On the Financing of our Infrastructure

During these past 20 years, many African economies have tried to develop domestic capital markets hoping to enhance local capacities to mobilize domestic resources for funding development projects and enterprises. And so, during these two decades number of stock exchanges in the continent has almost doubled, to the current 29 stock exchanges representing 38 countries, including two regional exchanges.

These exchanges though have a lot of disparity in terms of size, depth, liquidity, trading volumes, etc. The fact is the continent is characterized by a handful of prominent exchanges and then many new small exchanges. Yes, efforts are being made to boost exchanges by improving investor education and confidence, access to funds and make the procedures more transparent and standardized, however the outcome hasn’t been satisfactory. Almost all African exchanges lack a significant local investor base, as well as financial products such as those which can finance infrastructure projects, i.e. Infrastructure bonds. While, many countries have embarked in different infrastructure projects – for roads, railways, airports, ports, bridges, energy, irrigation, etc but only three out of 29 exchanges have infrastructure bonds issued and listed in their stock markets.

According to the African Development Bank (AfDB), road access in Africa is only about 35 percent as compared to 50 percent in other developing regions. In agriculture, just about 5 percent of agriculture in the Africa is under irrigation, compare to almost 40 in Asia or 15 percent in Latin America.

Africa’s average national electrification rate of 45 percent, is poorly compared to over 85 percent in developing countries in Asia and 98 percent in Latin America. According to AfDB, the amount of capital required to close the infrastructure gap in Africa is estimated to be in the region of over US$90 billion annually. So, we know we face a significant infrastructure deficit and its financing means.

In these three decades China has stepped in funding many infrastructure projects in the continent. Of course, with other countries, international development agencies and other development partners have continued to play the role in this space as well. But the question is, for how much long should Africa continue to highly depend on foreign countries and institutions to fill its infrastructure funding gap? Is there a possibility of enhancing its efforts to facilitate domestic mobilization of resources? Can these efforts be aligned to financial inclusion, economic empowerment and financial sector development policies and programs?

As we now know, sourcing funds to finance infrastructure project in Africa has always been fraught with difficulties. One major challenge is that development finance institutions often impose stringent policy conditions to finances, rightly so. But the fact also is that the funding required to close the infrastructure gaps is simply not easily in existence on these institutions’ balance sheets; hence a combination of both significant domestic resources mobilization and external funding is worth pursuance, at least in the short to medium term.

The other factor is that western lenders have historically been more active in financing social infrastructure such as health and education, their approach to development in Africa has by large been related to “poverty alleviation”. As it turns out, financing social infrastructure for poverty alleviation objectives isn’t the same as financing economic infrastructure which plays a critical role in spurring economic growth, which in this moment in time, has not been accorded the attention it deserves. While social infrastructure is important for socio-economic development, but, economic infrastructure is more urgent. Wealth creation and capital accumulation are better facilitated by investments in economic infrastructure.

The other fact is, the old approach of countries relying heavily on multilateral and regional development finance institutions to fund infrastructure has proved less effective, somehow incapable of closing the financing gap of the magnitude and size we face. In fact, neither the old nor the new institutions have the risk appetite for the kind of investments needed. If African countries continue to rely on these organizations and institutions, then the pace for closing the infrastructure gap will be relatively slow.
Given such context, the game-changing infrastructure projects that can make a dent in the infrastructure deficit and move economies to a higher growth path need to come from Africans’ own resources, and in some cases be supplemented by what we can be accessed from international financial markets. And, the place to start would be the debt (bonds) market where domestic savings will be intermediated and be able finance our significant economic infrastructure projects.

It is on such basis, that countries have to be encouraged to facilitate enhancement of capacities of domestic capital markets to raise funds for infrastructure projects. The good news about this is that ways can be found where external financiers and investors can use our domestic capital markets to finance local projects and enterprises, somehow enhancing our investor/financier base.

Railways and canals in America, and Europe, were/are largely financed with capital raised through issuance of products such as infrastructure bonds. From records of history, big infrastructure projects have been financed with funds from the capital market, why? because national budgets are often unable to support the required infrastructure expenditure. Country’s balance sheets in many cases lacks the fiscal space to accommodate the substantial financial outlays required for infrastructure development.

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