RAISING CAPITAL FOR AFRICA AND INFRASTRUCTURE PROJECTS

BY DR. K. MLAMBODEPUTY GOVERNOR RESERVE BANK OF ZIMBABWERAISING CAPITAL FOR AFRICA AND INFRASTRUCTURE PROJECTS

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BACKGROUNDAfrica has a huge infrastructure deficit:In terms of supply and access, Africa lags behind other regionsEllen Johnson Sirleaf has noted that on match day, the Cowboys Stadium in Texas uses more electricity than LiberiaThe little available infrastructure is expensive Moving freight by road in Africa costs $0.05-$0.13 per tonne-kilometer in Africa.Elsewhere in developing regions: $0.01-$0.04 per tonne-kilometer.BACKGROUNDYet infrastructure matters for sustained economic growth and poverty reduction

World Bank: if African infrastructure catches up with that of Mauritius, per capita growth in 2013 would have been 3.7% instead of 1.5% recorded

Catching up with the level of infrastructure in Korea would have meant per capita growth of 4.1%

Investment in infrastructure is thus key to unlocking Africas growth potential.

IBut finance for African infrastructure remains inadequatenfrastructure Funding Requirements$48 Billion$30 Billion$15 BillionFunding GapAfrican GovernmentsODA+ Private Sector$20 Billion for Operations & Maintenance$10 Billion for new InfrastructureTotal $93 BillionBACKGROUNDFor Zimbabwe, World Bank puts the infrastructure funding needs at US$33 billion over two decades:Electricity US$11.3 billion

Transport US$13.39 billion

Water US$1.81 billion

Telecom US$6.75 billionClosing the Funding GapHow should this financing gap be closed?Remove/reduce inefficiencies in the use of existing infrastructureEstimated that on average about US$17 billion is lost each year due to inefficiencies, such lack of rehabilitation, poor budget execution, etcImproving efficiencies would reduce the financing gap to US$31 billion a year (still substantial)Countries such as Zimbabwe rely on fiscal financingBut capital budgets insufficient to meet infrastructure deficiencies in the regionNeed to search for alternative/innovative ways of funding infrastructure

ALTERNATIVE SOURCES OF INFRASTRUCTURE FINANCINGDomestic borrowingInternational borrowingEnhancing the role of the Private Sector Sovereign wealth fundsDiaspora financingEngaging the new development partners

Domestic BorrowingFinancing infrastructure development through domestic borrowing: e.g. local infrastructure bondse.g. Kenya raised about US$1.6 billion (KSH 141bn) through domestic bond issues, from 2009 to September 2013. OpportunitiesNo foreign currency risk;Improves intermediation of savings; andFacilitate monetary policy implementation.

ChallengesCrowds out private sector; andHigh interest rates.

Accessing Global Capital MarketsDue to improved macroeconomic conditions, low interest rates in developed economies, African countries accessing international sovereign bond marketsExamples:Ghana issued bonds worth US$750 million in 2007;

Senegal issued bonds in 2009 and 2011 worth US$200 million and US$500 million;

Zambia issued bonds worth US$750 million in 2012; andKenya raised US$2 billion in June 2014.

Accessing International Markets contdIssuance reflects Africas high return potential, owing to its natural resource wealth and improved macroeconomic policies and development prospects.

Helps in benchmarks pricing of corporate bonds in international markets

Strengthens macroeconomic discipline, transparency and structural reforms

Provides access to long-term funding to help finance infrastructure

Lowers debt servicing costsPRIVATE SECTOR FINANCINGSpecialized infrastructure or private equity funds - funds created by established infrastructure firms, including upstream industries that invest in various infrastructure projects.

According to EY, in 2013, about US$3.2 billion was invested in 98 private equity investments in Africa.

But SSA still lags behind other regions in attracting significant amounts of private equity investments

Also average size of transactions smallbetween US$30million- $60 millionPRIVATE SECTOR FINANCINGAdvantagesRemoves burden from the fiscus; andEfficient allocation of resources;

ChallengesHigh financing costs; andDifficulties in pricing some public goods e.g. toll fees.

Securitization of natural resources Natural resources lend themselves easily to securitizationGrowing trend by Investors and new donors to adopt this form of financing Chinese investments in: Angola, Nigeria, and Sudan are backed by oil;Gabon backed by iron;Ghana backed by cocoa; andDemocratic Republic of Congo backed by copper.Note:critical for Governments to negotiate equitable deals that correctly value the resources assigned.Otherwise, risk of mortgaging minerals at highly discounted levels

Sovereign Wealth Funds (SWF)SWF represent a large and growing pool of savings, esp. in NR rich countriesGlobally, SWF control about US$30 trillion

Africa experiencing the strongest growth in SWFsSome of the countries with SWF include Algeria ($77bn); Libya ($65bn); Botswana ($6.9bn); Angola ($5bn); Nigeria ($1bn); Gabon ($380m); Mauritania ($300m); Ghana ($100m) and Eq. Guinea ($80m)Potential for more to be set up as countries in east and west Africa continue to make oil&gas discoveries

Asset allocation shifting towards long-term investments to close the infrastructure gap

Sovereign Wealth Funds (SWF)SWFs from other regions also beginning to invest in Africae.g. the Investment Corporation of Dubai recently invested $300m in Nigerian based Dangote Group focus will be on agriculture and infrastructureBut challenges remainThe funds are relatively small (the Norwegian SWF is $900 billion).Governance issues, esp. regarding transparency and accountability in the admin of the fund.Not all countries can set SWFneed excess forex reservesSecuritizing Diaspora RemittancesAfrica has a large growing diaspora, estimated at over 140 million by the AfDB

Remittances by Africans to their home countries exceed ODA flows

In 2012 total remittances to Africa stood at US$60 billionODA to SSA amounted to US$44.6 billion

According to the WB, Africa could potentially raise US$17 billion annually from securitization of future export flows and remittance

Diaspora as catalyst to develop and deepen local capital marketsZimbabwe has a large diaspora population living and working in countries such as South Africa, UK, Australia, and USA, among others.

Diaspora remittances have become a major source of foreign inflows, amounting to US$750 million in 2013.

To improve the investment instruments available to the diaspora, all non-resident Zimbabweans are now permitted to invest in any listed counter on the Zimbabwe Stock Exchange, without any limit (i.e. up to 100%).

Engaging new development partnersNew development partners, such as China, India and Brazil increasingly playing a prominent role in the global economy

Chinese investments to Africa increased from $317m in 2004 to $2.5bn in 2012 But only 4.3% of its global totalpotential to growOnly 5 countries dominate Chinese investment in AfricaSouth Africa, Zambia, Nigeria, Algeria, and Angola.

Brazil and India also expanding their reach into Africa: emphasize shared colonial legacy, shared identity (Brazil) and longer history on the continentCONCLUSIONTo attract additional financing:

African countries must institute sound economic policies to attract investors

Policies that facilitates development and deepening of capital markets to attract long term capital

Strengthens governance systems and capacity building in contract negotiation; and

Addresses adverse factors which increase country risk profile.

Thank you