In a previous article, it was established from research that private investors globally have at least US$500 billion in funds under management which they desire to deploy in the development of infrastructure projects across Africa. Africa being the continent that needs this most is ironically the continent that spends the least on the development of its infrastructure. The potential and scope for funding African infrastructure is enormous; however such potential is hamstrung by the state and management of public finances and the debt levels of African governments.
Statistics show that less than 10% of infrastructure projects in Africa reach completion and that 80% fail at the feasibility and business planning stage. Projects fail for various reasons the biggest being limited capabilities, which include the ability to draw up realistic budgets, designs, and implementation of the said infrastructure projects with commercial potential due to short political cycles that challenge commitments to long-term infrastructure projects.
In China, which has exceptionally advanced infrastructure systems, it is not surprising to find development plans for the next 100 years. This is regardless of the political dispensation of the day. The agenda for national development takes precedence over the politics. Unfortunately, in much of Africa this dynamic is the other way around. Politics takes precedence over the development of most nation states hence there are no long-range plans like those in China.
The net effect is that investors have few bankable projects in the pipeline that can secure funding and meet investor risk and return requirements. Infrastructure development and funding problems are not structural failures but the result of critical market failures. Some of these market failures are:
Limited deal pipeline or selection of low impact projects
These are due to the lack of long-term master plans that transcend political cycles. It implies that focus is therefore placed on short-term results at the expense of future developments. This resistance to look beyond political cycles results in poor infrastructure policy frameworks and in many cases leads to poor projects being prioritized.
Weak feasibility studies and business plans
These may emanate from the lack of crucial capabilities and resources to assess key technical and financial risks associated with large infrastructure projects. This could be the result of not having the requisite talent pool of people and having to rely on expatriates who can be expensive.
Delays in obtaining licenses, approvals and permits
This is a serious problem where government agencies lack the motivation and/or capacity to get projects off the ground. It can also be the result of community resistance and the lack of coordination between agencies. Corruption is a big factor in this instance which has seen many meaningful infrastructure development projects being placed on the shelf because a key official may have refused to grant a license or a permit without the payment of bribes.
The inability to agree on risk allocations
This is linked to one of the points related previously. Skills gaps may exist among locals in quantifying and allocating risks to participants. This however is not a purely African phenomenon—it can and has occurred worldwide.
The inability to secure offtake agreements and guarantees
This phenomenon is especially unique to Africa. Due to weak national balance sheets, governments are not able to provide the requisite financial assurances to ensure that projects take off as agreed.
Poor program delivery
The capabilities of the people and entities involved in an infrastructure project will always determine the quality of the outcome of that project. Where these capabilities are lacklustre, deficient and poor, the delivery of the program will also be poor. Poor capabilities in planning, management, and execution of large projects will result in poor delivery.
How can African countries develop bankable infrastructure projects?
Studies have shown unanimously and universally that over the long-term infrastructure development and funding will not occur unless there is private sector participation. There are, however, matters that must be precedent to the private sector’s involvement. African governments must develop plans for those projects that are eminently bankable in that they exhibit optimal risk and return characteristics and they must also have the following:
- Commercial viability and bankability
This includes predictable and stable revenues which may take the form of tariffs, offtake agreements and speed to profit. Projects should be able to ring-fence the revenues they generate to pay off debts and stimulate project finance.
- Political & currency risk
This is a hot potato in southern Africa. Political stability is not an optional extra where international capital is sought for projects with long gestation periods like infrastructure development. The environment needs to be stable. The recent unrest in South Africa will make it much more difficult to secure funding for its projects. Currency fluctuations, another southern African phenomenon will need to be managed especially where there is an offtake agreement made, say in US dollars, whereas revenues generated by that project are in local currency.
- Counterparty and regulatory risk
This needs to be managed by ensuring only credible and financially sound offtakers to guarantee revenues of an infrastructure project. This simply means that arrangements for funding projects must only be done with parties who have demonstrated beyond any doubt that they have the financial resources and wherewithal to perform according to what would have been agreed. There is also need for clear regulation in terms of public private partnerships, the protection of investors and so on. These will go a long way in reducing legal risks.
- Deal flow
This refers to the number of investment opportunities available at a given time to a particular company or investor within a particular region, country, market, or sector. Attractive markets for potential funders are those with a lot of deal flow. Where deal flow is sufficient it provides exit options and track records for reference to other investors.
- Presence of international development agencies and development finance institutions
When a DFI is involved in a project there is usually a multiplier effect on private capital as it guarantees that serious due diligence has been engaged and a conservative approach has been followed. Risk mitigation instruments used by these funders help to improve the credit rating of the borrower. Classic examples of this include Zambia and Senegal solar energy projects which were supported by the International Finance Corporation and agreed to with both governments on key issues related to land currency and politics and as a result these projects have attracted a lot of international interest.
Capital and investment will always be attracted to the prospect of profit. The most sustainable route to raising capital to fund infrastructure is through partnership with the private sector. The private sector however will only deploy capital to projects that align with the parameters described in the foregoing. The foregoing will be most useful when it is taken by key stakeholders as a guide map to work on their standing in the sight of potential funders in the private sector.
