Inadequate infrastructure remains a major obstacle towards Africa achieving its full economic growth potential. Most of the African continent lags the rest of the world in coverage of key infrastructure classes, including transportation, healthcare, energy and water.
The African Development Bank estimates that the continent’s infrastructure financing1 needs will be as much as USD170 billion a year by 2025, with an estimated hole of around USD108 billion a year. The scale of the funding deficit is so large and of such strategic importance that it remains crucial to encourage international investment to fill it. Closing the gap matters because it will aid economic development, help raise living standards and boost the prosperity of businesses across the continent.
It is therefore encouraging to see new patterns of infrastructure funding emerging that weave a brighter future for Africa. By bringing together governments, international export credit agencies, multilateral development banks (MDB), development finance institutions (DFI), private insurance players and banks, and through innovative funding techniques this chasm can be bridged.
Banks like Standard Chartered are playing a key role in this effort. “To make a meaningful contribution in closing Africa’s large infrastructure gap, all the stakeholders must work together” says Alper Kilic, Global Head, Project and Export Finance at Standard Chartered.
“Bi-lateral structures comprising of banks working with MDBs, DFIs and Export Credit Agencies (ECA) are already playing a key role in closing the infrastructure funding gap in many high-risk markets. However, when MDBs, DFIs, private insurance companies, ECAs and banks come together, they can provide new and innovative structures that offer acceptable risk vs return dynamics to all stakeholders that are investing in infrastructure projects. This helps to maximise impact and broaden investor reach.”
Collaboration meets innovation
It is often challenging to establish financing structures for raising long term funding in many high-risk emerging markets. MDBs/DFIs play an important role in working with the governments to identify priority projects which also satisfy investor appetite for risk and return and also fulfil ESG requirements. MDB/DFIs also contribute to the capital structure either through direct lending or guarantees.
Banks continue to be critical enablers because of their local network and on-the-ground presence, relationship franchise, technical expertise, and capital commitments to the projects. New and creative ways to structure finance for projects, for example introducing private insurance cover to mitigate certain components of payment risk, in addition to the credit support provided by MDB/DFIs, and establishing multi-tranche structures with support from ECAs can enable the governments to attract additional capital from the banks and other investors.
In a recent transaction to finance the development of critical water supply infrastructure in Angola, Standard Chartered brought together multiple stakeholders including The World Bank, African Trade Insurance Agency, Bpifrance Assurance Export, BNP Paribas, Credit Agricole, Credit Suisse, Société General, Santander and Helaba Bank with Norton Rose Fulbright and Allen & Overy as legal counsel.
Given the efforts by the governments in Sub-Saharan Africa and other emerging markets, in creating a conducive regulatory, economic and legal environment for investors, such collaborations can develop into repeated financing arrangements for infrastructure development projects there.
Safeguarding water supplies with a financial package
In the Angola water project financing the funding was provided under two facilities which amounted to USD1.1bn in aggregate from the lenders. The facilities benefitted from guarantees from the International Bank of Reconstruction and Development, insurance from the African Trade Insurance Agency and credit insurance provided by the French Export Credit Agency (ECA), Bpifrance Assurance Export (BPI).
This underscores how bringing together the right parties can support critical infrastructure investments. The project ensures safe water supply, which will help improve health outcomes and boost the resilience of the water supply system against climate shocks.
With investor appetite for projects linked to environmental, social and governance factors, one risk for funding across emerging markets is that other sectors like agriculture, transportation and education need to work harder to attract investment.
The good news is that the gap has been identified, it can be quantified, and financial institutions, governments and development organisations can work together to close it – in a sustainable way and with a long-term vision.
“There is no lack of capital in the world,” says Mr. Kilic. “We just need to focus together to mobilise it. One of our partners shared an Angolan saying: if you want to go fast, you go alone, if you want to go further, you go with your partners.” And when private-public collaboration meets innovation, you have a winning formula.
This article is based on themes discussed during a panel discussion at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.