Africa has been moving fast: with an average growth rate between 4.5% and 5% over the last two decades, the continent is one of the most dynamic regions in the world. Its economy has been progressively shifting from a raw-material export-orientated model towards a consumer economy supported by its demographics – currently 1.5bn, forecast to reach 2.5bn in 2050. As a final point to this 2-decade-long positive trend, the Covid crisis has shown the unexpected resilience of the continent, where the prophecies of doom announced at the beginning of the pandemic never materialised.
Resilience and growth: these trends are there, and things are probably about to move to the next level, as one of the major impediments to the realisation of the continents’ potential is being addressed: the under-development of intra-Africa trade. 2018 was a historic year marked by the launch of the African Continental Free Trade Area (AfCFTA): as it progressively comes into effect, the AfCFTA has the potential to become one the world’s largest free-trade areas, covering more than 1.2 billion people and around $5.6 trillion by 205[1] in combined consumer and business spending if all countries join.
Nevertheless, for regional integration to unleash its full potential, it is crucial to develop infrastructure and close the associated financing gap: although investment has been massive, reaching an annual average of $75bn p.a. between 2012 and 2016, the needs are still greater, estimated at $100bn p.a. – and meeting them is being hampered by a financing gap that amounts to 50% of that. In spite of the 10-year-long positive narrative on Africa, all of the summits and commitments made in recent years and the unanimous perception that infrastructure is the key to full realisation of the continent’s potential, the financing gap has just kept widening. If things are to change, three fundamental limitations must be captured and recognised.
Official Development Aid (ODA) is stagnating at around $55bn p.a. It is limited by nature, and no-one can ask it to fill the whole gap by itself. It is therefore essential to make it a priority to attract private sector investors, and recognise that their agility could be particularly beneficial for smaller infrastructure projects, in the $10m to $50m range (logistics bases, off-grid power plants, small port terminals, data centres, telco towers, etc.), distinct from the usual massive ones.
However, in the wake of the 2008 global financial crisis, it was exactly the opposite that happened, with the growth of prudential regulation, through the increase in capital consumption for banks transacting in non-investment-grade countries (basically, the whole of Africa apart from Botswana and Mauritius) and increased regulatory due-diligence costs. As a result, major international banks started cutting back their presence in the continent and arbitraging in favour of their traditional markets.
Non-banking investors (pension funds, insurance companies, investment funds, HNWIs) can offer an alternative and must be the new investors to be attracted towards Africa, which they are prevented from being by their misperception of risk.
In order to tackle this situation, work should be done around two main axes. Firstly, by promoting a pull rather than push strategy: international players are more often than not guided by objectives and specialised approaches laid down in their decision-making centres, which are often not aligned with the needs and priorities that have been determined on the ground. Some focus on the development of agriculture, others on climate change only, others again on infrastructure, etc. However, the reality on the ground shows that intersectionality between the different sectors in Africa is so great that it requires a global approach. Infrastructure, in particular, should be viewed with a wide-angle lens, and the development of corridors has proved to be most successful for the development of trade: the development of a corridor can include a port as an entry/exit point, road accesses for inland distribution and, of course, power plants that will favour the development of industries and services alongside and provide the means to develop agro-industrial projects in the neighbouring regions: the Lamu corridor in Kenya and Nacala in Mozambique are two cases in point.
When priorities are not the same, it is essential to identify tangential points where overlaps can be determined, particularly in the power sector. A good example is a slogan of the Africa Energy Chamber, which defined its priority as “Making Energy-Poverty History”, and which views the growing financial embargo on financing natural resources as increasingly indiscriminate and adverse to its priorities. Among all infrastructure projects, power will be essential. Without sufficient capacity, all of the much-hyped current trends will stall. The digital revolution will simply not happen if bandwidth is not powered, and this will hamper the development of e-commerce; the green revolution will not materialise if a shortage of power jeopardizes irrigation or breaks cold chains in agro-industrial processes – intra trade will have to be replaced by imports; SMEs will not thrive if their cost bases are hampered by running on expensive fuel generators – not to mention the environmental cost, etc. So, for instance, if coal-fired power plants are legitimately considered a no-go for international financial institutions, finding alternative solutions (gas power plants in addition to renewables) could be a good compromise for the respective priorities.
Adapting the mindset will not be enough though if additional liquidities do not arrive in the market. As changing prudential regulations to attract international banks back is currently unrealistic, it is, therefore, essential to bring new private sector players into the game. The timing is particularly adequate, in a period where liquidity in the markets has kept increasing and has never been so high: for the main pension funds alone, assets under management have reached a record, totalling $56.6 trillion by the end of 2021 – to which can be added insurance companies, sovereign wealth funds, and high net worth individuals.
This is where international institutions, and particularly Development Finance Institutions (DFIs), can play a key role and show the financial players that it is possible to invest outside the usual binary view of “aid” and “high-risk high-return”. First, they need to help reassure them regarding the worry that comes top of their list, namely political risk: the promotion of political risk insurance solutions, which are already provided by some DFIs and the private sector insurance market, should be developed and extended through public-private partnerships. That, in turn, will help the development of alternative investment solutions, from non-banking actors, which are the true key to bringing new sources of financing to Africa. DFIs could anchor a new type of alternative funds that would meet both the demand coming from the ground and the requirements of the private sector: we have long been defenders of the development of private debt, an asset class that is almost non-existent in Africa, whereas it accounts for over $700bn of investments from non-banking actors worldwide, mainly in the US and Europe. It has proved its efficiency in these markets and would be very well suited to the current needs in the African markets – a much-needed tool added to the currently available panoply.
At a time when there are large ambitions about redefining partnerships between Europe and Africa, the AfCTA offers a unique opportunity for two regional integration models to work together. Hopefully, a new lease of life will be given to redefining concrete relationships between the public and private sectors, with the former playing the role of catalyst to encourage the latter to deploy a new wave of investments throughout the continent. Tackling the financing gap will remain essential, not only for the full realisation of the potential of the continent but also for a successful common future of the two neighbours across the Mediterranean.
NOTES:
[1] McKinsey Global Institute, "Lions on the Move II", September 2016
Contenuti correlati:
