We know the story all too well: Africa needs to scale up private investment—rapidly.
We also know the numbers. The continent will require some $100 billion in new infrastructure each year going forward if it is to close its infrastructure gap. Yet less than half of that is currently financed. And with a labor force that is expanding by 20 million people a year, and rapid urbanization along with it, Africa’s infrastructure needs are only poised to grow.
The backstory is also familiar: Africa holds enormous potential for private investors. Since the turn of the millennium, it has been among the world’s fastest growing regions. And although growth in some parts of Africa is fragile for the moment, the continent has an improving business environment, expanding internet connectivity, rising incomes, and shifting consumption patterns. These enduring trends have created an abundance of commercial opportunities across the continent, transforming it into a market and opportunity that investors cannot afford to ignore.
Piecing together the puzzle
So, with all the opportunities for growth, and the need for much more investment, why is there still a shortage of private sector investments in Africa? Why do institutional investors remain hesitant to break new ground and invest full scale in African infrastructure? And why has foreign direct investment to the continent fallen off, from around 6 percent of the world’s FDI stock four decades ago to just 3 percent today?
Finally, why don’t more private investors use the instruments offered by Development Finance Institutions?
For reference see Joint report for G-20 by AfDB, IMF and World Bank
There are no easy answers to these vexing questions.
One part of the puzzle is simple, however, and it involves an information gap. Investors looking to get involved in emerging markets often encounter—and are discouraged by—a general lack of information. They don’t know what to expect, what instruments from Development Finance Institutions are available to support them, and how to get help in preparing projects for investment.
And while significant support exists that can help overcome these obstacles, many potential investors are unaware of - or even confused - about where and how to obtain this support. Development Finance Institutions provide much of it, yet to many investors these institutions and their many programs remain a jumble of abbreviations.
Development Finance Institutions have a multitude of financial products geared to lending, investing, mitigating risk, blending commercial with concessional funds, providing advisory services, and supporting project preparation. But the challenge for the private sector and other willing investors—simply put—is to obtain an overview of just what is available This is difficult terrain even for development experts.
A simple toolbox
To help bridge this information gap, the German G-20 Presidency has asked the International Finance Corporation to create a simple toolbox with straightforward and accessible information about the many programs available to investors, firms, and governments looking to engage with the G20 Compact with Africa countries. These countries include Cote d’Ivoire, Ethiopia, Ghana, Morocco, Rwanda, Senegal, and Tunisia—with more to follow.
Improving the conditions for private investment in Africa, with an emphasis on infrastructure, is central to the Compact. And the goal of the toolbox is to provide an accessible overview of where to go for financing and support of private investments.
The toolbox —which is an inventory of available instruments—is based on substantial inputs from all the multilateral development banks engaged in the region, as well as the International Monetary Fund and the Association of European Development Finance Institutions. It was compiled with the twin goals of providing transparency and closing the information gap facing governments, investors and businesses.
The toolbox also outlines the relevant knowledge platforms related to scaling up infrastructure in the Compact with Africa countries. Engaging with platforms such as the Sustainable Development Investment Partnership is critical to closing the information gap. By doing so, private investors and multilateral development banks can create and maintain a strategic dialogue about the key issues for mobilizing private finance for sustainable infrastructure.
Three steps for the future
At the end of day, all actors share the same agenda—to facilitate private investments in Africa. Only strong African leadership and ownership can create enabling environments and scale investments, but development partners can have an important supportive role.
Going forward, at least three steps are necessary to further transform African infrastructure into a truly tradeable asset class.
First, investors need to be provided with better insights into the performance of assets in the infrastructure space, including credit default rates. Knowledge about asset performance is essential for investors to assess the balance of risk and return that guides all private investments.
Second, Development Finance Institutions need to work to standardize and simplify their products. Naturally, standardization should not limit financial innovation, but there is substantial room to make products easier to access for both current and future clients. Increased user friendliness of products is a common responsibility, and one that can bring significant benefits to Africa.
Third, there is a need to work upstream to create a policy environment that promotes commercially viable projects. Without bankable deals, investments will simply not flow at a sufficient scale.
Platforms like the Sustainable Development Investment Partnership, with its unique membership of public and private actors, can be critical to moving this three-fold agenda forward. The G-20 emphasis on the Compact with Africa provides an excellent basis for common action.