Africa

The last few years have seen a decline in the value of infrastructure lending in Africa. However, alternative and innovative new types of financing are assisting the continent to address its vast infrastructure funding gap. Development Finance Institutions are increasingly anchoring the infrastructure ecosystem in Africa, and they are also very good at collaborating. For example, the actions of the United States, the United Kingdom, the European Union and China point to a willingness to work with regional institutions in Africa.

There has been much debate over the last few years about the state of Africa’s infrastructure financing gap, and a recent report – New Dynamics: Shifting Patterns in Africa’s Infrastructure Funding – delves deeply into the current state of the market, revealing a changing approach to infrastructure lending on the continent. While the IJ Global data used in the report shows a decline in the value of infrastructure lending, innovative new types of financing are coming to the fore.

The decline of bilateral and multilateral lending into Africa has been significant in the last few years – deal values dropped from USD 100 billion in 2014 to USD 55 billion in 2019 and USD 31 billion in 2020, which is remarkable when one considers the huge funding gap that must be addressed on the continent.

This slowdown in infrastructure investment is attributable to numerous factors, including COVID-19. The pandemic closed borders and stopped trade, other than for essentials, across the continent and was, without any doubt, the principal reason for the decline in investment in 2020. There were other reasons for declining investment, however, including that the levels of economic activity have slowed in the major contributors to African GDP, such as Nigeria and South Africa. The good news is that we are already seeing green shoots and market fundamentals are signaling a region with underlying resilience. Commodity prices are rising, and landmark deals are returning, such as mining multinational Sibanye-Stillwater’s commitment of ZAR 6.3 billion to South African infrastructure projects.

What is surprising, given the pandemic, is that, according to the report, lending by Chinese banks into energy and infrastructure projects in Sub-Saharan Africa saw a small uplift in 2020, although deal values were well below their 2017 peak. In 2017, Chinese banks lent USD 11 billion to African infrastructure projects, which decreased to USD 4.5 billion in 2018, USD 2.8 billion in 2019 and USD 3.3 billion in 2020. Overall, the numbers show that there has been a slowdown in the number of infrastructure deals from China, although they are by far the biggest investors in the region. In the short-term, we expect to see more targeted lending from China – fewer projects of a higher quality using sophisticated structures — and new finance options, such as supply chain finance structures, used to deploy financing in the region.

Other international players have also had the region in their sights, with key political changes in the United States (US) and United Kingdom (UK) already resulting in capital flow into Africa. The US hasn’t kept pace with Chinese lending into Africa, but the Biden administration is expected to renew focus on impact-building and financing strategic long-term projects in the region, with the US Exim Bank supporting infrastructure development in the continent.

The European Union has always been clear about its commitment to strong relationships with African countries. Recently, Development Finance Institutions (DFIs) from the US, France and Germany collaborated to jointly finance a substantial transaction in the healthcare sector in Africa that will significantly bolster the continent’s COVID-19 treatments and therapies.

The UK is also making a strong play for influence, investment and trade with Africa post-Brexit. Further to key summits held in 2020 and 2021, there are signs that finance will be redirected into Africa. For example, earlier this year a deal was announced for a large agro-processing company that operates across the continent, with the UK providing a major funding line. The UK is also funding infrastructure development in Africa’s healthcare sector — the UK Export Finance recently announced it will provide financing for the construction of six new hospitals in Côte d’Ivoire, West Africa.

In the commodity financing space in Africa, international banks have withdrawn as they focus on managing their liquidity and current debt positions. Such lenders are deploying capital selectively. The report shows that in 2020, just 84 projects were supported by commercial bank finance and their involvement in DFI and Export Credit Agency (ECA) deals continues on a downward trend.

While it is imperative that Africa continues to attract foreign investment, there is also a need for countries to develop infrastructure and production for their own needs. Most countries in Africa, even South Africa, are net exporters of raw materials and beneficiation and localization have a role to play in addressing a county’s specific infrastructure needs.

There is therefore an urgent imperative to identify and enable new sources of finance, outside traditional lenders and international partners, to address the infrastructure gaps in, for example, transportation, energy provision, internet access and data services, education and healthcare infrastructure in Africa. Further to the expected return of multilateral and bilateral lending, there is room for evolution to bridge the funding-opportunity gap.

As such, there is a deepening DFI involvement in the infrastructure ecosystem at large, with DFIs increasingly anchoring the infrastructure ecosystem in Africa — serving a critical function for project finance as investment facilitator and a check on capital. This is because they can shoulder political risk, access government protections and enter markets others can’t, as well as being uniquely capable of facilitating long-term lending.

African DFIs are also very good at collaborating, and the actions of the new US administration, UK government, European Union and New Development Bank, for example, point to a willingness to work with regional institutions.

Local and regional banks, specialist infrastructure funds and private equity and debt are also stepping in to collaborate with DFIs and access returns, and multi-finance and blended solutions are expected to grow in popularity as a way to de-risk deals and support a broader ecosystem of lenders.

As an example, collaboration between a DFI and a local bank could involve a bank in Malawi requiring credit lines to support SME trade credit lines, which they would borrow from a DFI and deploy in the trade value chain — effectively creating liquidity on the short-term cycle of the funding.

The way in which infrastructure financing deals are structured in Africa has clearly become more inventive, and I am encouraged that alternative sources of funding are raising activity in the region.

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