A bold new initiative, the African Investment Forum is anticipated to play a significant role in plugging Africa’s infrastructure gap estimated as wide as $170-billion a year. On this platform, talk is cheap. There will be no speeches. Transactions are the only objective.
The African Development Bank (AfDB) is leading the charge on the forum — which was launched in Johannesburg this week — and aims to guide investor funds to African projects.
There is a lot of money to be spent in the global market — $112-trillion a year — but the question is not the availability of capital; it is that it is not moving to Africa where the need is quite high but where the rate of return is too.
Enter the African Investment Forum (AIF) which aims to mobilise private equity funds, sovereign wealth funds and the private sector to facilitate infrastructure projects with the capacity to transform the continent.
A bevy of developmental financiers are also involved, including the World Bank, the Inter-American Development Bank, the Asian Infrastructure Investment Bank, the Islamic Development Bank, the European Bank for Reconstruction and Development.
“Essentially what it is [is] — a place where you bring transactions together, you de-risk them and government does what it needs to do to accelerate investments in Africa,” said Akinwumi Adesina, president of the African Development Bank speaking to the Mail & Guardian in Johannesburg this week. By developing the right projects, and by reducing the risk … it will accelerate investment and it will reduce the cost of finance.”
Reducing risk is key. “When investors look at Africa they put a risk premium on it … For most cases, the perception is much higher than the actual risk,” Adesina said.
To address this, the AfDB together with other multilateral development banks are creating “a mutualised core guarantee platform”, that is: they will pool all of their risk-sharing instruments together in order to de-risk investment at scale.
“We will use partial risk guarantees and partial credit guarantees to address at the scale the obligations of the public sector to a private entity that is invested,” said Adesina.
The priority for funding will be on infrastructure, that’s where the big gaps are in Africa. There’s obviously going to be a lot of investment opportunities in the service industry (64% of foreign direct investment goes there already). Investments will also be made in financial institutions in Africa can use that money and leverage it.
Much of this is what the AFDB does already. As an AAA rated institution the bank can raise funds cheaply and lend them to African states and companies at highly preferential rates. Public sector loans from the AfDB are cheap at an interest rate of around 1.2%, said Adesina. The private sector borrows at a rate of Libor plus 4 or 5. South African institutions such as the Land Bank and Eskom benefit from its offerings. Last year alone the AfDB disbursed $7.4-billion in funds.
“Africa’s needs are massive and they are more than what the AfDB alone can lend,” said Adesina. “The key is making sure there are more than enough resources to meet the needs of bankable projects — that’s what the AIF is trying to do.”