UNITED NATIIONS ECONOMIC COMMISSION FOR AFRICA

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Financing Regional Projects in Africa

Robert M. Okello

Director, NEPAD and RRegional Integration Division

United Natiions Economic Commission for Africa

Addis Ababa, Ethiopia

Theme: Achieving the Millennium Development Goals
in Africa: The role of Transport

A workshop at the Institute of African Development, Cornell University, Ithaca, New York, 5-6 May 2007

FINANCING REGIONAL INFRASTRUCTURE PROJECTS IN AFRICA: ISSUES AND OPTIONS

Introduction

Since the late 1970s, African countries have been in search of a policy framework to guide a continent-wide fundamental socio-economic transformation that would enable them to place the continent on a path to sustainable development. These policy frameworks include the Lagos Plan of Action (1980) for the Economic Development of Africa (1980 – 2000), as well as the Abuja Treaty (1991) establishing the African Economic Community. The common thread in all the plans is the ambition to achieve self-reliance, sub-regional and continental economic integration, economic growth and sustainable development.

The development of transport infrastructure and services was thus seen as key to achieving the physical integration of Africa. Thus, in 1977 the United Nations General Assembly declared the period 1978-1988 as the United Nations Transport and Communications Decade for Africa (UNTACDA), to support Africa’s aspirations in the framework of the New World Economic Order of 1976. A second UNTACDA was implemented during the period 1991-2000 to consolidate the gains made during the first Decade.

The Millennium Declaration by the United Nations General Assembly in the year 2000 gave further impetus to addressing Africa’s challenges to attain sustainable development. African leaders accepted that it was time for Africans to take ownership and responsibility of their own development. This led to the adoption of the New Partnership for Africa’s Development (NEPAD) in 2001, as the AU programme for development. NEPAD thus became the vision and a framework for transformation, reform and renewal. It is also a long-term, holistic, integrated and comprehensive programme focusing on changing the way development is approached in Africa for sustainability. Infrastructure is one of the eight priority areas identified for focus, namely: Political, Economic & Corporate Governance; Agriculture; Infrastructure; Education; Heath; Science & Technology; Market Access and Tourism; and Environment.

Africa’s economic and social development, as well as its political and physical integration is seriously hampered by the inadequacy of infrastructure, which constitute an essential foundation for development process. Road transport, which accounts for over 90% of Africa’s inter-urban traffic, is generally inadequate with only 1.9 million km of all classes, is of poor quality, and high cost, amounting to between 12-25% to the value of import/export goods. The whole continent has about 75,000 km of single line rail network, of differing gauges, thus limiting connectivity. Approximately 80 major seaports, which handle over 95% of import/export trade, generally operate with obsolete cargo handling equipment and limited container storage facility, thus low productivity. Aviation plays a critical role in integration, and the 100 or so international airports handle about 5% of passengers and 4% of freight traffic of global air transport.

Globalisation and regional integration require effective regional infrastructure. Effective regional transport infrastructure also supports the movement of people and goods across borders thereby accelerating the pace of regional integration. However, Africa’s cross-border infrastructure network remains inadequate, with the largest part of missing links of the Trans-African Highways network being cross-border links.

Strengthening Africa’s infrastructure, at national and regional levels, requires massive investments. It has been estimated that implementing the NEPAD infrastructure Short Term Action Plan (STAP), consisting of 120 priority regional and continental projects/programmes, will cost approximately US$8 billion. Various institutions have also made estimates of expenditure needed to close Africa’s infrastructure gap, ranging between $10–20 billion per year between 2005 and 2015.

The traditional approach to the construction and operation of transport infrastructure facilities, both at the national and regional level, has been largely the domain of the public sector. However, the governments of most African countries have not been able to meet the ever-growing demand for infrastructure and services. Some of the constraints encountered by African governments in this regard include limited financial resources, due partly to a decrease in official development assistance (ODA) for infrastructure projects. As a consequence, African governments are increasingly turning to the important role of the private sector in implementing their infrastructure programmes.

The public investment resources derived from the African Development Bank (AfDB) has contributed significantly to the implementation of the NEPAD Infrastructure Programme. Between 2002-2005, the Bank financed 25 projects for a total of US$ 630.1 million, and mobilized about US$1.6 billion in co-financing of some of these projects. An additional 12 regional projects, estimated at approximately US$324 million, were considered in 2006. Overall. Between 2002-2005, financing of regional infrastructure projects by the Bank and other developing partners totalled approximately US$ 2.52 billion. In addition, the regional development banks have also financed regional projects through special funds for community development.

It is in this regard that the Heads of State and Government of Member States of the African Union, meeting in Sirte, Libya, in July 2005, decided to include in the MDGs framework, the transport target and the indicators adopted in April 2005 by the African Ministers in charge of Transport and Infrastructure with a view to accelerating poverty reduction, which now constitutes a fundamental objective of Africa and the international community.

The objective of this paper is to explore the various innovative financing options, which could supplement the traditional financing sources such as government, development banks, and development partners.

Challenges in Financing Regional Infrastructure Development in Africa.

Financing regional infrastructure projects poses a bigger challenge than national projects. At least two countries, sometimes having different priorities, regulatory frameworks and investment regimes, are involved in regional projects. Moreover, approved regional projects are not always priorities at the national level. Furthermore, securing loans to finance regional projects could be a complicated issue especially as all the countries involved may not necessarily have the same credit worthiness from the perspective of financial institutions. There are also cases were some countries involved in a regional project are not eligible to receive donor support for a variety of reasons, thereby delaying implementation.

A review of the implementation of the NEPAD STAP highlighted the following challenges, among others: limited funds for infrastructure development; limited capacity of countries and RECs; weak or ineffective institutional relationship between the key stakeholders; perceived complexity of donor funding; and fractured funding approach.

Response to Constraints - Africa’s development partners have established a number of facilities aimed at addressing some of the challenges related to the development of regional infrastructure on the continent. These include: NEPAD Infrastructure Project Preparation Facility; Infrastructure Consortium for Africa (ICA); Proposed Capacity Building Facility for RECs; EU-Africa Partnership on Infrastructure; The Invsetment Climate Facility for Africa; Other Emerging Sources of Finance (The Arab and oil-producer funds and banks, China and India).

Recommendation for Innovative Financing Mechanisms

African countries and RECs lack adequate financial and technical capacity to meet existing regional infrastructure requirements. This calls for innovative approaches in financing infrastructure development on the continent, notably those involving the private sector. However, for such mechanisms to be effective, there is a need to build the public sector capacity of African countries to negotiate and manage public private partnerships (PPPs) in infrastructure development. They also have to adopt appropriate, coherent, transparent, and harmonised investment frameworks to attract potential investors.

Africa depends heavily on multilateral agencies for the development of its regional infrastructure. However, these traditional sources of funds are not enough to support the gigantic infrastructure needs of the continent. There is therefore a strong need for African countries to look for alternative means of finance. The following is a list of proposed financing mechanisms recommended for further investigation, bearing in mind that some may be more appropriate for national than regional projects:

v Public-Private Partnerships (PPP) - The limited financial resources of African governments are one reason for their inability to provide adequate infrastructure and services. This has led to an increase in the demand for greater private sector participation. There are several mechanisms, which could give different roles to public and private institutions in areas such as ownership, operation, management, financing, risk sharing and contractual management. These arrangements are generally known as public-private-partnerships. The strategies generally include retention of public ownership of the assets while contracting out management and operations. It is recommended that it is preferable for the private sector to invest in public projects, than for public investments into private sector projects.

v Africa’s Pension Funds - The cumulative pension funds in the continent are reported to be between US$30-40 billion. A fraction of these funds could be used to support infrastructure development on the continent, especially for regional projects.

v Infrastructure Indexed Bonds - An innovative and potential mechanism for attracting financial capital for Africa’s infrastructure is through the issuance of infrastructure-indexed bonds. This is bond would differ from a regular bond as its value is linked to the market value of the investment project. Given that the fall in the value of infrastructure increases the probability of default, investors could be attracted to hold the indexed bonds if coupon payments on the infrastructure indexed bonds are set higher than those paid to bearers of a regular bond. Who would hold the indexed bonds? African governments could invest part of the pension or retirement funds in these bonds. Institutions, such as the banks, insurance companies and the African Diaspora could also be encouraged to invest in these bonds. Receipts from the sale of the indexed-bonds must be targeted solely for the development of Africa’s infrastructure.

v Global Financial Markets - Global capital markets have the depth, maturity, size, and sophistication potentially to fund all viable investments and projects in African infrastructure. For this to happen, however, African countries would have to put in place an enabling environment to attract foreign capital. Such measures include reforming the laws governing the operation of financial institutions and markets. In addition, sound corporate governance and transparency in accounting practices in Africa must be brought up to world standards. Local capital markets and institutions need to be strengthened to support the flow of foreign capital.

v Special Government Credits to Private Investors - There is enormous reluctance on the part of the private sector to be involved in the development of infrastructure. There are several factors that inhibit this investment. To address part of the concerns of the private investor, African governments could consider providing credit facilities with flexible terms so as to mitigate the concerns of the private investor about investment horizon, liquidity, and general commercial risk. Such facilities could include direct, secured loans from a government to a private investor for infrastructure development; loan guarantees applying to the principal and interest on borrowing by a private investor; and lines of credit, which act as contingent government loans in case the revenues from the completed infrastructure fall below target. Furthermore, a government could agree not to collect interest on its loans in the first five years after completion of the infrastructure project so as to give the private investor some “breathing space.”

v Regional Infrastructure Banks: The creation of special regional infrastructure banks provides another innovative avenue to meet Africa’s infrastructure investment needs. These banks could be established in the five regions of Africa. The regional infrastructure bank could be established with initial contributions by member countries in each region. Non-African countries could be invited to hold shares in the bank. The role of these banks would be to offer loans, loan guarantees and lines of credit, at competitive interest rates, to public and private investors involved in infrastructure development. Alternatively, the African Development Bank could be encouraged to provide loans to the private sector for investments in infrastructure projects.

v Allocating a Fixed Percentage of GDP - Under this mechanism, African countries would allocate a fixed share of future GDP towards financing the continent’s ailing transport infrastructure. This could be done by member states channelling a percentage of their GDP into the regional infrastructure bank. Such a move would ensure the solvency of the bank, particularly in its formative period.

v Special Taxes - African governments could impose special taxes on users of infrastructure to support development. These special taxes could be imposed on: freights, fuel, trucking companies, shipping lines, users and suppliers of energy, communication equipments, etc. As taxes have the potential of introducing distortions into the economy, this special infrastructure development tax must be set at a level that would not choke off the competitive forces needed for enhancing economic activities.

v Diasporas Remittances - The International Organisation for Migration (IOM) (2003) estimates that over the last 20 years, annual official remittance flows to many African countries surpassed inflows of official development assistance (ODA) and foreign direct investment (FDI). According to the World Bank, the cumulative worker remittances to sub-Saharan Africa jumped from $4.9 billion in 2000 to $6.1 billion and $8.1 billion in 2004 and 2005, respectively (ECA, 2006). The real figures are probably much higher since records underestimate the full scale of remittance, as payments made through informal, unrecorded channels are not captured. Indeed it is estimated that unrecorded flows through informal channels may conservatively add 50% (or more) of recorded flow. The fact that remittance inflows are higher than ODA, on which most African countries rely to develop their infrastructure, suggest that remittances constitute a potential funding source for infrastructure development.