A new report by the African Development Bank (AfDB) explores how structured finance techniques can mobilise African domestic capital to support economic infrastructure projects and economic growth.
The report, “Structured Finance – Conditions for infrastructure project bonds in African markets”, was launched by AfDB Vice President, Finance, Charles Boamah, on April 19 in Washington, DC, on the sidelines of the IMF-World Bank Spring Meetings.
During the launching ceremony, African Ministers of Finance and Central Bank Governors discussed how African markets could mobilise capital for infrastructure projects, especially through African capital markets. They also discussed how policy-makers and development institutions can help the process.
The new AfDB report highlighted the opportunity for project bonds, while outlining the conditions for efficient capital markets. In that regard, the report explains the crucial role of constructive government policies and draws the lessons from other markets that might be useful for Africa.
The release of this new report comes at a very opportune time. African countries have been growing at rates in excess of five per cent. Indeed, seven out of the 10 fastest-growing countries in the last few years are in Africa. This has created a growing middle class and a flourishing financial sector. Savings are accumulating with institutional investors such as pension funds and insurance companies.
Africa has the financial resources to play a significant role in building African infrastructure, especially since domestic capital markets are growing in several countries. Domestic government bond markets are well established and becoming increasingly sophisticated. In many markets, non-government issuers are actively raising funds.
An opportunity for further innovation exists and would be welcomed by the market. Several African countries today have given priority to the issuance of ‘infrastructure bonds’. Many countries have been attracted by the example of Kenya, which has launched infrastructure bonds both from the central government and from state-owned enterprises such as KenGen. The government of Kenya has led the way by introducing certain tax advantages for investors buying such bonds. This has helped to build interest in the institutional sector.
The report also elaborates on examples from other emerging markets such as Chile, Brazil, Peru and Malaysia using project bonds as a way to catalyze investors’ interest in infrastructure projects. Such examples can serve as a template for African countries on how to develop their own markets.
For Africa to catch up on infrastructure with other developing regions over the next 10 years, an annual investment of $93 billion would be required—15 per cent of the region’s GDP and more than twice the amount estimated by the Commission for Africa in 2005. About two-thirds of the total represents capital expenditure to build new infrastructure assets and rehabilitate assets that have fallen into disrepair. The remaining third is needed to operate and maintain new and existing infrastructure.
The power sector accounts for 40 per cent of the required investment. Transport and water each account for a further 20 percent. Relative to the size of their economies, the burden of meeting these spending needs looks daunting for the region’s low-income countries (23% of GDP), particularly the fragile states (37% of GDP). But for middle-income and resource-rich countries, the targets look much more affordable representing 10–12 percent of their GDP.
To put these numbers in perspective, during the mid-2000s, China was spending 14 percent of its GDP on infrastructure investment alone
Africa is already spending $45 billion a year on its infrastructure needs—about half of the amount needed to achieve its goals and to close the gap with other regions.
Present spending on infrastructure in Africa is higher than previously thought, once off-budget spending (including state-owned enterprises and extra-budgetary funds) and external financing (aid and private participation in infrastructure) are taken into account.
Strikingly, about two thirds of spending is domestically financed, coming from the pockets of African taxpayers and consumers. Some countries already spend more than enough in some infrastructure sectors to cover the needs identified.
Source: Graphic Business