent, Internet usage is low relative to other developing regions.

‘To address the infrastructure gap requires many billions of US dollars. A 2009 World Bank estimate indicated that over $90bn annually was required in sub-Saharan Africa alone, a figure likely to have increased in the six years that have passed since then,’ the report says.

Private-sector financiers have ploughed billions of US dollars into Africa-based infrastructure projects. In 2013 the ICA estimates that private-sector players allocated $8.7bn to Africa-based infrastructure projects across a host of sectors, including power, communications and transportation. However, to put that into perspective, Crossrail, a single transport
project in the UK, has a funding envelope of around $23bn.

‘It is clear that private-sector actors’ funding contribution in Africa is not nearly enough, and,
importantly, sourcing the required funding is only part of the challenge,’ the report says.

It notes that addressing the infrastructure deficit in power, transport, water and sanitation, and other sectors, requires the technical capacity to manage the physical build and on-going maintenance, as well as establishing a conducive or “bankable” environment to support large and, at times, complex projects.

These resources, according to the report, unfortunately, are lacking in many African jurisdictions. ‘A crucial enabler to building, upgrading and maintaining Africa-based infrastructure is the collective support provided by the development-capital sector, made up of development finance institutions (DFIs) and export credit agencies. DFIs can bring capital, technical expertise and a capacity to engage in ways in which private-sector players are unable, are ill equipped or are unwilling to do on their own, if at all,’ says the report.

‘Moreover, the participation of DFIs creates a platform that private- and public-sector actors can build on to develop viable infrastructure initiatives. Without the involvement of DFIs, the already inadequate private-sector funding contributions to Africa-based infrastructure projects would be significantly less,’ it adds.

The sectorial allocation of funding indicates that Africa is far from a commodity play. Over two-thirds of this $93bn was directed to the power and transportation sectors. Around 80 percent of approved funding from focus DFIs is going to countries in sub-Saharan Africa. However, just six of the focus countries received 67 percent (or $62.5bn) of the approved funding over the
period. By and large, the six are the countries with the largest economies in the region. Ethiopia is a notable exception, punching above its weight: the East African nation achieved around two-thirds of the funding allocation of Nigeria, notwithstanding the Ethiopian economy’s being less than one-tenth of the size of the Nigerian economy.

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