A new report from Global law firm Baker & McKenzie in collaboration with the Economist Corporate Network, Spanning Africa’s Infrastructure Gap: How development capital is transforming Africa’s project build-out, reveals that development capital has been by far the predominant funder of African infrastructure since the financial crisis.

Closing the infrastructure gap requires many billions of US dollars, both to upgrade and maintain existing infrastructure as well as to fund new projects. In 2009 the World Bank estimated that over US$90bn annually was required in Sub-Saharan Africa alone.

This report estimates that actual development capital funding for African infrastructure totalled around US$328bn between 2009 and 2014 – roughly US$54bn a year. Add annual commercial lending estimated to be between $9bn and $12bn a year and suddenly that gap looks more realistic to close. Development Capital is a crucial enabler to make projects bankable by taking risks (primarily political risks) which the private sector would not be able to accept. Without them, private-sector contributions would be significantly less.

“Put bluntly, Africa cannot fulfil its economic potential without more and better infrastructure, particularly in the power, transport, and water and sanitation sectors,” said Gary Senior, chair of Baker & McKenzie in EMEA. “This needs funding one way or another for the ‘Africa Rising’ growth narrative to come to fruition. But what is surprising about these numbers is not so much the challenges as the apparent achievability of closing the funding gap over the next 10 years if Development Capital keeps flowing – we just need to find more ways to bring private and institutional capital into projects. That means making them bankable.”

The report contains detailed analysis of the $US93bn in commitments made by thirteen of the largest development capital institutions across 22 African countries between 2009 and 2014.

“DFIs play the long game. They are there through the economic cycle and are able to support projects in ways that the private sector cannot,” said Herman Warren, Director at the Economist Corporate Network and author of the report. The ‘through-the-cycle’ role DFIs play was relevant when oil and other commodities were trading at much higher levels and is even more important now given the current softer commodity cycle.”

Major capital providers

Over 67% of DFI-funding approvals analysed were provided by four institutions: The World Bank and related bodies, Development Bank of Southern Africa (DBSA), African Development Bank (AfDB), and Agence Française de Développement (AFD) and related entities.

Annually billions of dollars are directed into Africa-based infrastructure projects. DFIs are a primary source of this funding, but more than providing the financial capital alone, DFIs play a critical catalytic role, enabling power, water, transportation, urban development and other projects to materialise that otherwise would not see the light of day.

“It’s not just about money, it’s also about tenor and bankability,” said Michael Foundethakis, Baker & McKenzie’s head of Banking & Finance in EMEA. “DFIs are often key to due diligence pre-, during and post-construction phase, which increases a project’s chances of success. Furthermore, DFIs tend to have the experience and appetite to offer financing in jurisdictions and for longer term tenors than private sector banks may be willing to provide; as the risks for such commercial lenders are often too great relative to the returns.”

China: Soft Power – Hard Infrastructure

The role of Asia-based DFIs looms large. Although they did not provide official numbers for this report, China-based DFIs, in particular, are estimated to be the largest single source of funding, contributing over US$13.4bn in Africa in 2013 alone, according to the Infrastructure Consortium for Africa , and almost $60bn over the period covered.

Chinese support for Africa-based infrastructure has been weighted towards transportation sectors: rail, roads, airports and seaports. However, China-based DFIs are also funding mineral extraction and production platforms, such as commodity-processing and manufacturing facilities in African countries.

In an interview for the report, Zhao Changhui, chief country risk analyst from China Exim, says: “There is no doubt that cumulative Chinese investment in Africa will amount to at least US$1 trillion over the next decade.”

The report states that China Exim is believed to be the main source (at least 75%) of the billions of US dollars that will be directed to infrastructure in Africa on an annual basis from China-based organisations.

“What’s notable is the evolution of Chinese investment to a sophisticated approach after learning from early experiences,” said Wildu du Plessis, head of banking and finance at Baker & McKenzie South Africa. “We’re seeing complex projects being signed, finance and built, including multi-billion dollar rail projects in Nigeria and Zimbabwe as China’s ‘One Belt, One Road’ policy gains traction.”

Sectoral shifts

A key finding from the report is that infrastructure investments skew considerably away from the perhaps stereotypical categorisation of Africa, in the main, being a commodity play. For example, power and transportation projects were allocated around 67% of the funding approvals from the DFIs analyzed in detail.

The sectorial allocation of funding indicates that Africa is far from a commodity play. Over two-thirds of this US$93bn was directed to the power and transportation sectors.

Top recipients

South Africa, Egypt, Nigeria, Morocco, Kenya, Ethiopia and Ghana received more than 70% of funding from the DFIs analyzed in the report over the period.

Notably Nigeria increased its share of funding significantly in 2014 as commodity prices dropped dramatically, supporting the notion that DFIs fund through the cycle, while Ethiopia received a much higher amount of funding than larger countries, underlining its economic potential as well as need for infrastructure links to and from the landlocked country.

Filling the gap

The challenge of addressing the infrastructure gap in Africa is too big for any one group of stakeholders to address on its own. Billions of US dollars annually are required to pay for the physical infrastructure, but, beyond the build-related finance, funding and assistance are required to plan, manage and develop bankable projects. Many African countries face the conundrum of not being able to take on additional debt and a lack of the technical and other capacities to manage infrastructure-related projects successfully. In this context, the role DFIs have played of being there “through cycles”, and helping to create an enabling environment that supports infrastructure development, has been indispensable.

Not all DFIs operate on an altruistic basis. Some DFIs, the bilateral ones in particular, are guided primarily by a nationalist agenda in support of their own export base, which may or may not distribute the benefits of their funding initiatives equitably. However, without the contributions of DFIs, bridging the infrastructure divide would be all the more difficult.

“The key to filling the infrastructure funding gap is ensuring that public and private sector investors can work together. The greater reach, experience and risk appetite of DFIs can provide the platform for commercial banks, private equity and institutional investors to bring their own experience and capital to bear in supporting long-term bankable projects,” said Calvin Walker, Baker & McKenzie’s Global Head of Project Finance. “It’s not so much a question of needing DFIs and the private sector to combine to achieve scale of funding on particular projects; it’s more a question of having the public and private sector achieve an appropriate risk allocation across all types and sizes of projects, not just the largest ones.”