Africa's Infrastructure Gap: the Importance of the Private Sector

By John de Villiers

The second edition of the International Infrastructure & Invest Convention, themed "African Solutions for African Challenges," was held recently in Johannesburg, South Africa. Much of the discussion delved into the current state and future requirements of Africa's various infrastructure classes and - with public and private financiers being in the same room - how to bridge the gap between the private and public sector in terms of the technical and financial backing of these projects.

Despite the growing demand and opportunities for private-sector involvement in building infrastructure in Africa, private firms still provide only a small fraction of the total amount invested, which itself represents a small fraction of the total demand for infrastructure investment. In fact, many countries are forecasting enormous infrastructure needs and funding shortfalls.

The question then arises: how is the gap between the private and public sector going to be bridged?

Innovative financing models are increasingly being used by the private sector to reduce the risks associated with large capital outlay projects - making large-scale investments in markets like sub-Saharan Africa feasible. In particular, the use of the project finance model has gained popularity over the past few years, with the African region attracting transactions worth $11 billion in 2013 - a figure that increased 12.3 percent over the previous four years.

With project finance, funds are raised on a limited-recourse or non-recourse basis to finance an economically separable capital investment project. The fund providers look primarily to the cash flows from the project as the source of funds to service their loans and provide the return on their investment.

However, further proactive initiative is required at a governmental level if project finance capitals flow into infrastructure is to increase and the funding gap is to narrow. In particular, there are three notable areas of concern for private sector players which the sector needs to address:

* Concerns over policy uncertainty - as policy support is needed to reduce the uncertainties and associated risks and improve the overall climate for financing;

* The regulatory environment - where tariffs are often not set in a reasonable manner, affecting the offtaker (and thus the 'bankability' of the project); and

* Doubts surrounding the creditworthiness of the host country.

These concerns are the main points affecting the bankability of projects. Indeed, the bankability of infrastructure projects in Africa needs to be achieved before they can gain long-term investor interest and funding. If governments are able to resolve these key issues, then financiers would be more confident of seeing a successful return on their large equity and debt investments.

(The author is an analyst at Frontier Advisory)