/ 23 November 2018

Continent must be smart about funding

The exchange of Africa’s natural resources for infrastructure development by China needs to be reviewed
The exchange of Africa’s natural resources for infrastructure development by China needs to be reviewed, argues Dr Emmanuel Sekyere. (Yasuyoshi Chiba/AFP)

A funding shortage is one of the biggest challenges to the development of infrastructure in Africa. The African Development Bank (AfDB) has estimated that about $93-billion a year is required to close Africa’s infrastructure gap by 2025. This calls for creative and diversified ways to fund infrastructure.

China, with its ideology of “shared prosperity”, the mantra of the Forum on China-Africa Co-operation, has emerged as Africa’s dominant partner. It is assisting with many aspects of infrastructure development, including by funding the AfDB’s programme for infrastructure development and other presidential initiatives.

China’s financial aid has a price

Although the financial assistance is welcome, it is not without problems and raises several concerns that need to be addressed. China’s lending patterns mirror the pursuit of “debt diplomacy” in Africa.

China is consciously not doing due diligence by advancing loans to African countries that are incapable of paying them back. Those that default lose control of strategic national assets, which has been the experience of Djibouti and Zambia, and very soon Kenya. Seaports, energy installations, national broadcasting corporations and international airports have been ceded to China in these countries.

It has been forecast that, in the next two years, Kenya will have to cede the largest port in East Africa to China because of an anticipated loan default.

Almost every other African country today finds itself excessively exposed to Chinese financial assistance and in a position of worsening external debt that is not sustainable.

China has promised to cancel the debts of African countries that default on their loans, but the question is: Will it be in exchange for a strategic national asset?

In addition to this problem, the exchange of Africa’s natural resources for infrastructure development by China, which has come to be known as the Angola model, needs to be reviewed.

It locks the continent into being producers and exporters of primary commodities, which creates job-less growth and does not reduce poverty.

The continent wants to escape this and industrialise, so the onus rests on African countries to ensure that borrowing conditions favour development and are sustainable. Therefore, alternative and innovative ways of raising financing to develop infrastructure are needed.

Alternative financing models

Traditional public spending used to finance infrastructure development has declined significantly because of African states’ other needs. Even so, in 2015, African governments contributed $28.5-billion to a total infrastructure budget of $83.5-billion.

About half the total infrastructure budget went into the energy sector, and East Africa has benefited the most.

Besides public funds, special purpose vehicles (SPVs) have been used by some governments to seek partnerships with the private sector to finance infrastructure, an example being the SPV between Gauteng and the Maputo Development Corridor.

Sovereign wealth funds have also been explored by some countries to finance infrastructure. A percentage of fiscal surpluses, natural resource receipts and balance of payment surpluses have been invested in sovereign wealth funds dedicated to developing infrastructure.

Public-private partnerships have been proposed as a way to involve the private sector in infrastructure financing, relieving governments of some of the financing pressure. The information communications technology sector, especially, has seen increased private sector involvement.

In addition to simple commercial banking loans, long-term funding sources such as pension funds and insurance reserves have also been useful in private sector infrastructure financing.

READ MORE: China’s generosity queried

The long gestation period of infrastructure development matches the long-term investment horizon of pension and insurance reserves. Build-operate-transfer and user-fee models have been handy in recouping expenditure on infrastructure development for the repayment of debt.

But it is necessary to ensure both proactive and retroactive financial and social sustainability analysis of infrastructure financing and repayment frameworks before being implemented. This requires adequate social and key stakeholder consultation, especially before project implementation. The private sector further brings in the dimensions of efficiency, quality assurance and expertise in terms of pre- and post-construction repayment models.

Diaspora remittances

Remittances from migrants in the diaspora have been used by many developing countries globally to finance several developments. The Latin America-United States corridor is the leading example.

Official World Bank statistics show that, although in 1990 migrants remitted about $24-billion to lower- and middle-income countries, this number doubled to $59-billion in 2000 and reached a spectacular $550-billion in 2012.

In countries such as Lesotho, Nepal and Moldova, remittances represent 25% or more of gross domestic product.

Research has shown that remittance flows are countercyclical and are an insurance against times of economic hardship. Hence sovereign bonds aimed at the diaspora for infrastructure development or as a source of capital during economic downturns is an option African countries need to explore fully.

A better future

Africa’s infrastructure deficit is a major bane of its development. The problem of a funding shortage and its sheer magnitude require a diversified portfolio that mitigates overdependence on China to avoid excessive exposure and vulnerability to that country.

Responsible lending and borrowing behaviour are required on the part of Africa and its development partners to avoid unsustainable external debt levels, which are detrimental to Africa’s growth, the main objective of borrowing in the first place.

READ MORE: Africa’s debt to China is complicated

Public-private partnerships, sovereign wealth funds, special purpose vehicles and sovereign bonds targeting the diaspora are creative and diversified ways of raising funding for infrastructure development and avoiding the Angola model and extreme exposure to China.

Africa’s ability to address its infrastructure deficit will be enhanced if these issues can be effectively addressed.

Dr Emmanuel Sekyere is a chief research specialist at the Africa Institute of South Africa, a research programme of the Human Sciences Research Council. These are his own views