CRAIG WEITZ: High risk keeps Africa from surfing infrastructure investment wave

Africa has an immense infrastructure gap. The African Development Bank (AfDB) estimates that $130bn-$170bn a year is needed to address it. And the Organisation for Economic Co-operation & Development (OECD) calculates that $194bn must be spent annually until 2030 for the continent to achieve its sustainable development goals (SDGs).

There are two demographic factors at play: Africa’s population of about 1.46-billion is expected to reach 4-billion by the end of the century; and urbanisation means the number of people living in cities is expected to nearly triple to 1.5-billion by 2050.

The need to prepare metropolitan areas for an unprecedented influx of people is urgent. According to the AfDB, the continent’s ability to plan for rapid urbanisation will set its economic trajectory for centuries to come.

But in the past few years events have conspired to frustrate progress, starting with the Covid-19 pandemic, which forced many governments to redeploy their infrastructure budgets to meet the health and social costs of caring for citizens. During the prolonged recovery from the pandemic, the constrained fiscal space was further stretched by the effect of the Russia-Ukraine war on global economies.

High interest rates have made borrowing expensive and local currencies weaker. Many African countries have seen the interest they pay on external debt more than double in the past 18 months. At the same time, the flow of dollars to investment grade rated, higher-yielding assets has reduced dollar liquidity in many African economies, pushing them towards the edge of the fiscal cliff.

Meanwhile, the UN has issued a lukewarm review of Africa’s progress on the SDGs, mentioning uneven progress and the need for accelerated efforts to achieve the 2030 targets. However, in its 2023 edition of Africa’s Development Dynamics, the OECD puts the scale of the problem into context. It says the continent’s sustainable financing gap is less than 0.2% of the value of global financial assets, and it could be filled if just 2.3% of those assets were allocated to Africa by 2030. This is less than Africa’s share of global GDP.

A blended approach to financing the continent’s development that incorporates debt structures, public-private partnerships and innovative solutions like green bonds is often the way forward, and the key is ensuring that our financing structure mitigates the risk we assume as a lender to the greatest extent possible.

In striving for this goal, we require the following three key groups of institutions:

• Export credit agencies are one of the mechanisms lenders and exporters can use to mitigate risk. In SA, for instance, the Export Credit Insurance Corporation was established in 2001 to provide political and commercial risk insurance to support the export of SA goods and services. Export credit finance in Africa has surged in the past two to three years, helping to fill the gap left by eurobonds.
• Multilateral development agencies also have a role to play as investors seek partners. The ability of multilateral development agencies to offer long-term debt to public and private sector clients is paving the way for greenfield infrastructure projects to take shape and for complementary private capital to follow.
• Multilateral insurers are playing a meaningful role in mitigating risk for lenders. The role of insurers as a catalyst for investments in Africa is growing as insurers add credit enhancement, or nonpayment cover, to their offerings. Insurers also cover political risk, which is becoming an important consideration amid a heightened risk of coups, insurgency, civil disturbances and social uprisings. Such events disrupt infrastructure project timelines, supply chains, logistics and flow of capital.

In the post-pandemic era, many governments are prioritising social infrastructure such as hospitals (SDG 3), and water and sanitation (SDG 6), and it is worth noting that because the SDGs in these areas complement each other (and SDG 1’s goal of ending poverty), they are particularly efficient investments.

SDGs present enormous market opportunities and Nedbank’s new Africa infrastructure team is also working on investments in urban mobility and rail and port infrastructure, all economic enablers and positive contributors to GDP growth. African finance ministries are increasingly raising debt in support of these goals.

Each project is evaluated according to whether it meets the bank’s risk appetite and complies with its policies. The project’s feasibility and the track record of its sponsor are also assessed, as well as its ability to deliver shareholder returns. As with insurance underwriters, investment teams at export credit agencies and multilateral development agencies conduct their own analyses.

The heightened-risk environment in Sub-Saharan Africa continually demonstrates how important it is to fully engage in an economy when investing for the medium to long term. Desktop reviews have proved unreliable in unpacking political dynamics and public sentiment, which are the leading indicators of political unrest and social disturbances.

This need for local knowledge is echoed by the OECD, which wants African national statistics institutions to supply more timely and reliable data for a country’s risk assessments and for investment promotion agencies. They also want regulators to provide more detailed, up-to-date information.

Regardless of data shortcomings, Africa is ripe for a boom in infrastructure investment as the Africa Continental Free Trade Area, which was six years old in March, positions the continent as the world’s largest free trade area.

• Weitz is principal of Africa Infrastructure Finance at Nedbank.