A new year is a time for renewal, a time to reconsider priorities and new ways of achieving objectives. Late last year, I was heartened to be part of high-level discussions across Africa around galvanising private-sector sources of investment for infrastructure development – a topic echoed outside the continent at this month’s World Economic Forum in Davos. These debates inspire hope of a new impetus.
According to World Bank estimates, to meet the UN Sustainable Development Goals, Sub-Saharan Africa (SSA) needs to invest at least 7% of GDP in infrastructure each year. Currently, annual investment is about half of that, and with the debt problems most SSA countries face, the chances are that resources available for such investment may be further reduced. According to the African Development Bank, the gap amounts to more than US$100bn each year.
In recent years, most of the funding for public infrastructure in SSA – be it for power, transport, health or education – has been derived from government budgets.
Annual investment in projects with private-sector participation fell from US$15bn to US$5bn
In the period 2015-18, SSA governments shouldered 90% of infrastructure financing, partly from their own resources (38%) and partly from external borrowing from concessional or commercial sources (53%), with just 10% emanating from the private sector.
Investment nosedive
IMF reports show that annual investment in infrastructure projects with private-sector participation actually fell between 2012 and 2019, from US$15bn to US$5bn.
Plugging the infrastructure gap is a must-do, but it can’t be achieved without alternative funding, which means private capital. This was a theme at the African Economic Conference 2023 in Addis Ababa, jointly organised by the African Development Bank (AfDB), the Economic Commission for Africa (ECA) and the United Nations Development Programme (UNDP) in November.
The following month, the subject was in the headlines again when the finance ministers of Nigeria and Ghana both expressed support for pursuing private sector-led models for infrastructure finance at conferences organised by their respective Securities & Exchange Commissions. The Nigeria event, organised in conjunction with the Islamic Finance Standards Board, focused on financing with non-interest structures.
With the right policies, infrastructure can become a mouth-watering investment opportunity
There is plenty of private capital looking for investment. With the right policies, infrastructure provision in SSA can become a viable option for such capital and a mouth-watering investment opportunity.
Vehicles for private sector-led infrastructure financing don’t only include public-private partnership (PPP) projects such as those currently being used to finance transport infrastructure in many parts of the continent. Other vehicles such as non-interest (Islamic) capital market instruments also offer a solution. Countries like Côte d’Ivoire, Nigeria, Senegal and Sudan have a growing amount of private capital interested in non-interest investment, which could make good use of this opportunity.
Strong drivers
You may ask what factors need to be in place to attract private capital to finance infrastructure. A recent study by the International Finance Corporation (IFC) found that the quality of institutions, the regulatory framework, market size and trade openness were all strong positive drivers of private participation in infrastructure financing. According to the IFC report, institutional reforms in these areas are capable of triggering an additional 0.8% of GDP of investment over four years.
It’s a challenging list and will require a lot of work, but all these reforms are within the power of SSA governments to achieve.
