Structural reform needed to encourage investment in Africa, says IMF

Out-Law News | 18 Mar 2014 | 10:16 am | 2 min. read

The creation of a “large portfolio of bankable infrastructure projects” in central Africa will trigger increased contributions from the sub-regional banking sector and the capital markets, a ministerial-level International Monetary Fund (IMF) conference has been told.

However, the IMF said infrastructure development must be accompanied by structural reforms to “promote a strong private investment climate”.

The “desirability of tapping private sector financing” was discussed at the conference in Cameroon, with the IMF highlighting the benefits of private–public partnerships (PPPs) while “mitigating the fiscal risks tied to them”.

However, the IMF said the lack of infrastructure across the continent was “a key obstacle to achieving faster growth, because higher transportation, water, and power costs are estimated to reduce private sector productivity by almost half”.

“While the wider choices of available financing options can open up opportunities for African countries, governments have to be savvy about how they finance the scaling up of their infrastructure investments,” the IMF added.

The World Bank’s lead financial sector specialist Arnaud Dornel told the conference that annual infrastructure needs across Africa are estimated at $93 billion – 15% of Africa’s gross domestic product (GDP).

However, Dornel said total actual investments in infrastructure in Africa are $45bn annually, with more than half funded by the public sector.

About a third of the infrastructure gap can be met through “operational optimisation”, reducing the gap to $31bn (5% of GDP), Dornel added. He said PPPs “could theoretically represent 40% of the optimised gap” – around $12 billion annually (2% of GDP).

Dornel said sub-Saharan Africa had closed 158 project finance deals between 2003 and 2013 with a total debt of $59bn. Top countries were Nigeria ($17bn), Ghana ($11bn), South Africa ($10bn) and Angola ($4bn) – accounting for 70% of sub-Saharan Africa’s total. The four topped the regional league tables thanks to a few “jumbo transactions”, such as the 2007 discovery of Ghana’s Jubilee oil field, Dornel added.

Dornel noted that this figure represented a “very small portion” of the global project finance market – which saw more than 5,000 projects closed internationally between 2003 and 2013 and raised total debt of $2 trillion.

However, IMF public financial management specialist Maximilien Queyranne warned that PPPs are “complex to design and implement” and presented pitfalls for governments unless good institutions, regulations and sound budgeting, accounting and reporting is in place.

Queyranne said some 55% of all PPPs are renegotiated, on average every 2 years, leading to tariff increases in 62% of all renegotiations. A “due-diligence/multi-stage gateway process” is vital for PPP procurement, he said.

Queyranne added that PPPs are “less likely to be renegotiated when the regulatory framework is embedded in law (17% of all renegotiations) than when embedded in concession contracts (40%) or in government decrees (28%)”.

Africa specialist Akshai Fofaria of Pinsent Masons, the law firm behind Out-Law.com, said that the way infrastructure projects are procured and run must change if investment is to increase.

"There is significant capital waiting to be invested in African infrastructure but what is needed is more transparency about how projects are procured and run," he said. "Only when that is in place will international investors support projects. This is true across Africa, including in Cameroon, where it is essential that processes are open, fair and transparent."

Meanwhile, the African Development Bank said the launch this month of the African Renewable Energy Fund (AREF) was an example of how private investment can be channeled to a key development sector.

AREF, a dedicated renewable energy fund focused on sub-Saharan Africa, closed on 12 March with $100 million of committed capital to support small- to medium-scale independent power producers (IPPs).

AREF will be managed by Berkeley Energy Africa Limited, a fund manager focused on developing and investing in renewable energy projects in emerging markets. The fund will target IPPs with “an ideal size” of between 5 and 50 megawatts and a commitment per project of between $10m and $30m, with the capacity to source further funding from co-investors where necessary for a larger investment.

Berkeley Energy managing partner T C Kundi said: “The launch of a first pan-African dedicated renewable energy fund, with a centre of gravity in Africa, sourcing a majority of its capital from Africa at an exciting time in the evolution of macro-economic factors in Africa’s favour, presents a propitious environment for the investment of AREF.”