Wednesday, May 26, 2021

Africa’s infrastructure paradox can be mitigated through innovative financing Yariv Cohen

Downtown Kigali. / Photo: File.

$108 billion dollars. This number, too big to apprehend, represents Africa’s annual infrastructure financing gap, and as research conducted by the African Centre for Economic Transformation (ACET) and Omdena, a data collection platform revealed, it could reach $1.7 (!) trillion over the next 20 years. According to the African Development Bank, energy infrastructure seems to be the most in need of

financing in Africa, followed by sanitation, and transport.

The subject, albeit the growing gap, is at the top of the priority list. Over the past two decades, multiple countries across the continent have expanded core infrastructure, including telecommunications networks and access to safe potable water, but overall, developmental progress has remained limited. Today, Africa is the only region in the world where there has been a decline in road network density and almost no improvement in per-capita electricity-generating capacity.

One of the main reasons for the growing gap is the inherent uncertainty that the region encompasses, as investing in African infrastructure remains, by all means, a risky venture. Mckinsey notes that Africa’s track record in moving projects to financial close is poor, with about 80 per cent of infrastructure projects failing at the feasibility and business-plan stages. This represents Africa’s infrastructure paradox - there is need and availability of funding, together with a large pipeline of potential projects, but not enough money is being spent.

 

A risky adventure

 

The reasons for the paradox varray. Infrastructure development projects are a complex process that require interface and coordination between multiple agencies including financial, tax, and legal that are mostly based and managed outside the continent. Local entities often lack the budgets and capabilities to design and implement infrastructure projects at scale. An ever-changing regulatory environment and inadequate policy frameworks may challenge commitments to long-term projects and lead to poor prioritization, and delays in obtaining licenses, approvals, and permits. And above all these, an excessive focus on risk avoidance as opposed to risk management and mitigation, constitutes a main reason leading many international investors to avoid the region altogether.

But to those who choose to focus on the vast opportunity instead of the risks, Africa, encompasses unlimited opportunities.

Banking on impact

In the past decade, innovative financing schemes have been devised with risk mitigation being a major focus, as it was becoming increasingly clear that risk is a main concern hindering global investors, and a major factor that can be handled by outside financing bodies, unlike the inherent causes that are harder to mitigate.

One of these innovative schemes that is becoming more and more substantial is Results-Based Financing (RBF), an innovative scheme that is banking on development impact. This type of financing ensures that development funding is linked to pre-agreed and verified results, and that funding is provided when the results are achieved. Through a range of mechanisms, RBF helps deliver development outcomes, improves accountability, and drives both innovation and efficiency, while mitigating multiple risk-factors that come with the territory of infrastructure investments in developing countries, and most specifically in Africa.

There are various types of RBFs, each addressing a different need in sustainable development. Advance market commitments offer a fixed quantity or price for a product or service over a relatively short period of time in order to stimulate a market response. Output-Based Aid (OBA) links the payment of public funding to the delivery of outputs such as the provision of solar home systems. Service delivery is contracted out to a third party, which receives a subsidy to complement the portion of user fees that poor households are not able to afford, with the results verified independently after the services have been delivered, and before payment. Impact bonds are public-private partnerships that reward investors for successfully delivering impact. There are other kinds of RBFs, and they all come together under one, effective roof; attracting private investment in historically “non-bankable” areas by establishing effective incentives for service providers to reach underserved low-income households.

Empowering communities and companies alike

The main benefit of RBF is that it transfers the financial risk away from the payment ability of impoverished local communities, and puts it on the ability of a company to perform and deliver. By tying disbursement of funds to actual results, local partners are both incentivized to meet specific goals and given flexibility on how to meet them, incentivizing innovation and creativity.

A good example for the power of RBF across Africa is the off-grid, solar energy sector. In the early years of deployment of solar home systems across sub-Saharan Africa, initial high upfront costs created significant affordability challenges, causing an insurmountable financial barrier for most last-mile families living in extreme poverty conditions. By relying on RBF, companies across the region are able to lower the cost for the end-user, scale their operations faster, and create substantial impact.

One of the main bodies acting in the RBF sphere is the GPRBA, a global partnership program in the World Bank Group that funds, designs, demonstrates and documents results-based financing approaches to improve the delivery of basic services in developing countries. The program has benefitted 11 million people across the world to date, and has provided $273.9 million in funding in its 17 years of operations. Other groups such as ENDEV, Sida, and GIZ, all changing reality across Africa, South East Asia, and Latin America, and providing millions with electricity access, running water, healthcare facilities, and more.

Some companies working in the region recognised the vast potential, and have been leveraging it to scale up operations and connect millions more to sustainable solutions. Ignite has been working with leading investors and financiers in the RBF sphere across Rwanda and Mozambique, with added pipeline deals across sub-Saharan Africa, and millions to be connected through these financing schemes in the coming years.

McKinsey’s analysis indicates that Africa’s current pipeline of infrastructure projects includes $2.5 trillion worth of projects estimated to be completed by 2025, with RBFs playing a major role, but to reach the coveted SDGs by 2030, substantial funds and added projects are needed. As a share of GDP, infrastructure investment in Africa has remained at around 3.5 percent per year since 2000, as China spends about 7.7 percent of GDP, and India 5.2 percent. In absolute terms, this would mean a doubling of annual investment in African infrastructure between 2015 and 2025, to $150 billion by 2025.

Proper, quality Infrastructure enables societies to function and economies to thrive, making it the very core of the efforts to meet the Sustainable Development Goals (SDGs). Mitigating Africa’s infrastructure paradox is the way to support the continent’s economic development, to encourage the growth of its business sector, and to establish an inclusive reality for local communities.

The writer is an entrepreneur and investor,leading sustainability-driven companies in Africa and the Middle East

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