Infrastructure Financing in Developing Countries of Africa

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1. Africa- The Emerging Growth Pole 2. Growing Infrastructure Needs

3. Infrastructure Financing

Structure of Presentation

Africa- The Emerging Growth Pole

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IntroductionHighest Valued Exports Resource- Rich Continent

Rapidly increasing reservoir of human capital- 2.3 billion people projected for 2050

30% of the world known reserves of minerals; 10% of oil & 8% of gas resources

Largest cobalt, diamonds, platinum, and uranium reserves in the world

Mining, oil & gas account for 28% of the continent’s GDP

US$ 24 billion fisheries sector Home to highest annual rainfall; second largest

tropical forestEmerging as Global Economic Growth Pole Registered an average GDP growth of 4.2% p.a.

during the past decade- double the growth achieved by world as a whole

Growing Infrastructure Needs

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EAP* SAR LAC SSA ECA MENA

87

309

141

58 62 533568

41 28 35 5252

241

100

30 271

RequirementsActualGap

Infrastructure Investment Requirement in Emerging Markets and Developing Economies (2014-20; Annual US$ bn)

Infrastructure Investment Gap

Actual; 259

Gap; 452

All Emerging Markets and Developing Economies (2014-

20; Annual US$ bn)

Note: EAP*: East Asia and Pacific (not including China); SAR: South Asia; LAC: Latin America and the Caribbean; SSA: Sub-Saharan Africa; ECA: Europe and Central Asia; MENA: Middle East and North Africa

Source: Ruiz Nunez, Fernanda and Wei, Zichao, Infrastructure Investment Demands in Emerging Markets and Developing Economies (September 17, 2015). World Bank Policy Research Working Paper No. 7414

In Emerging Markets and Developing Economies (excluding China), US$ 711 billion per year over the period 2014–20 is required to satisfy new infrastructure demand while maintaining service for existing infrastructure

Annual infrastructure investment gap is US$ 452 billion per year; requires doubling of current spending

Half of the spending needs to be allocated to maintenance of existing assets

INFRASTRUCTURE FINANCING NEEDS IN AFRICA

Infrastructure Deficit in AfricaIn

fras

truc

ture

Nee

ds (9

3.3)

Spen

ding

(4

5.3)

Infr

astr

uctu

re G

ap (4

8)

(17.

4)

(30.

6)

Optimizations

Optimized Gap

Opportunity for PPPsSource: World Bank

POTENTIAL FOR INFRASTRUCTURE DEVELOPMENTSub-Saharan Africa World

Mobile cellular subscriptions (per 100 people), 2013

66.0 93.1

Improved water source (% of population with access), 2012

64.4 89.3

Energy use (kg of oil equivalent per capita), 2011

680.6 1890.1

Quality of port infrastructure, WEF (1=extremely underdeveloped to 7=well developed and efficient by international standards)

3.5 4.1

Access to electricity (% of population), 2010

31.8 83.1

Source: World Bank

Only one in three rural Africans have access to an all-season road

Many African countries face chronic power deficit Ports efficiency can be enhanced significantly

Potential for improvement in healthcare infrastructure and delivery

Transportation costs increase prices of African goods by 75%

Water resources are underutilized

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Infrastructure Deficit in Africa: PowerPower-generation Potential for Select SSA

countries by Technology

1 Potential from domestic resources only; gas includes all conventional proven/speculative reserves, and hydro includes all technically exploitable potential. 2 Democratic Republic of the Congo.Source: McKinsey and Company Research

Africa has 13% of the world’s population, but 48% of the global population without access to electricity

Only seven countries- Cameroon, Côte d’Ivoire, Gabon, Ghana, Namibia, Senegal and South Africa- have electricity access rates exceeding 50%

Rich in potential power-generating capacity. Excluding solar, there is an estimated 1.2 terawatts of capacity. Solar can deliver about 11 terawatts

To meet energy demand in Africa by 2040: US$ 43 billion of annual capital investment required [Of that, US$ 5.4 billion for transmission (regional interconnectors)]

Current annual investment in Africa energy projects- less than US$ 5 billion.

Region’s cost-effective energy resources too distant from major centres of demand

Regional Grids could save US$ 33 billion per year - roughly (17%) in power generation costs

Infrastructure Deficit in Africa: HealthcareGENERAL GOVERNMENT HEALTH EXPENDITURE AS

% OF GENERAL GOVERNMENT EXPENDITURE, 2012

Source: WHO

Large part of health problem can only be addressed by effective government actions

Trend in Africa is to increase funds available for private, pooled healthcare by encouraging health insurance schemes

Pooled private spending best represented in South Africa

Addressing medical needs require combining direct Govt. expenditure with other financing models

Govt. financing the administrative side of healthcare- leaving some projects to external donors, and an increasing share of healthcare delivery to private sector

When funding healthcare, govt. preferring to pay into health insurance schemes

Expertise of Indian private sector in pharmaceuticals and healthcare delivery can create win-win outcomes

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Infrastructure Deficit in Africa: Transportation Only South Africa, Morocco, Malawi & Egypt performed better in trade & transport related

infrastructure index than global avg It costs US$ 2,930.9 mn per container and 37.6 days to import in Sub-Saharan Africa- the

highest among all regions Port efficiency and performance needs significant improvement through additional investments Spending needs for the road sector amount to around US$ 9.6 billion a year, skewed towards

capital expenditure Restoring Africa’s aging rail networks to good operating condition requires a one-time

rehabilitation efforts of US$3 billion

South

Af...

Moroc

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Ghana

Liber

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Namibi

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Nigeria

Algeria

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Sierra

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Kenya

Burund

i

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in

Leso

tho

Burkina

...Cha

d

Rwanda

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Zambia

Sene

gal

Tunis

iaLib

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Botswan

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Ethiop

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Madag

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Angola

Guinea

Gabon

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0.00.51.01.52.02.53.03.5 Quality of Trade and Transport-related Infrastructure

(1=low to 5=high) World Average : 2.8

Infrastructure Financing

Infrastructure Financing: Key Characteristics

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Positive Indirect Externalities to Economies Such benefits fundamentally difficult to measure Even if measured, charging for them may not be feasible or

desirable

Often Comprises Natural Monopolies Governments want to retain ultimate control to prevent

abuse of monopoly power Requires complex legal arrangements to ascertain

allocation of pay-offs and risk-sharing, thereby aligning the incentives of all parties

Purely Private Investment Difficult and Costly Time profile of cash flows High initial risks Illiquidity

Presence of Externalities

Natural Monopolies

Pvt. Investment Difficult

Infrastructure Financing : Options

Domestic investorsPublic utility

Dedicated government fundsInstitutional investors

Foreign investorsEquipment suppliers (in

collaboration with domestic and international developers)

Dedicated infrastructure fundsOther international equity

investors

Domestic commercial banksDomestic term lending

institutionsDomestic bond markets

Specialized infrastructure financing options such as infrastructure debt funds

International commercial banksExport credit agencies

International bond marketsMultilateral agencies (financing with development perspectives

and in long tenors)

EQU

ITY

DEB

T

DOMESTIC SOURCES EXTERNAL SOURCES

Infrastructure Financing : Key Issues

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Infrastructure projects are long gestation, and long term projects Project exporters may face challenges securing funds from offshore

channels to fund their overseas investments or refinance their offshore debt

Cross border lending for infrastructure projects is in foreign currencies: hedging for the currency risk comes with a cost and may not be available for long tenors in all currencies

Several ways of mitigating currency risks: political risk insurance; currency swaps; offshore reserve accounts

Lending in currency of lenders is an option; however, this may be a challenge for the borrower (hedging is again difficult)

Infrastructure Financing : PPP Models

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Public budgets have traditionally been the largest contributor of infrastructure finance in the developing world However, Governments are increasingly facing challenges in managing their budget.

MDBs finance only about 10% of the developing world’s infra investments or 5% of total needs

Need for supplementing traditional sources of finance with new sources of equity and debt finance; New MDBs like NDB and AIIB likely to play a significant role in infra financing space Investment fund by ADB and Japan to support “sustainable” infrastructure development in

the region Innovative tools, such as ECA guarantees, to reduce risks, lower cost of sovereign

borrowing Public-Private Partnerships (PPPs) represent one of the many promising

instruments to meet the challenge of crowding in finance in the infrastructure space. Enables public sector to harness the expertise and efficiencies of the private sector PPP lowers the risk of the private players as compared to their independent venture in

such projects

Role of Export Credit Agencies (ECAs) in Infrastructure Financing

Large scale infrastructure projects in developing countries in the energy, resources and port sectors continue to look to ECAs to supplement and facilitate finance due to

insufficient liquidity in the local market for commercial banks to fund all of the debt (covered or uncovered); add o it the asset-liability mismatch

the long lifespan of projects; potential political or economic risks

ECAs provide financing support that helps restore investor confidence and facilitate investment in high impact areas like infrastructure development

Given their status as quasi-governmental institutions, the cost of borrowing, capital reserves and return expectations for most ECAs is lower than that of commercial lenders – meaning that cost savings are often passed on to borrowers

ECAs can also provide ‘soft support’ through their intra-government relationships, political knowledge, diplomatic goodwill and reputational strength

ECA support generally entails that materials, machines and sometimes even labour for infrastructure projects are bought from their home jurisdictions creating win-win outcomes 16

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Thank you!