Financing Infrastructure in Africa A Landscape of Evolution and Innovation Stephane July, Associate Director, West Africa ICP IMO Leader, Deloitte he financing needs for meeting the infrastructure gap in Africa are a topic of numerous talks, reports and analysis. In terms of quantification, as a bright colleague of mine rightly put it recently while talking at a conference in Lagos on the subject, “any tens of billions number provide a good answer to the question of how much”. With regard to the means, the consensus is that Government and traditional donors financing could meet at best 50% of Stephane July the requirements, that therefore innovative solutions combining international and Any tens of billions number provide a domestic public and private sources of finance good answer to the question of how will need to be devised and implemented, and much that anyway the challenges for doing so are almost as immense as the quantity of money There is firstly sustained evidence of increasing sought for. liquidity (i.e. amount of capital available to invest and spend, including cash, debt or These are undeniable hard facts but behind equity) for African infrastructure finance even those, the reality is also a dynamics of events if the sources of money are significantly and initiatives which show that the path to shifting. achieve the ambitious targets of the Continent might not be as impracticable as it seems. The capacity of the bilateral European donors will surely be more and more constrained as Raising financing for infrastructure projects are the budget of the Governments and obtaining adequate terms for it (including supporting them. In addition, the price and maturity) are all about getting the strengthening of the banking regulations right interconnection between liquidity, risks (under the forthcoming Basel III rules) will mitigation and structuring. continuously decrease the traditional project 2 The histories of Nigeria and Angola have been far from smooth in terms of accountability and spending efficiency but they certainly pave the ways for others like Tanzania or Ghana to follow. loans capacity of international commercial more than three times as much in Sub- this respect, the histories of Nigeria and banks although that regulatory impact might Saharan Africa as they did in 2012. Angola have been far from smooth in terms of be counterbalanced in the short term by the accountability and spending efficiency but quest for higher profitability in Africa. The capacity remains with the multilaterals they certainly pave the ways for others like which have the capacity to address the Tanzania or Ghana to follow. However, despite (and actually, to a large infrastructure issues on a regional basis, extent and ironically, thanks to the financial structure principal investment matching the New capacity is with the access to crisis), the global investors pockets are deep, region’s needs and attract international international capital markets. The fact that their appetite for infrastructure strong, and investors alongside them. The ongoing Africa is now a growing investment their confidence in Africa rising. building up of the Africa50 fund from the destination for investors from both advanced African Development Bank (AfDB) is probably and emerging economies (with a record $80 The capacity is shifting from the traditional the best illustration of this trend. billion inflow expected this year in accordance debt providers to the private equity funds New capacity comes from the opening of with the IMF and AfDB) has recently enabled nourished by international investors dedicated Sovereign Funds in the resource-rich many Sub Saharan countries (Nigeria, Ghana, increasingly keen on infrastructure asset class countries (Africa is home to more than 30% Kenya, Gabon, Rwanda, Zambia..) to issue and thrilled by the African growth potential. In mineral reserve) aiming to ensure the right Eurobonds at relatively favorable conditions. accordance with the latest Deloitte survey on recycling of money from natural resources Sovereign bond issuances from African Private Equity in Africa, PE funds invested extraction to infrastructure development. In countries reach a total $11bn in 2013 from 3 The comprehensive identification, right allocation, proper mitigation and adequate management of risks are the legitimate primary obsessions of any project finance providers $6bn in 2011 and $1bn in 2000. Obviously the The comprehensive identification, right very different and so is therefore the financing benefit of this should be looked at with allocation, proper mitigation and adequate structuring for them. The questions and caution since additional borrowing means management of risks are the legitimate answers on the feedstock supply chain or the additional vulnerability especially when most primary obsessions of any project finance off-taker credit quality and their sustainability African countries face important fiscal deficits. providers. in relation to an Independent Power Production (IPP) project do not have the same New capacity will emerge with the This evidently starts with country risks echoes on the financial structure than those development of domestic capital markets and including in particular political and legal. In this on usage or availability for a road or rail the mobilization of local savings. In this respect, the reality of a sustainable enabling project. The Social Infrastructure space with respect, the so called financial inclusion of the environment is increasingly being perceived water, sanitation, schools and hospitals, which large and increasing African middle class is although it continuously needs to be further might be too often relayed to second place developing fast. And the channeling of these strengthened in most African countries. despite its essentiality, also bears its own savings towards infrastructure should be specificities in terms of risks. progressively organized with the development Next on the list are risks which could be of adequate institutional and financial categorized as sectorial and there the Another important consideration from frameworks. If liquidity is there, the next differences between infrastructure sectors investors when they come to appreciate risks is questions to address to enable this available should probably be further recognized and where we are in the project life cycle. In capital to flow into infrastructure are what are understood. If Energy and Transport are rightly particular, most of the investors do not put the risks of infrastructure projects and what identified as the sectors to develop first, the money on the table before all authorizations, are the protection available against them. spread of technical and commercial risks are permits and other regulatory requirements are 4 owned by Credit Agricole, hence applying securitization techniques to help lower banks regulatory costs and free up capital obtained or fulfilled. In project financiers’ framework allowing for Governments to get availability. words, they do not take development risks. the private sector taking responsibilities for Furthermore, most of them usually favor design, financing, construction and operation Africa shall and is actually in the process of projects in operations and feel cold feet of infrastructure projects, are being enabled innovating large and fast with regard to during construction. Hence the need to find with specifics laws and operational units infrastructure finance. As it has done in mobile additional sources of finance or risks implementation all over the continent. services or is currently doing in banking mitigation tools at the development services, Africa could even leapfrog mature and construction stage, and more broadly the The necessity to subsidize most Transport and markets in this respect. need to put in place structures which take all Social Infrastructure is being recognized into account the project life cycle. and adequately met with Government 15 years ago, I was lucky enough to be Finally, each project is different and has its Support and Viability Gap Scheme set up. involved in the financing structuring and own usually numerous specific risks. To me, Sovereign and multilateral funds such as raising of the Cross Israel Highway, a 100km this is actually the magical thing about Nigeria Sovereign Investment Authority or toll road built and operated under a PPP infrastructure. Each bridge, building, rail or Africa50 have committed to allocate a portion contract, the $1,2Bn financing of which road section, water or power plant is unique of their resources to fund development costs. involved a combination of US bond private since it must fit into a unique physical and Donors are reviewing their product offering placement, local bank debt, Canadian and human landscape. considering first loss insurance to bridge the Israeli equity, and a complex toll gap between construction and operation adjustment mechanism in accordance with the To protect investors and financing providers resulting from investors and debt providers’ fluctuation of the local currency against the against those risks, institutions are being set reluctance to take construction or traffic risks. US dollar. It was considered as a highly up, policies implemented, products structured Even further, the World Bank’s International innovative financing structure at the time. I so that overall the perceived risk of investing Finance Corporation has just provided believe it still is. I think the innovation in in Africa infrastructure