African Development Bank Group ZOOMING ON PRIVATE AND EXTERNAL INVESTMENT: FOCUS ON INFRASTRUCTURE FINANCING IN AFRICA PROF. JOHN C. ANYANWU* LEAD RESEARCH ECONOMIST DEVELOPMENT RESEARCH DEPARTMENT AFRICAN DEVELOPMENT BANK ABIDJAN, COTE D IVOIRE E-Mail: J.ANYANWU@AFDB.ORG Working Session on Means of Implementation for the SDGs and Financing for Development for July 2015 Addis Conference, New York, 7 APRIL 2015 * The views expressed here are those of the authors and in no way reflect those of the AfDB and its Executive Directors.
Outline of Presentation I. DOMESTIC PRIVATE INVESTMENT & EXTERNAL FINANCIAL FLOWS TO AFRICA II. III. IV. WHY INFRASTRUCTURE? EXTERNAL FINANCING OF AFRICA S INFRASTRUCTURE: THE STATE OF PLAY AfDB s ROLE IN FINANCING INFRASTRUCTURE DEVELOPMENT IN AFRICA V. INNOVATIVE FINANCING INSTRUMENTS/ MECHANISMS 2
DOMESTIC PRIVATE INVESTMENT & EXTERNAL FINANCIAL FLOWS TO AFRICA 3
Domestic Private Investment & External Financial Flows to Africa Private Investment & External Financial Flows to Africa, 2000-2013 (US$ billion) 250,0 16,0% 200,0 14,0% 12,0% 150,0 100,0 50,0 10,0% 8,0% 6,0% Remittances (left axis) Official development assistance (left axis) Portfolio investments (left axis) Foreign direct investments (left axis) Total Flows as % GDP (right axis) Gross Private Investment (% of GDP) (right axis) 4,0% 0,0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2,0% -50,0 0,0% Source: AfDB et al (2015) & AfDB Database 4
Net External Private Flows to Africa 120 Net External Private Flows to African Countries, 2005 2012 (US$ billion) 100 80 60 40 20 0-20 2005 2006 2007 2008 2009 2010 2011 2012-40 -60 Net Private Capital Flows Net Foreign Direct Investment* Net Portfolio Investment** Other Net Investment Source: AfDB et al (2015) 5
Development Finance to Africa by Income Groups Average Development Finance to Africa by Income Groups (% of GDP, weighted), 2000-2013 18,0% 16,0% 14,0% 12,0% 10,0% 8,0% 6,0% 4,0% 2,0% 0,0% -2,0% Foreign direct investments Portfolio investments Official development assistance Remittances Total foreign flows Low-Income Countries Lower-Middle-Income Countries Upper-Middle-Income Countries Source: AfDB et al (2015) 6
Net ODA Disbursements to Africa 60 Net ODA Disbursements to Africa, 1996-2012 50 Constant 2011 US$, billion 40 30 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Other official development assistance Bilateral debt relief Humanitarian aid Source: AfDB et al (2015) 7
FDI Flows to Resource-Rich and Non- Resource Rich African Countries, 2000-2013 USD, billion 60 50 40 30 20 FDI Flows to Resource-Rich and Non-Resource Rich African Countries, 2000-2013 Resource-rich countries (left axis) Non-resource-rich countries (left axis) Resource-rich countries (right axis) Non-resource-rich countries (right axis) 5% 5% 4% 4% 3% 3% 2% 2% % GDP 10 1% 1% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0% Source: AfDB et al (2015) 8
WHY INFRASTRUCTURE? 9
Why Infrastructure? (i) Good infrastructure creates an enabling environment for economic activity: Lowers costs of doing business Improves global competitiveness of local production Promotes FDI and partnerships Promotes cross border investments and trade Hence promotes productivity and growth: ü African firms could achieve productivity gains of up to 40 percent with adequate infrastructure ü GDP growth could be enhanced by as much as 2% per year 10
Why Infrastructure? (ii) Added pressure from consistent growth of African economies, which has led to: Larger cities and increased urbanization Growing consumer markets Broader ties to the global economy - Infrastructure stock must increase to support this growth - US$40 billion in lost annual growth every year due to huge infrastructure deficit 11
Why Infrastructure? (iii) Linkages to local industry Manufacturing Construction Financial markets Labor Hence growth in infrastructure development activities has direct GDP growth implications Infrastructure expected to become the 4 th largest contributor to revenues in Africa by 2020 12
Infrastructure Financing Needs " Africa lags behind other low-income countries on all dimensions of infrastructure coverage. " US$ 93 billion required annually to finance infrastructure in Sub-Saharan Africa. " Current expenditure = US$ 45 billion " Potential efficiency savings = US$17 billion " Financing gap = US$ 31 billion Recent estimates situate infrastructure financing requirements for Africa at US$ 360 billion annually until 2040 Financing for just the 51 Program for Infrastructure Development in Africa (PIDA) Priority Projects by 2020: Energy (US$40.3 billion); Transport (US$25.4 billion); Water (US$1.7 billion) & ICT (US$0.5 billion) totaling US$68 billion, requiring about US$7.5 billion annually. 13
EXTERNAL FINANCING OF AFRICA S INFRASTRUCTURE: THE STATE OF PLAY 14
Africa s Infrastructure Financing Map: Financing Flows into Africa s Infrastructure in 2013 Who Financed Africa s Infrastructure in 2013? Source: ICA (2014) 15
Africa s Infrastructure Financing in 2013 by Sources Source: ICA (2014) 16
External Public and Private Funding of Africa s Infrastructure External Public and Private Funding of Africa's Infrastructure, 2011-2013 (US$ billion) 18 16 14 12 10 8 6 4 2 0 Asia Americas Europe Arab Coordination Gp Multilateral Devt Banks Regional Devt Banks Private Sector: US $8,764m (8.8%) 2011 2012 2013 Source: ICA (2014) 17
Africa s Infrastructure Financing by Sector and Sources Africa's Infrastructure Financing in 2013 by Sector and Sources (US$ million) 25000 20000 5299 15000 13044 10000 12425 4431 5000 0 4567 4179 Transport: US $22,291m 5023 1066 396 1506 675 18 145 152 Water: US$6,089m Energy: US$21,291m ICT: US$1,090m Multi-Sector: US $1,651m Unallocated: US $152m Private Sector Extenal Funding Non-ICA Public Sector External Funding ICA Members Source: ICA (2014) 18
Trend in Private Sector Participation in Africa s Infrastructure Trend in Private Sector Participation in African Infrastructure (US$ billion), 2010-2013 9 8,7 8,8 8 7 6 US$ billion 5 4 3 2,9 2,4 2 1 0 2010 2011 2012 2013 Source: ICA (2014) 19
AfDB s ROLE IN FINANCING INFRASTRUCTURE DEVELOPMENT IN AFRICA 20
AfDB s Ten-Year Strategy with Emphasis on Infrastructure Development AfDB s Strategy 2013 2022 Core Operational Priorities 21
AfDB s Support to Infrastructure Lending Ø Sovereign including regional operations pool Ø Non-sovereign (loans and equity) ü AfDB is the largest external financier for infrastructure in Africa Grants for technical assistance Ø FAPA (US$ 16 million per year towards private operations) Ø IPPF (US$ 15 million per year towards regional infrastructure operations) Ø MIC (US$ 16 million for operations in middle income countries) Risk Instruments Ø Guarantees such as the Credit Enhancement Private Sector Facility Ø Hedging products Coordination Ø Hosts the Infrastructure Consortium for Africa (ICA) Ø Executing agency of the Program for Infrastructure Development in Africa (PIDA) 22
AfDB s Support to Infrastructure AfDB s New and Creative Ways of Mobilizing Additional Resources and Leveraging its own Resources: Ø Attraction of additional investments from emerging economies and from new funders and donors, including sovereign wealth and pension funds. Ø Using its existing instruments better by ensuring that a dollar invested by the Bank unlocks significantly more from other investors including through wider use of PPPs, co-financing arrangements and risk-mitigation instruments. Ø Use of quasi-equity instruments, such as subordinated loans and innovative Currency Exchange Fund. Ø Issuing bonds in local currencies, providing guarantees, and participating in currency swaps markets. Ø Promoting capacity building in RMCs to build efficient and sustainable institutions and regulatory frameworks that are robust enough to develop even the most complex projects. Ø Africa50 Fund A new infrastructure financing vehicle that is independent, profitdriven, commercially-managed and targeting investors such as African governments, African institutional and private investors, and non-african investors - delivering infrastructure through a new global partnership platform. Ø. 23
AfDB s Innovative Initiatives Supporting Infrastructure Financing. 1. Local Currency Note Issuances 6. Joint AfDB/ WEF Business Working Groups 6 1 AfDB 2 2. Local Currency Market Infrastructure Bonds Feasibility Study 5. Review of Project Preparation Facilities 5 4 3 3. African Financial Markets Initiative (AFMI) 4. Africa50 Fund
AfDB s Innovative Partnerships for Infrastructure Financing & Development. 1. NEPAD Infrastructure Project Preparation Facility (IPPF) 6. Africa Infrastructure Knowledge Program (AIKP) 6 1 AfDB 2 2. EU-Africa Infrastructure Trust Fund (EAITF) 5. Infrastructure Consortium for Africa (ICA) 5 4 3 3. Program for Infrastructure Development in Africa (PIDA) 4. Africa50 Fund
AfDB s Support to Infrastructure AfDB s Approved Financing by Sector Share of Approved Amount by Sector 0,87 0,74 8,28 10,84 5,93 17,9 5,74 20,39 29,3 0,02 Environment Multisector Finance Transport Communications Energy Water & Sanitation Social Agriculture Industry Consistent with the TYS, infrastructure sectors now attract the lion s share (55.4 %) of AfDB Group s financing 26
AfDB s Support to Infrastructure AfDB s Approved Financing by Infrastructure Type 2014 Infrastructure Loans and Grants [CATEGORY NAME], [VALUE] [CATEGORY NAME], [VALUE] [CATEGORY NAME], [VALUE] [CATEGORY NAME], [VALUE] 27
AfDB s Support to Infrastructure Private Investment (About 10 times over 10 years) AfDB Non-Sovereign Approvals (US$ million) 2500 2065 2000 1837 1874 1500 1285 1397 1489 1612 1000 500 0 571 608 475 429 279 224 173 130 23 50 67 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 28
AfDB s Support to Infrastructure AfDB s Private Sector Operations, 2014 Infrastructure s Share is 39% Sectoral Shares of AfDB s Private Sector Operations, 2014 0,3 7,1 2,5 0,3 21,6 51 17,2 Multisector Finance Transport Energy Supply Social Agriculture Industry 29
INNOVATIVE FINANCING INSTRUMENTS/MECHANISMS 30
AfDB s Support to Infrastructure AfDB and other MDBs support for achieving the SDGs by committing to: Ø Increase available financial resources; Ø Promote and catalyze private investment; Ø Expand policy guidance and technical assistance for resource mobilization; Ø Support international action on global development issues; and Ø Improve coordination and alignment with development partners. 31
AfDB s and Other MDBs Financing Solutions to Help Achieve the SDGs: Additionality, Efficiency & Effectiveness LEVERAGING ADDING, POOLING, ENABLING DEBT-BASED, RIGHT-TIMING RISK MANAGEMENT RESULTS- BASED FINANCING New global taxes Solidarity levies Policy Advice and Lending for DRM, Public Expenditures, Investment Climate Local Currency and Domestic Capital/Bond Markets Building Public-Private Dialogue - Platforms/ Information Facilitation Bond Issuance Bridge Financing Debt Convergence Frontloading Lines of Credit Long-Term Finance Blended Finance/PPPs Co-investment Platforms/Pooled Vehicles Derivatives/Swaps Guarantees /Insurance Indexed/Performance Based Bonds Local Currency Debt Finance Market Data/Benchmarks Project Preparation Facilities Risk-Sharing Vehicles Advance Market Commitments Buy-downs Conditional Cash Transfers Payment for Results/Pull Mechanisms Performance-based Funding Prizes/Competitions Source: MBDs (2015) 32
Some Innovative Instruments for Infrastructure and Other Development Financing in Africa Innovative Government Financing Instruments & Unlocking the Value of External Financing 1. Government infrastructure 5. Resource- backed bonds infrastructure financing 2. Sovereign wealth funds 6. Diaspora bonds 3. Remittance securitization 7. External sovereign bonds (ESB) 4. Transforming Foreign Direct Investment 8. Tracking and Stopping Illicit Financial Flows Innovative Private Financing Instruments 1. Corporate Bonds 2. Specialized infrastructure funds 5. Public- private partnerships (PPPs) 6. Private equity funds 3. Private sector Local currency infrastructure bonds 4. Bringing the Informal Sector into the Tax Net & Improving Tax Administration 7. Commodity- linked debt instruments 8. Incentivizing Private Investment 9. Africa50 Fund New Integrated and Strategic Approach for Positive Results 1. More efficient public spending; 2. An enlarged regional approach to infrastructure investment; and 3. An improved regulatory framework. 33
Thank you for your kind attention 34