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Africa calls all hands to the pump

By Nicholas Norbrook
Posted on Tuesday, 16 November 2010 10:46

Infrastructure is about raising money. New financing plans with loan guarantees and access to capital markets are slowly attracting a different kind of investor to infrastructure projects – with the promise of steady returns.

How do you finance your country’s hardware during a credit freeze? One solution: get the Chinese in. Lou Jiwei, chairman of the China Investment Corporation, the $300bn sovereign wealth fund, visited Egypt in June. Despite the obvious attractions of the pyramids and Red Sea resorts, Lou was there to look at “major projects in infrastructure activities”, explained Egypt’s investment minister, Mahmoud Mohieldin.

With the cost of money much higher than in the heady days of 2006/2007, financing infrastructure is now harder. It is not simply a case of hoping China will foot the bill, even if some resource-rich African countries may agree on infrastructure-for-commodity deals of varying quality.

Instead, African governments are looking at several ways to support infrastructure investment: improving the legal framework as a way to encourage investment, inviting development banks and other partners to provide innovative credit guarantees and bearing some of the risk burden in the early stages of a project.

Above all else, countries are deepening their capital markets, which are essential to creating the longer-tenor lending that infrastructure demands. Borrowing on the international credit markets has tentatively begun, with Ghana and Gabon making debuts in recent years. Critically, once a country has debt with long-dated maturities, typically around 20 years, banks can price risk more accurately over the long term, opening the door for infrastructure lenders.

Some countries that already have an issuance record on capital markets have started focusing on bonds for infrastructure. Kenya has been a trailblazer in this regard. In 2009, the government launched a 12-year Ksh18.5bn ($226m) bond devoted to infrastructure. Of this, 22% is to be spent on water, sewerage and irrigation, 44% on power and the remainder on roads. Nigeria and Morocco are following close behind in this domain.

Proof that a well-structured African infrastructure bond is attractive to global markets, the Kenyan bond offer was twice oversubscribed and received nearly $600m in bids.

Increasingly, as major investors look to diversify away from Europe, where countries have budget deficits of around 10% of GDP, unfunded liabilities of 200% of GDP and an ageing population, they will turn to high-growth regions in the world.

?Africa, the last investment frontier

There is still a way to go, and one of the biggest problems is volume: Africa makes up just 5% of global sovereign bond issuance, with South Africa and Egypt representing the only serial issuers. It is not just about building ?accurate yield curves. The African Development Bank (AfDB) – which last year for the first time disbursed more money on African power projects than the World Bank – is developing new mechanisms to safeguard cash flows for investors, making 25-year projects more attractive. By guaranteeing a utility company’s monthly payments for a power station, for example, governments can bring a new category of investor round to financing African infrastructure, suggests AfDB’s president Donald Kaberuka.

Power and water are the least ‘attractive’ infrastructure projects to finance because they are seen as low-yield; hence the need to address security-of-payment issues. But despite the pinch, power projects are increasing in number, the result of projects planned over the last decade that are now being completed. The challenge is how to swell the project pipeline and turn a trickle into a flood. The target? Africa needs $350bn in power financing over the next two decades, according to the deliberations of the African Energy Forum in Basel in late June. All hands to the pump.

This article was first published in the August-September 2010 edition of The Africa Report.

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