Why is it so Difficult to Fund Infrastructure Development in Africa?
- Closing the infrastructure deficit in Africa entails recognizing the numerous barriers impeding economic growth and prosperity.
- Environmental, social and governance factors should not be ignored.
- Africa presents an unparalleled opportunity for investors willing to finance infrastructure development.
In a period of rapid advancement worldwide, Africa's development needs remain huge. Why? Closing the infrastructure deficit in Africa entails recognizing the numerous barriers impeding economic growth and prosperity. Environmental, social and governance factors should not be ignored.
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Over the past two decades, the region has expanded core infrastructure, such as telecommunications networks and access to safe potable water, but developmental progress has generally been too limited, with Africa remaining the only world region where there has been a decline in road network density and almost no improvement in per capita electricity-generating capacity. Investment in development infrastructure has also been insufficient: according to recent statistics, Africa has a development financing gap of nearly USD 108 billion and an estimated need for infrastructure investment of between USD 130 billion and USD 170 billion.
Africa's development gap and relatively slow progress present attractive investment opportunities for developmental projects focused on building intra-regional transport networks, creating power generation solutions, revolutionizing manufacturing and agro-processing, and achieving environmentally responsible natural resources extraction. But the chances of meeting this potential are hampered by fundamental challenges limiting the involvement of potential financiers. To successfully fund infrastructure development projects, financial investors need to identify, understand and overcome these challenges.
Setting up and managing infrastructure development projects is a complex process, requiring interface and coordination between financial, tax, legal and corporate management structures, and specialist advisory services, all of which are often based and managed outside the project country. In addition to the generic challenges associated with funding infrastructure development in Africa, there are environmental, social and governance (ESG) factors, which are further exacerbating the region's infrastructure gap. In the past decade, a broad understanding has arisen that ESG factors are extremely significant to developmental finance, and financing institutions across the globe are now increasingly cognizant of this. Worldwide calls for the understanding, consideration and embedding of ESG factors into project financing are also on the increase. The importance of ESG factors is particularly sharp for infrastructure projects in Africa, where countries are not equipped to address ESG issues themselves.
Environmental problems in Africa are both natural and human induced and currently poorly controlled. They include climate change, deforestation, desertification and erosion, biodiversity loss and pollution. Africans also face social and health problems, including widespread poverty, war, insurgency, rapid population growth, exposure to diseases such as malaria, acute respiratory infections and diarrhea, and inadequate sanitation and sewage treatment. Environmental and social problems in Africa are further exacerbated by degrading conditions in mining, construction and industrial activities, overuse of pesticides and insecticides, and inadequate environmental, waste and health management practices.
Infrastructure development projects in the region also face challenges complying with and embedding the environmental and social standards and requirements of international development funding institutions. This challenge is heightened by disparities between international requirements and varied and complex social norms, priorities and practices in host communities. Aligning Africa's developmental projects with internationally recognized social standards requires expert assessment and input, requiring considerable effort from project sponsors.
Some of Africa's current governance practices also impede the successful development of infrastructure projects: entrenched leadership, government and corporate corruption, restrictive government policies and inadequate human rights mechanisms. In 2018, nearly a quarter of African Heads of State had spent longer terms in office than either constitutionally or generally accepted and today several African countries' ruling governments are struggling with fraud or electoral malpractice allegations. In 2015, Transparency International reported that nearly 75 million people in sub-Saharan Africa were estimated to have paid a bribe.
The existence of these ESG-related factors poses fundamental challenges to the successful implementation of the continent's development objectives. For the infrastructure deficit to be bridged, Africa must address its urgent need for development options that will contribute to resolving the ESG-related constraints it faces. This requires the provision of additional capabilities and technical know-how and expertise to embed environmental and social risk management and control mechanisms into project finance models. Successful development solutions should also attempt to address core environmental and social problems through proactive risk management, mitigation of climate change and increasing the ability of people to adapt to climate change.
Africa presents an unparalleled opportunity for investors willing to finance infrastructure development yet barriers to successfully bridging its infrastructure gap are numerous. Determined efforts must be made to fully understand and embed the continent's context-specific ESG factors and challenges, with the aim of identifying and implementing development solutions that will not compromise Africa's environment or society.
Omawumi Kola-Lawal, leads the Environmental & Social Risk Management function at Africa Finance Corporation (AFC).
“The AFC aims to consistently improve its ability and positioning to catalyze the bridging of Africa's infrastructure deficit, by identifying and working with countries and project sponsors who have a demonstrable ability to adapt infrastructure development solutions to the economic, environmental and social needs of the region. AFC seeks to foster close partnerships with project sponsors who are able to evolve and actualize project development solutions that surmount the generic challenges of project financing, while recognizing and embedding the mechanisms necessary to properly identify ESG factors applicable to development projects and design control measures needed to reduce negative externalities.”