Thursday, July 31, 2014

On my radar: Africa50

A recurring theme at African Development's Bank annual meeting is that after insecurity, the continent's infrastructure deficit is responsible for the difference between her positive growth rate on paper and the realities of her people.Africa is growing yet that growth is not meaningful for her people due to poor and unavailable infrastructure. For instance, high prices of food items is associated with high transport costs occasioned bad road conditions. 
Africa Progress Panel Report 2013 notes that "Like financial systems, infrastructure occupies a pivotal position in social and economic life. Companies use energy to produce the goods and services on which employment depends. Transport systems link people and markets. Social infrastructure – such as water and sanitation – enables people to avoid health risks. But Africa’s poor infrastructure acts as a bottleneck constraining growth, driving up the costs of producing and marketing goods. The costs are spread across society, but the poor, smallholder farmers, and small and medium-sized enterprises bear the brunt." 
To become infrastructure-compliant, the continent needs about $100 million annually to fund the provision of basic amenities. Of that amount, $50million is provided by governments and development finance institutions (DFIs) and $50 million is unfunded. That amount remains unfunded because African countries do not have financial means to provide it. On this account, the African Development Bank has come up with a financing medium labelled Africa50 to provide funding.

What is it?
According to Donald Kaberuka,AfDB's president, Africa50(which has been approved by governments and the AU and launched in partnership with the Made in Africa foundation in 2013) is about " transformational, commercially viable projects of regional significance. It is about using Africa's savings to leverage the private sector".It is a financial pool of resources from the reserves of central banks across the region, the AfDB, private African investors that will provide private financing for projects to accelerate the speed of  infrastructure delivery across the continent with the aim of fast tracking growth. It promises about 10/100 rate of return. It seeks investors such as SWFs, pension funds and other interested parties to invest in Africa rather than Euro and US bonds 

Why is it different from it's parent DFI? 
Infrastructure projects are perceived as risky thus AAA organizations like AfDB shy away from investing in such projects. 

Why Africa50?
- A number of projects are not bankable that is, they are not presented in a manner that  will attract investors to the project. Thus, while they may look good on paper, they do not become reality. Africa50 will help translate projects into feasible  projects and de-risk (i.e provide initial financing) for a project to make it appealing to other investors. Project preparation which is vital to implementing any plan is also lacking. Africa50 through AfDB will close that gap by providing expertise. AfDB will act as the bridge between investors and the government 
- It will help reduce the perceived riskiness of investing in Africa. When investors begin to see returns, the fear of investing in the continent will be reduced. 
- It will make it easier to demand for reforms: Aids/loans provided by DFIs usually come with some reform riders which may or may not be acceptable by the recipient country. in the case of investments, it is easier to tie reforms with investment and this results in a win-win situation. 

What is the Business model?
There are no specifics yet on the business model and how it would run. However, investments will be on a first come first serve basis in terms of project readiness and not by the equity provided by countries.

Is it too good to be true?
Though the instrument has been hailed as an innovative and creative answer to the Continent's lack of amenities, how to balance profitability for investors without impacting the people it seeks to help remain unclear. For instance,if investors provide equity for a regional road project, how will the investment be recouped without pricing out lower-income citizens via tolls? Would a government that accesses the loan also subsidize usage for her citizens? Equality issues such as this have to be addressed to ensure that the poor  that are being targeted are not further mired into poverty.What  measures will be put in place to ensure that governments are not at the losing end of whatever agreements are reached?

What does this mean for me?  
Someone once noted that three factors are required to drive the change needed in Africa. They are: capital and financial resources, human capital and  insights. The last two- human capital and insights- depend on each individual. There are entrepreneurial spirits amongst us. We should hone in our skills and develop them. Who knows, they may be useful for the next big project

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