Mega project financing in Africa still a major challenge, report

Raising funds for infrastructure development is difficult in many African countries, but slightly easier in Kenya than in most sub-Saharan African countries, but the country is yet to reach the level of eight other countries in the sub-region.

South Africa and Nigeria, who have a more developed infrastructure financing framework, are the leading in SSA along with Mauritius, Rwanda, Tanzania, Ghana, Botswana and Ethiopia. This is according to a report by Africa Finance Corporation (AFC) and The Boston Consulting Group (BCG) titled Infrastructure Financing in sub-Saharan Africa.

In many African countries government policies and financial markets challenges are hindering potential investors from investing in infrastructural projects, says the report dated May 2017. In government, challenges range from limited public-sector capabilities to develop strategic foresight and planning and insufficient political will.

Others include policy uncertainty, weak regulatory environments and law enforcement, and a shortage of people who have the needed technical skills.

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In financial markets, challenges range from narrow financial markets, higher actual and provisional risks, longer project durations, significant cost overruns, and currency mismatches which make financing issues more complex.

In addition, Africa often fails to attract first-tier international private investors in infrastructure projects, and a number of the second and third-tier investors that tend to be more active in the continent lack some capabilities themselves.

“Financial systems, too, need upgrading. Only the banking sectors of South Africa and (to a lesser extent) Nigeria currently offer financial markets sound enough to be tapped for infrastructure projects – although, in a similar vein, Kenya has developed a framework for infrastructure bonds,” the report said.

A World Bank report “Africa Pulse” points out that closing the infrastructure gap in sub-Saharan Africa would increase per capita GDP by 2.6 per cent a year.

Analysts have estimated that the total financing requirements is about $92 billion (Sh9.5 trillion) per annum.

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Only about half of this amount can be raised from domestic revenues, Development Finance Institutions (DFIs), Public Private Partnerships (PPPs), natural resources – backed contracts and bilateral.

PPPs have made a significant contribution to infrastructure development in the region, but they are not a solution. They remain complex both in negotiation and execution.

The most pressing challenges facing infrastructure investment in sub-Saharan Africa are; limited public sector capabilities, insufficient political will, policy uncertainty, and weak regulatory environments.

A shortage of available people who possess needed technical skills.

Financing complexities attributable to narrow financial markets, higher actual and provisional risks, longer project durations, significant cost overruns, and currency mismatches.

The report said in view of these challenges, investors must take a more integrated approach to project life cycles, assure political buy-in and ongoing local negotiation skills, and accept longer maturation periods and higher uncertainty.

Most key players believe that the levels of public sector capacity, political will, policy certainty, and regulatory environment in sub-Saharan Africa are below the levels that are usual elsewhere, and that this translates into greater political and regulatory risks.

Although further financing innovations are needed, financing is not the only obstacle or even – for some countries, the most important one.

Two other impediments need to be overcome, that is, policies and execution. On these two fronts, much remains to be done.

“Africa’s governments recognise the infrastructure problem, but they have neither the financial resources nor the technical ability needed to close the gap by themselves. Private capital and expertise must be mobilised,” the report said.

It stated that international private capital especially Foreign Direct Investment (FDI) has much to gain by broadening its investment in African infrastructure.

Successful projects are likely to generate a higher return on investment than similar projects in other regions, but to succeed in Africa, investors must adapt to an environment that presents a number of challenges related to government and financial markets.

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The report said that most African countries’ regulatory frameworks remain limited, piecemeal and untested.

It suggests that African governments should understand and nurture the idea that increased private investor involvement in the infrastructure space is the best way to achieve intensive jobs creation and to incentivise funding and skill transfer.

Establish a solid legal and regulatory framework and guarantee its enforcement and stability both within the relevant sector and more generally by clarifying specific standards and relative laws, develop fiscal incentives and facilitate provisions that promote dispute settlement and licensing.

Equally, enhance individuals’ capabilities with training and build effective institutional capabilities in specialised PPP units.

Formulate an integrated infrastructure plan and create a steady pipeline of new projects across these segments.

These are; basic infrastructure that is difficult to make economically profitable should be the responsibility of governments and development partners.

Infrastructure that is financially viable with appropriate tariffs in place should be the responsibility of private investment via concessions or PPPs.

Infrastructure that is marginally profitable, but not enough to justify a purely private investment should be handled either through the use of PPPs or via Operation and Maintenance (O&M) contracts.

Similarly, develop domestic capital and debt markets that provide lower financing costs and longer tenures.

Such markets also increase investors’ access to local currency financing for infrastructure projects, pursuing ideas such as issuing infrastructure bonds for the retail market that are backed by some level of governmental guarantee.

Strong financial markets also support refinancing to reach an optimal capital structure and to revolve the existing debt component.

Insist on transparency, enforce anti-corruption standards and strengthen anti-waste capabilities.

And, ensure that government follows up on projects through the end of construction and on into ongoing operation, recognizing that its work does not end, and in many respects only begins with the concession agreements.

The report said private sector investors in African infrastructure projects need four key attributes.

First, a mind-set and expectations that reflect the distinctive realities of the African investing environment, in particular, persistence and resilience, a long-term view of project success, and appropriate risk tolerance.

Deep local knowledge of each target market and each local environment, as well as of local dynamics.

An entrepreneur/engineer outlook rather than a more hands-off financier-type viewpoint with an integrated end-to-end view of the project and a willingness to acquire in-house capabilities for its different stages.

And finally, awareness of community engagement as a core priority, not an add-on.