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Soaring costs and shrinking pockets

By Gregory Mthembu-Salter in Cape Town
Posted on Monday, 23 November 2009 16:25

At least 30 African countries experience regular power cuts but it is water projects that suffer most from the drying up of foreign investment

The global downturn has affected African ?economic growth in several ways, but one of the most damaging is the ?reduction in infrastructure ?financing, which in turn will slow the take-off of national and ?regional economies. To build power stations and roads, ?governments are now turning to ?domestic sources of finance.

Infrastructure has generated more than half of Africa’s improved economic growth since 2000 and would contribute much more if there were a better regulatory environment and sufficient infrastructure finance. So says a just-released World Bank study, Africa’s Infrastructure: ?A Time for Transformation, which estimated Africa’s infrastructure needs at $93bn a year, around 15% of the continent’s GDP and $54bn higher than the annual figure the Commission for Africa came up with in 2005.

Need, however, is a highly elastic term. For its study, the Bank defined infrastructure needs with reference to several priorities: the Millennium ?Development Goals, especially for water and sanitation projects; AU and New Economic Partnership for Africa’s Development (NEPAD) planning objectives, particularly relating to continental transport connectivity; and also conditions it considered ?necessary for the continent’s accelerated economic growth. Growth is the key rationale behind boosting Africa’s power generation and infrastructure, since at present, at least 30 countries experience power cuts and shortages, which the Bank has calculated shaves up to 2% off their annual growth rates.

Sourcing the finance is a daunting task in today’s troubled economic environment, in which global foreign direct investment (FDI) has been a major victim of the slowdown. According to the 2009 World Investment Report from the UN Commission on Trade and Development (UNCTAD), global FDI will fall from $1.7trn in 2008 to $1.2trn in 2009, possibly rising to $1.4trn in 2010. Africa’s FDI was $88bn in 2008, but it is likely to fall in 2009 and 2010. FDI flows to Africa in the first quarter of the year were 67% lower than during the first quarter of 2008, and UNCTAD expects to see a rise in African FDI only in 2011.

Where is the needed finance going to come from? One source will be domestic financing. The Bank’s report calculates that domestic financing for infrastructure is higher than had been thought, totalling around $30bn a year, mostly from taxation and user fees. The Bank estimates that another $15bn comes from external sources. Assuming a $93bn annual requirement, this means there is a $48bn deficit for annual infrastructure needs. Efficiency gains, however, ?especially in the power sector, could reduce this deficit, says the Bank, to $31bn.

According to Vivien Foster, lead Africa economist at the Bank’s private sector and infrastructure division, there are several sources of finance for African power projects, of which the first and largest is African public investment. Also significant are the continent’s donors, who she says are moving back into the sector after a decade of keeping their distance. Chinese, Indian and Middle Eastern investment is also rising, with China committing itself to financing the construction of hydro-power projects with a combined capacity of 6,000 MW. Private sector participation in power has been growing too, with funding committed for thermal independent power projects (IPPs) totalling 3,000 MW.

IPPs and China were an important component of Nigeria’s plans under President Olusegun Obasanjo to boost the country’s puny electricity-generation ?capacity, but the administration of current President Umaru Yar’Adua has shown less interest in both, focusing instead on raising output by improving maintenance of existing capacity. Nigeria has installed generation capacity of 6,000 MW but averages output of only 1,500-3,000 MW, in large part because of poor infrastructure maintenance.

South Africa has installed generation capacity of 45,000 MW, over seven times Nigeria’s, but steady economic growth since the mid-1990s and very little investment in new capacity has left supply far too tight, resulting in major power outages in 2008. Declining manufacturing output due to the global economic slowdown has eased demand in 2009, but a major upgrade is needed if the country is not to be caught short again (see box).

The ability of Eskom, South Africa’s chief electricity supplier, to borrow from domestic capital markets is unparalleled in Africa, but it is not unique. Kenyan power company KenGen, which supplies about 80% of the country’s electricity, issued an infrastructure bond in September that the company hoped would raise up to KSh25bn ($318m). To sweeten the deal, the government authorised buyers of the bond to earn their returns tax free. To KenGen and the government’s delight subscriptions were fully taken up by early October.

Financing for African water projects, according to the World Bank’s Foster, is almost evenly split between the African public sector and overseas development assistance, with little input from other sources. “As opposed to a number of high-growth sectors in Africa, the infrastructure market has had difficulty being able to demonstrate that projects can generate high enough internal rates of return for investors to deploy their capital,” Mark Allegretti, managing director of investment bankers Nova Capital Africa, told The Africa Report.

World Bank data shows only rare private sector investment in the Sub-Saharan African water sector, with $121m recorded in 2007 and none in 2008 and 2009. In North Africa, however, private sources invested $2.3bn over the same period.

State financing

Even in North Africa, however, the state is still the main investor. In August, the Egyptian government reported that over the last ten years it has invested E£7bn ($1.3bn) in the country’s controversial Toshka water project. Toshka, the cost of which is estimated at around $70bn, diverts water from the Nile in the south in a bid to turn the surrounding desert into an irrigated oasis. Toshka is unpopular with other countries in the Nile Basin, which also accuse Egypt of blocking efforts to develop a common approach for the river’s use.

The Tanzanian government announced plans in early October for a huge new rural water project, which it claims will be the biggest in Sub-Saharan Africa. This highly ambitious project is intended to reach 10% of the population and will cost $950m. Water and irrigation minister Mark Mwandosya said the government had already secured commitments for $700m from donors, with the balance to be sourced internally. This is an immense fiscal challenge, though it may be possible to part-fund the project through the issuance of an East African Community bond via the Nairobi Stock Exchange.This is certainly the route South Africa’s water authorities are taking. In September, Halima Nazeer, CFO of the state-owned Trans-Caledon Tunnel Authority (TCTA), announced plans to raise R44bn from domestic and international markets to finance new water infrastructure. The TCTA has already held talks with local and international development finance institutions and Asian export credit agencies, and is in discussions with the banking sector. The issue, it seems, is not the availability of funds but the terms on which they are offered.

Coordinating and planning infrastructural roll-out at a continental level is a key rationale of NEPAD. Eight years old, NEPAD has become very good at “blueprinting” – coming up with master plans – but has made too little progress on facilitating projects. Recognising this, the AU restructured NEPAD at a summit in Addis Ababa in February, bringing it closer to other AU structures and giving it a sharper focus on project delivery.

Reflecting a growing awareness within NEPAD of the need not to concentrate exclusively on supply constraints, but to take greater account of demand, the NEPAD Spatial Development Programme is focused on identifying private sector investment that can generate the necessary revenue streams.

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