Changing Africa’s infrastructure funding’s status quo
This blog was originally publidhed on the ESI AFRICA website.
At a recent conference on funding infrastructure in Africa held in London, the premier destination for conferences about Africa, a fellow speaker lamented the lack of solutions these events yielded. His observation was that the talking points and conclusions at these events always appear to be the same, but that solutions seem few and far between. I resolved to not only spend the next day at the conference cataloguing the repetitive themes that afflict infrastructure in Africa, but also to try and think of some creative solutions.
The first session highlighted a number of issues, but the most pugnacious point of view was expressed by an investor who felt that Africa’s biggest (if not only) problem with getting infrastructure funded on the continent is corruption. Although corruption is widespread in African government functions, it affects the procurement of infrastructure disproportionately. Some sources estimate that the continent’s procurement contracts for infrastructure are inflated by 20%-30% by corrupt procurement practices. The large size of contracts and lack of directly comparable pricing enables large scale corruption that is difficult to detect. As the building of infrastructure is (from governments’ point of view) really just a large procurement process, the answer to the corruption problem appears to be a need for controls that create transparency and accountability. Easy to say, but hard to do, as resource-strapped governments would then need to invest significant resources into processes that limit their absolute power.
The next repetitive theme from those involved in funding infrastructure is the lack of bankable projects. Although the need for infrastructure is almost infinite, projects that have political support, can be paid for by the government and are commercially-attractive to private investors, are few and far between. Most infrastructure stakeholders agree that the solution is increased capacity at government level. However, it is worthwhile spending a moment thinking about what this increased capacity in government would focus on. From the private sector’s point of view, capacity in structuring and executing Public Private Partnerships (PPP) is seen to be the immediate need because it will enable them to do what they are paid to do, transact and deploy cash. But, one wonders if that is the most effective place for capacity to be created.
Like any project process, time and effort spent at the planning and risk identification phase is likely to pay larger dividends than time spent on execution. Surely, by this reasoning, the first area where capacity should be created is in determining which projects take priority, as they will have the largest flow through effect on economic growth. These projects should then be evaluated to see which are suitable for private sector funding, and what risks and obligations the government will be exposed to depending on the method of funding. All of this requires an unbelievable amount of specialised knowledge.
This kind of knowledge is difficult to build up and the thought of 54 countries across Africa slowly and painstakingly trying to build the capacity to make the best possible decisions is daunting. But, what if African countries could share skills and learnings? What if they could lean on a central body that had the requisite skills and resources to assist independent authorities (or any government body, including PPP units) to execute their mandate (both planning and procurement of infrastructure), requiring a lesson only to be learnt once across 54 countries? Like all ideas, the possible problems with the solution are almost as complex as the problem it is trying to solve! For example:
1. Such a central body would need to win the trust of African governments to be able to make a meaningful contribution.
2. Elected officials may fear that allowing an external organisation access to government will expose them to public criticism.
3. The political will to change a status quo that allows politicians to benefit from large infrastructure contracts may be limited.
Recruiting and retaining suitably skilled staff in a central body may be difficult. From the above, it is clear that the solutions to Africa’s infrastructure funding problems are not simple (and that I was unlikely to solve them), but simply not addressing the problem and allowing the status quo to continue could mean that 10 years from now, we would still be having the same conversations at the same conferences. In our industry we often talk to the effect of compound interest and how small differences in return, compounded over time, have a spectacular effect on the outcome of an investment.
Investing in infrastructure has a far-reaching and compounded impact on economies. Making the best possible decisions when planning and procuring infrastructure is an imperative for Africa. The right choices could ignite faster and higher growth, leveraging every dollar of investment made on the continent to ensure a spectacular outcome.
About the Author
Heleen Goussard is the Head of Unlisted Investment Services in RisCura. Heleen heads up the team which provides independent valuations for clients across all alternative asset classes such as Private Equity, Infrastructure and Private Debt. She provides assurance to investors in alternative assets and alternative asset funds that their assets are priced correctly. She joined RisCura in 2012 and has performed and reviewed over 150 valuations since then. Heleen previously worked as a corporate finance partner at PKF Inc.