A Panacea for Africa’s Ailing Infrastructure and Development Conditions

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Project Finance: A Panacea for Africa’s Ailing Infrastructure and Development Conditions

With all of Africa’s potential and its fast-growing economy, infrastructure development continues to dwarf its economic growth and efforts. Infrastructure in Africa lags other regions on quantity, affordability, and quality. The continent, at the same level of GDP per capita, Both China and India have higher access to basic infrastructural facilities like energy and water than most African countries. In other key infrastructure classes, like transportation infrastructure, it is self-evident that Africa is aback. Citing power infrastructure as an example, many villages in Africa lack connection to electricity grid as it is far more expensive to access electricity in the region. In sub-Saharan Africa, consumers pay about three to six times more for electricity than what other grid consumers pay across the world. Many Africans even ‘purchase’ the electricity they generally do not use. For context, a Malian uses less electricity in a year overall than a Londoner uses just to power his tea kettle. Despite the expensive power access, consistent power outages still bedevil the continent. The World Bank said that countries in sub–Saharan Africa have outages from 50 hours to 4600 hours a year.

Nigeria alone has an estimated 427 GW of solar power potential, As of 2013, the total power capacity installed in Africa was 147 GW. This is equivalent to total capacity installed in Belgium and to what China installs every one to two years. With the continent’s power generation potential, it is projected that half of its population (660 million people) will remain without access to electricity in 2030. Industry operators have however opined that for Africa to achieve reliable power supply, power infrastructure sector will require significant investment. In Nigeria for instance, this investment is estimated to be $100 billion over the next 20 years in order to maintain current service. To overcome the infrastructure challenge, Africa will need to add up to 200 GW between now and 2030. The magnitude of power infrastructure investments required is substantial for the continent and the need to scale up investment’s development in power infrastructure and maintenance is pressing.

Access to quality transportation infrastructure on the other hand has become a notorious feature in Africa’s outlook. According to the Africa Union, more than 60% of the existing continental road network is unpaved with much of it being of non- engineered gravel and earth quality. Efficient and quality transport infrastructure are key for Africa’s economic and development goals. Inadequate transport infrastructure will only but hike the production and transaction costs, and consequently spell doom on trade and commerce which ultimately makes achieving overall development goals a difficult task. It is worth noting that the government have channeled efforts to the infrastructure development in the continent, moreover, in a recent publication by McKinsey & Co, all the attempts to address these gaps have mostly resulted in infrastructure projects that never move beyond the planning stages. Even as Africa needs to invest around $170 billion per year in infrastructure in order to place itself on the global economic graph. It has also been projected that about $115 billion of this amount will be required to build entirely new infrastructure. The objective of this section of the article is not to spell out the development woes that have befell the continent, but rather to establish how terrible the conditions are and to re-orient the mindset towards a more sustainable and efficient way to alleviate Africa from its current infrastructural conditions.

Funding remains a key challenge in closing the infrastructure gap in Africa. African governments have historically financed a sizeable share of the continent’s infrastructure development with its balance sheet and thus, what now occurs to be a lukewarm attitude showcased by the government developing infrastructure investments at scale largely stem from high cost of debt service and budgetary restrictions – with little proportion of the budget for capital expenditure. There is no gainsaying that African governments wallow in rising debt-to-GDP ratios, which has since limit sovereign spending on infrastructure with Sub-Saharan Africa having a debt-to-GDP ratio of over 50 percent in 2020. The increase in this ratio, which in turn puts a strain on the budget, makes it practically impossible to fund infrastructure projects on the continent. Banks and other financial institutions also lack the appetite to deploy the tenor of loans needed for long term infrastructure investment, hereby creating the need to diversify the sources of funding. This article posits Project Finance as the proper and ideal source of financing for Africa’s infrastructure. It is one method of financing large-scale, and capital-intensive projects where project debt is repaid from future cash flow generated by the project once operational.

According to OECD, project finance is a form of financing projects, primarily based on claims against the financed asset or project rather than on the sponsor of the project. One key attribute of project finance is its off-balance sheet nature, and the repayment which often comes from the cash flows that the project generates in the future. The process of obtaining Project Finance requires setting up a ‘Special Purpose Vehicle’ (SPV). SPVs are economic entities that are set up to design, build, and manage the financials of a specific project. It is worthy of note that Project Finance is still in its infancy in Africa. Globally, project finance has grown to become a method for funding large infrastructure and projects. In developed regions like North America, Europe, and parts of Asia, project finance is widely used.

It has however been established that funding is key to closing the infrastructural gap in Africa. According to the IMF, actual investments in infrastructure total $45 billion annually, with more than half funded by the public sector. This level of investment is not sufficient at all. Within the lack of funds pose numerous factors. A good number of African governments have limited financial resources to fund large-scale infrastructure projects themselves. These limited resources have led to deferring crucial projects for the future. The high dependency on grants and aid has also become a problem. African governments are uncertain about when fundings will accrue from foreign donors which causes an asymmetry in prioritizing national development. Lack of funding has also resulted to focusing on short-term, low-cost projects, rather than long-term, transformative infrastructure development that has the capabilities to boost trade and economic conditions in the continent. Corruption, inefficiency, and bureaucracy in the public sector has also hindered the effective deployment and use of funds for infrastructure development. Additionally, most African countries struggle in effectively managing and mitigating the risks associated with infrastructural projects which consequently leads to cost overruns, delays and even the failure of projects.

The use case and positive outcomes of project finance as a tried-and-tested method gives credence to its proposal as an intervention to help Africa fund large, risky, and complex infrastructure projects. Hereby, closing the infrastructural gaps that exist.  Project finance generally offers a structured and well-organized method to financing any projects. It possesses a rigorous end-to-end process that generally involves thorough planning, risk assessment, and mitigation strategies, which can be said to be the proxy to better project execution and management, hence reducing the possibility of delays and project failure. Project finance relies on equity and debt from private investors and lenders. It can be said that private investment brings efficient innovation and expertise required for proper infrastructural project execution. The allocation of risks in project finance allows for channeling risks to parties who have the “muscle” to manage them. This mechanism can help attract private investment from those that may not have the appetite to participate in the financing if they were left to bear all the risks by themselves.

Project finance attracts huge financial, technical, expertise, risk guarantee supports from multilateral and development organizations at scale, which in turn strengthens project bankability. Unlike banks and other financial institutions with shorter loan tenor, project finance provides access to long-term financing, which is crucial for infrastructure projects with extended payback periods. The mechanism aligns the financing structure of the infrastructure with its life cycle. The off-balance-sheet financing nature of project finance eradicates the existence of budgetary limitations and pressures. With project finance, governments and private sponsors can keep project-related debt remote from the sovereign’s balance sheets. This remoteness ensures that the government’s creditworthiness and financial flexibility is preserved. With project finance, cash flows are structured to ensure debt service obligations are met before equity investors receive returns, increasing predictability.

In conclusion, to be able to clear Africa’s infrastructure backlogs, other sources of financing are required. Project finance poses as an alternative to explore with important precondition. According to the OECD, simulations suggest that improving Africa’s infrastructure could boost GDP growth by an additional 2.2% a year. This, amongst many other issues raise in this article accord credence to the strong need to diversify the available sources of funding, with the end goal of closing the infrastructural gap in Africa, which in turn means boosting trade, economy, and standard of living of Africans.

 

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