SEKETE MOKGEHLE: Africa’s infrastructure funding conundrum

The African Development Bank (AfDB) estimates that the continent’s infrastructure financing needs will be as high as $170bn a year by 2025, with an estimated annual gap of $100bn.

With pressures to bridge the infrastructure gap and digital divide, fund the transition to a green economy and promote socioeconomic development, what choices do cash-strapped countries have? Possibly more importantly, which approach provides the most long-term benefits?

There are several funding sources countries could turn to. Commercial banks have always offered bilateral loans specific to identified projects, bonds have grown in importance, providing much-needed long tenors, and of course there are always the multilateral development finance institutions.

Export credit agency financing has been taking centre stage of late, and is growing in popularity in support of developed nations’ efforts to export their technologies. In contrast, syndicated loan markets have long been a dependable source in offering budgetary support. There are also new emerging sources (non-financial institutions) to consider, such as funds created specifically with infrastructure in mind.

When it comes to commercial bank lending it is critically important that banking regulations are clear and consistent in recognising risk mitigation tools, an aspect that will inevitably unlock financing.

Unfortunately, several banks interpret regulations differently, leading to an uneven playing field, largely to the detriment of the borrower, the African sovereign. In the end, not much capital relief to lending is provided, despite the risk-mitigated structures, further contributing to a continuing infrastructure financing deficit.

China as a catalyst 

China has played a crucial role over the past two decades in providing financing to African countries. According to a study conducted by think-tank the Centre for Global Development, China’s development banks have provided a total of $23bn in financing for infrastructure projects across Sub-Saharan Africa from 2007 to 2020. According to the findings, this is more than double the figure lent by banks in Germany, Japan, France and the US combined.

However, the reality is that most of these countries have been those that have been unable to access funding in more traditional ways. To add to this, multilateral development finance institutions (including the World Bank) provided only $1.4bn annually on average (from 2016 to 2020) for public-private infrastructure projects in Sub-Saharan Africa from 2016 to 2020, further showcasing China’s lending prowess.

While there has been some criticism about China’s lack of lending transparency and its use of collateralised loans (including possible debt distress for borrowing countries), there is still a growing infrastructure shortfall across the continent. This is also a hindrance to the enablement of effective intra-Africa trade, which in and of itself has GDP growth benefits. As such, the rationale for China to refocus towards trade and less on capital investments could well be guided by the tough negotiations on debt restructuring.

Insurance market failure?

Many would agree that the phrase “insurance market failure” is misplaced and unfortunate. While the period since Covid-19 has been challenging and often frustrating for banks trying to obtain the necessary insurance capacity required, significant deals were conducted during this period.

In fact, in 2020 Africa’s export credit finance peaked at more than $35bn in deals recorded, and while these were done through export credit agencies and multilateral development finance institutions, these would have been supported by insurance-backed commercial tranches emanating from the down-payment requirement.

Having said this, the industry does have to acknowledge the challenges insurers face when having to provide capacity and risk appetite in an environment characterised by elevated credit, an increase in sovereign and geopolitical risks and anticipation of record claims due to Covid losses.

To add to this, specific credit rating data showed a rapid increase in emerging risk defaults throughout 2020 and 2021. As a result, it stands to reason that sector players will become even more cautious when it comes to underwriting risks, further adjusting costs as reflected in premium rates.

The question remains: is there a way to ease insurer fears?

First, using one broker ensures that a lender is able to present itself in a consistent and uniform way to the market. Track records are also everything. If an institution has used the same insurance product over a number of years and successfully built relationships across the insurance landscape, it certainly makes a “capability statement” to stakeholders.

Proximity and presence are also key; the closer you are to your clients and the events that would affect their operations, the better the outcome. Deal filtering (not sending everything to the insurance market), rigorous deal assessments, and the eventual sharing of due diligence outcomes (further complemented by a deliberate focus on only financing strategic projects) go a long way in enhancing insurer confidence in a lender’s strategic approach and overall business model.

Ultimately, there are a number of trade and infrastructure opportunities in Africa, across transportation, mainly road and railways (though we expect metro transit systems to follow suit); healthcare in the wake of the Covid pandemic; energy, which growing economies will depend on; and social infrastructure. Simply put, Africa needs substantial development and infrastructure finance to fund this.

However, whichever funding source is selected certain aspects remain pivotal — consistent regulatory frameworks, lending transparency, effective risk management, insurer confidence and the lessening of debt distress.

• Mokgehle is head of export credit finance at Nedbank Corporate & Investment Banking.