What are the needs?
Estimates of financing needs in infrastructure range from US$130 billion to US$170 billion, with an annual financing gap of US$53 billion to US$93 billion. However, for the first time, total commitments for infrastructure financing in Africa amounted to US$100.8 billion in 2018 according to the Infrastructure Consortium fo Africa (ICA) Infrastructure Financing Trends report. According to the same report, the annual financing gap remains highest in the water sector (US$43-53 billion), followed by energy (US$5-20 billion), transportation (US$4-16 billion), and, to a lesser extent, Information and Communication Technology (US$1-3 billion). The main factors driving the demand for infrastructure on the African continent are: sustained economic growth, rapid population growth in Africa, the future implementation of the African Continental Free Trade Area, the African Union's Agenda 2063.
What is the AfDB's role?
Financing structuring projects
The AfDB, a leading development finance institution on the continent, works with African governments to implement strategic infrastructure projects that promote inclusive growth and regional integration. The AfDB's support for infrastructure development in Africa over the years reinforces its belief and commitment to transforming the lives of African communities through improved access to social and economic services. The Bank maintains a sustained approach to infrastructure financing in four (4) sectors in particular: Transport, for the construction of roads, ports, airports and railroads; Energy, for the construction of hydroelectric power plants, transmission lines, wind farms; ICT, for the construction of submarine cables; Water, through water supply and sanitation projects. The AfDB's support is also reflected in the financing of major regional and continental priorities such as the Program for Infrastructure Development in Africa (PIDA). In the last 20 years alone, the AfDB has financed about USD 45 billion in infrastructure in Africa. Examples include Trans-Gambia Bridge Project (Senegal-Gambia); Regional Express Train (TER) Project in Dakar (Senegal); Bridges such as Kazungula between Zimbabwe and Botswana; Rosso Bridge between Senegal and Mauritania; Ethiopia-Kenya; Ghana-Burkina-Faso, between the Gambia River Basin countries (OMVG), Gambia, Guinea, Guinea-Bissau and Senegal; AES Sonel in Cameroon; Ouarzazate Noor I and II in Morocco; Eskom in South Africa; rural electrification projects in Tunisia; Koudiat Accerdoune dam in Algeria; in ICTs we can mention projects such as the Cameroon, Chad, and CAR backbone; submarine cable between the East African countries, etc. .
At the end of 2019, 56.1% of the Bank's active portfolio consisted of interventions in the transport (25%), energy supply (21.8%), water supply and sanitation (8.4%), and communications (0.9%) sectors.
Supporting an enabling environment and policy reform
The legal, regulatory, and institutional frameworks in Africa are major constraints to attracting private capital for infrastructure. Clear and unambiguous laws are needed to reassure potential investors about the enforceability of their infrastructure contracts. The AfDB is helping to overcome these challenges by creating enabling environments through support for targeted economic and institutional reforms in countries, and by providing concessional financing to reduce financial risks to an acceptable level for private investors. Some Bank-hosted initiatives, such as the Infrastructure Consortium for Africa (ICA), and the African Legal Support Facility (ALSF) also address these gaps. In addition, the AfDB works closely with the World Bank's Public-Private Infrastructure Advisory Facility (PPIAF), which supports the investment climate needs of low-income developing countries, including in Africa.
Project Development and Preparation
Project development and preparation is one of the critical weak links in the African infrastructure value chain. Across the continent, there is a lack of well-prepared projects, resulting in a stagnant development pipeline of bankable projects. To help African countries and regional institutions prepare bankable infrastructure projects for the market, the AfDB, with the support of its donors, has put in place several project preparation facilities such as the NEPAD Infrastructure Project Preparation Facility (NEPAD-IPPF[2]) to prepare good quality and sustainable regional infrastructure projects, the African Water Facility (AWF) to finance water resources development activities in Africa the Sustainable Energy Fund for Africa (SEFA) to support the preparation of small and medium-scale renewable energy and energy efficiency projects in Africa; the Fund for African Private Sector Assistance (FAPA) and the Middle Income Countries Technical Assistance Fund (MIC-TAF) to provide technical assistance, capacity building and project preparation for middle-income countries The Bank has also established the infrastructure investment platform, Africa50, and holds a stake in Kukuza, a project finance and development fund for investing in large-scale African infrastructure projects. To substantially increase private sector participation in infrastructure, the AfDB is launching a PPP Project Preparation and Structuring Advisory Service that will help African countries better develop bankable PPP projects. This reflects the Bank's ambition to attract more private capital.
How is the AfDB involved in financing infrastructure in Africa?
The AfDB's financing mechanisms include: innovative blended financing instruments for PPPs, risk mitigation and credit enhancement, loan syndications, infrastructure co-financing, indirect AfDB financing through independent investment vehicles, local capital market development and the non-bank financial sector.
Innovative blended financing instruments for PPPs
Through the increased use of blended financing instruments (concessional and non-concessional resources), the AfDB's objective is to change the risk-return profile of investments in high-impact infrastructure projects and overcome the problem of low returns or perceived high risks that limit private investment. The Bank sees blended finance as a catalyst for mobilizing private capital for infrastructure in developing countries. This type of instrument allows the Bank to leverage and extend the reach of limited development funds to attract larger volumes of private financing through public-private partnerships. This is particularly important in a context where African countries are under enormous fiscal pressure and much available private capital is reluctant to invest because of not only the low risk-adjusted returns but also the perceived high risks of infrastructure projects. Some cases where the AfDB has used this instrument include the Kampala - Jinja Highway Project (Uganda), where the Bank provided a US$ 230 million loan as part of the viability gap financing for the project, which has a total cost of US$ 840 million for the first phase. This is the first PPP toll road in Uganda and its financial viability was to be enhanced by a sustainability gap financing component. Half of the sustainability gap financing was provided by the Bank, while the other half is co-financed by the Agence Française de Développement (AFD) and the European Union (EU). In addition, private capital has been mobilized through 20% equity and 80% debt to be raised from development finance institutions and commercial banks.
Risk Mitigation and Credit Profile Enhancement
The AfDB has developed a series of innovative and tailored risk mitigation instruments such as the Partial Risk Guarantee, Partial Credit Guarantee, and the Private Sector Credit Enhancement Facility. These instruments are used to mobilize private capital to finance infrastructure projects as well as to mitigate political and commercial risks identified in these projects. One example where the Bank has used its partial risk guarantee is the Lake Turkana Wind Power Project in Kenya, the largest wind power project in Africa that will produce 300 MW of electricity. As lead arranger, the AfDB provided a financing package consisting of a €110 million senior loan, a €5 million subordinated loan, and a €20 million partial risk guarantee to cover 20% of the project costs. The ADB's partial guarantee supported the government's obligations to the developers in the event of a delay in the construction of the transmission line. The remaining 80% was obtained through other development finance institutions, private banks, and a grant facility from the EU and the Netherlands to reach financial close of €625 million.
Loan Syndications
The objective of this instrument is to enable the AfDB to attract private capital to Africa through its participation in transactions as a lender of record and co-financier. The Senior Syndicated Loan Facility A/B allows the Bank to act as a mandated lead arranger for the syndication of senior loans to commercial/private financiers who enjoy AfDB preferred creditor status. This instrument plays a key role in expanding the pool of financing that infrastructure development projects can access. For example, the AfDB recently used syndication to mobilize approximately US$1 billion under a B-loan facility to finance a capacity expansion program for South Africa's power utility Eskom. The program will allow the company to refurbish nearly 8,000 MW of installed capacity, while adding 11,000 MW of base load capacity, including 1,300 MW of renewable energy.
For more information, visit our website www.afdb.org.
