Africa is on the cusp of unmatched economic transformation, and the UK must engage in a “partnership of change,” African Development Bank President Akinwumi Adesina said Tuesday in a keynote address at a UK Parliamentary Symposium. “The Africa of the 21st century is very different. The Africa of the 21st century is new and more confident,” he said.
The Symposium was co-organized by the All-Party Parliamentary Group for Africa with the Royal African Society, Oxford Brookes University, and the Trade Justice Network under the theme UK-Africa Trade and Brexit.
The Bank’s chief argued that Africa and the UK should be significant trading partners. “The reality, however, is that UK’s trade with Africa is trending downwards. From a $49 billion peak in 2012, trade decreased to $30.6 billion in 2018,” he noted.
The decline in UK trade and investment in Africa is against a backdrop of projected business-to-business and consumer-to-consumer expenditures of $5.6 trillion by 2020, and a food and agriculture market worth $1 trillion by 2030.
“The fact that we are having this conversation in the UK Parliament is a great start. The convening of this Summit by Prime Minister Boris Johnson is an even greater start,” he acknowledged.
President Adesina used his engagement at the House of Commons to share Africa’s investment opportunities, “which speak for themselves.”
Trading under the African Continental Free Trade Agreement, which represents a market of more than 1.3 billion people and a gross domestic product of $2.5 trillion, and is the world’s largest free trade area since establishment of the World Trade Organization, starts in July.
Speaking earlier in the morning at the UK-Africa Investment Summit Sustainable Infrastructure Forum, the Bank’s chief said: “Investing in quality and sustainable infrastructure can spur Africa’s economic transformation.”
The Forum, organized by the Department of International Development (DFID) and Her Majesty’s Trade Commissioner for Africa, seeks to facilitate new investment and commercial opportunities for the UK and promote quality infrastructure to deliver better services to African citizens.
The Bank has been a forerunner in the race to rapidly close the continent’s infrastructure gap, which Adesina suggested be renamed “Africa’s infrastructure demand opportunity.”
Investors who tapped early into information and communications technology infrastructure in Africa have seen those investments become game changers for Africa, he noted.
“Just under two decades ago, Africa had fewer telephones than Manhattan in New York. Today, Africa has over 440 million cell phone subscribers.
“Returns on digital infrastructure are very high as the continent expands broadband infrastructure to boost connectivity and improve services,” Adesina said.
The African Development Bank has been a major investor in infrastructure development in the electricity, transport, and water sectors across Africa. Cumulative Bank funding for infrastructure on the continent rose by 22% from $66.9 billion in 2016 to $81.6 billion in 2017.
“During the same period, the value of infrastructure projects with private sector participation has increased from $3.6 billion to $5.2 billion.
To meet Africa’s unmet infrastructure needs, project preparation is critical, the Forum heard.
The Bank has established several project preparation facilities to address the lack of bankable projects and ensure a robust pipeline of projects. These facilities collectively provide $30-50 million annually in support for project preparation.
The African Development Bank and DFID are collaborating to explore how to better support fragile states, which are facing huge financing needs. DFID has been the Bank’s key strategic partner since it joined the Bank group in 1983.
And its “strong and consistent” support for the African Development Fund has helped the development of low-income states, especially the fragile states.
Instruments, such as the Private Sector Credit Enhancement Facility, a credit-risk participation vehicle from the African Development Fund, (ADF)’s concessional window to support Non-Sovereign Operations in low-income countries, are showing tremendous results.
With $500 million in credit guarantees, provided through ADF, the Bank has leveraged $2.5 billion of financing into fragile states, with a zero default rate.
“We are committed to quality infrastructure and ensuring that no one is left behind!” Adesina concluded.
The Bank’s chief is on a three-day visit to the UK. On Monday, he joined African Heads of States at a reception at Buckingham Palace after taking part in a presidential panel at the UK-Africa Investment Summit convened by British Prime Minister Boris Johnson.
Read below a keynote speech delivered by Dr. Akinwumi A. Adesina at the UK-Africa Investment Summit, “Sustainable Infrastructure Forum”
Good morning everyone!
It’s a pleasure to join you at this special side event organized as part of the UK-Africa Investment Summit. Let me congratulate the organizers, the Department for International Development (DFID) and Her Majesty’s Trade Commissioner for Africa for hosting us today.
The DFID is a key strategic partner of the African Development Bank (AfDB.org) . Since joining the African Development Bank in 1983, the DFID has been a lead supporter of the African Development Bank. It’s strong and consistent support for the African Development Fund has helped us to support the development of low-income states, especially the fragile states.
And just think of the impact that our work has had on infrastructure alone in the past four years. The African Development Bank, through its operations, has helped to connect 18 million people to electricity, 101 million people with access to improved transport and 60 million people with access to improved water and sanitation.
Without any doubt, DFID and the UK government’s investment in the African Development Bank pays off and delivers huge impacts in Africa.
So I’d like to especially thank the UK Secretary for international development, Mr Sharma, Nick Dyer and his colleagues at DFID for making the UK proud with its investments at the African Development Bank. Together we will do more for expanding infrastructure for Africa.
There’s much talk about the infrastructure financing gap. But we should now be framing this differently as the infrastructure demand opportunity for financing.
And the opportunities are many: from railways to ports, airports, water, sanitation, ICT and energy.That’s a $68-108 billion annual investment opportunity.
Investors tapped early into information and communications technology infrastructure in Africa. Those investments became game changers for Africa.
Just under two decades ago, Africa had fewer telephones than Manhattan in New York. Today Africa has over 440 million cell phone subscribers. Returns on digital infrastructure are very high as the continent expands broadband infrastructure to boost connectivity and improve services.
Take the case of energy. Unmet demand is for some 600 million people for electricity. Huge opportunities exist for investments in renewable energy, especially for hydropower, wind, solar, thermal and geothermal.
But many of these opportunities can’t be realized unless we invest a lot more in project preparation to make projects bankable. The African Development Bank through its NEPAD infrastructure project preparation facility has helped to mobilize financing for $8.5 billion of infrastructure projects. That’s a leverage ratio of 1:525.
We helped to establish Africa 50, an institution to support infrastructure project preparation and financing. It has raised over $860 million and will now be establishing a $1 billion third-party private fund to finance infrastructure investments by private sector on a commercial basis.
The Sustainable Energy Fund for Africa (SEFA) based at the Bank, has supported investments in excess of $800m in renewable energy. And I was delighted yesterday to announce the partnership of DFID with the African Development Bank for £80 million to further support project preparation for infrastructure. There’s definitely need for more resources for project preparation facilities in Africa.
The largest share of infrastructure finance is done by governments. Some $37.5 billion annually. There’s a need to improve the efficiency of public financing for infrastructure through better, more efficient, and competitive procurement processes, quality design, timely execution and better maintenance culture. Equally important is the need to focus on quality infrastructure, and move beyond the least-cost projects, and focus more on life cycle costs for infrastructure.
Many countries are borrowing to finance infrastructure. While such financing, especially if concessional, can help, greater focus should also be put on ensuring that governments attract the private sector into infrastructure financing. More focus is also needed to improve the policy, legal and regulatory environment to support greater private sector investments in infrastructure.
With global climate change, and increasing frequency and intensity of extreme weather events, there’s an urgent need to climate proof infrastructure investments. The devastating cyclones in Mozambique, Malawi and Zimbabwe led to massive destruction of critical infrastructure. The same applies for coastal states, which are more vulnerable to coastal erosion and floods. Infrastructure investments must now be climate-resilient.
Institutional investors hold a large pool of capital that need to be mobilized and channeled into financing of infrastructure. Total assets under management alone by pension funds, sovereign wealth funds and the insurance sector in Africa is about $1.8 trillion. Tapping just a fraction of this into infrastructure will go a long way to close the infrastructure financing gap. Many reforms are needed. One is to designate infrastructure as an asset class for institutional investors. Meeting their infrastructure allocation targets would require them to hire quality staff who understand infrastructure.
Multilateral development banks like the African Development Bank and others should take early-stage investment risk in the project development phase. When cash-flow streams are stable, these brown-field projects can be rolled off to institutional investors.
The African Development Bank launched a $1 billion synthetic securitization that it used to transfer risks on its private sector portfolio assets to the private sector, the first time this has been done by a multilateral development bank. The African Development Bank was able to free up $600 million for its balance sheet, which it is using towards renewable energy investments.
We are currently exploring with the DFID the use of synthetic securitization for the sovereign portfolio of the African Development Bank. This will be used to transfer sovereign risk to the market, working with insurers and reinsurers in the UK. This could be a huge game changer for how governments can transfer their sovereign risks on infrastructure to the market.
Because the bulk of infrastructure is financed through foreign loans, and the revenue streams are in local currency, it introduces high financial and forex risks to investors. Using swaps and hedging are effective, no doubt, but more can be achieved by focusing on local currency financing. This will also help with debt sustainability as the bulk of Africa’s external debt is on infrastructure.
That’s why the African Development Bank launched the African Domestic Bond Fund to support the development of infrastructure debt markets in Africa. This helps in crowding in international investors and improving cross-border investments in Africa. The development of capital markets is also critical to create the liquidity and exits to encourage more investors into infrastructure in Africa.
A critical constraint to investments in infrastructure is the high level of risks, ranging from project risks, financial risks, operational risks, and political risks. De-risking instruments such as partial risk and partial credit guarantees are quite effective in leveraging private sector investments.
The African Development Bank used a partial risk guarantee to support the Lake Turkana wind power project in Kenya, the largest wind power generation project in Africa, which will produce 300 MW of electricity. The African Development Bank’s €20 million Partial Risk Guarantee essentially backstopped the government of Kenya’s obligations to developers against delays in the construction of transmission lines.
The African Development Bank also has a Private Sector Credit Enhancement Facility, which it uses to reduce risks of financing private infrastructure projects in fragile states. And it works: so far with $500 million in credit guarantees, provided through the African Development Fund, it has leveraged $2.5 billion of financing into fragile states. And the default rate is zero.
To attract even more infrastructure investments, two years ago, the African Development Bank launched the Africa Investment Forum, to advance bankable projects, secure financing and accelerating financial closure for projects. In 2019, at the fully transactional forum, investor interest was secured for projects worth $40.1 billion in less than 72 hours. The African Development Bank and its partners have formed a formidable financial alliance that pools together development finance institutions, commercial banks and insurers, with a co-guarantee platform to de-risk infrastructure projects at scale.
There’s so much to do to help close the infrastructure financing gap in Africa. Progress is being made as Africa witnessed an increase in infrastructure financing to $100 billion in 2018, an increase of 24% over 2017 and 38% over 2015-2017 on average.
As we develop and deploy innovative instruments for infrastructure, mobilize domestic resources, support governments to do the right things, and create more opportunities for greater private sector investments, we will fully meet Africa’s infrastructure financing demand.
Together let’s do more to accelerate sustainable infrastructure investments in Africa.
Thank you very much.