AFRICANGLOBE – Donald Kaberuka‘s performance has been described by some as ‘flawless’. His endeavours to improve growth and development in many African countries have earned him much acclaim. Kaberuka has stepped-up the African Development Bank’s (AfDB) role in financing major infrastructure projects in all African regions, committing more than $12 billion to these projects in the last five and a half years.
The absence of good infrastructure in Africa is well known. The lack of proper and sound infrastructure in most countries has affected productivity and raised production and transaction costs. Higher transaction costs stymie growth by reducing the competitiveness of businesses and the ability of governments to successfully pursue economic and social development policies.
African countries are the least competitive in the world as a result. According to the African Union (AU), poor infrastructure on the continent has been found to reduce growth by as much as 2 percent per annum. The AU has warned that this is a continentwide problem which requires a continental solution. For this reason, infrastructure is the focus of the AfDB’s activities. Over the last seven years, it has accounted for 60 percent of the bank’s operations.
Kaberuka recognises that good infrastructure plays a critical role in economic growth and poverty reduction. “When I assumed the Presidency of the Bank, this was one of the areas where I intended to make a steep change. And we have. Private sector commitment now accounts for 30 percent of all bank operations,” he says. “In this regard, the bank seeks to mainstream private sector development in all its strategic and resource allocation platforms. Total financing is expected to further grow to $2.5 billion per year in the next three years.”
Beyond financing, the bank attempts to assist governments to better structure concession transactions and has initiated some transformative vehicles in key economic sectors, including innovative Public-Private Partnerships (PPPs). According to Kaberuka, the Programme for Infrastructure Development in Africa (PIDA) has set the “right tone” and helped clarify issues of prioritisation.
PIDA, which is a multi-sector programme covering transport, energy and trans-boundary water and ICT, is dedicated to facilitating continental integration in Africa through improved regional infrastructure. Kaberuka says: “Africa’s $94 billion dollar infrastructure financing gap is a formidable challenge. The situation requires us to be creative and look beyond traditional means of financing. Even though the AfDB, together with other multilateral banks and new partners such as China, India and Brazil, has steppedup infrastructure financing, a substantial gap remains [in Africa]. That gap is unlikely to be closed by conventional financing, including Official Development Assistance (ODA).”
While good progress in infrastructure development is currently underway, the challenges are twofold and include bringing most infrastructure projects to ‘bankability’ and mobilising the. requisite resources. Kaberuka admits that there have been many proposals of all types regarding innovative financing of infrastructure projects. But he says most have largely failed to take off, as is the case with climate financing in the continent.
On the other hand, there is this growing surplus in Asia, the Gulf region and other emerging countries. In those areas, it is predicted that sovereign wealth funds (SWFs) alone will be holding $10 trillion by 2015. (SWFs are stateowned investment funds composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. They invest globally and are financed by the state and through foreign exchange assets.)
Says Kaberuka: “The Financial Times reports that the 20-year US Treasuries are yielding only 1.4 percent interest. So there is little doubt these sovereign wealth funds would be looking for more appealing investments, provided security and good returns are assured. The question is: how can we tap into those resources? Could multilateral banks and ODA be leveraged in this effort as a conduit between the terms in which resources are borrowed from SWFs and the terms on which they are lent to lower income countries?”
It is critical that the AfDB find a means of reducing risk for providers of finance such as SWFs and ease risk for borrowers such as African countries. The bank also needs to find ways and means that would consider the spread between the cost of borrowing and interest payments by African countries. “This is technically possible, although it will require a paradigm shift by the ODA providers to accept that a part of the ODA can be utilised as subsidy, as well as a guarantee for borrowing. This is not an insurmountable problem as we know well that these guarantees are unlikely to be called,” Kaberuka says. “A proposal for creating an Infrastructure Fund that could be housed at the bank, along the lines of other funds we manage, was also put forward to the G20 High Level Panel established to look into these issues. The High Level Panel did make some proposals, vis à vis leveraging private financing.”
According to Kaberuka, the AfDB intends to continue pushing for this idea to proceed by calling for the extension of the bank’s work through publically-financed projects. This, he says, would give the bank a genuine win-win solution for all. It will also ensure that what is left over in the emerging markets is put to use in high return infrastructure projects in Africa. These would generate growth and jobs in Africa and elsewhere.
“We should continue to explore the possible expansion of other instruments such as infrastructure bonds – issued on local currency bond markets. Needless to say, the success of such instruments requires continued financial market reforms, the appropriate regulatory framework and institutions that provide investors with confidence such as pension funds to look favourably at infrastructure bonds.”
In some cases, the bank has used alternative financial instruments such as Climate Investment Funds (CIF). These funds have been designed by developed and developing countries and implemented with the multilateral development banks to bridge the financing gap between now and the next international climate change agreement. This year, the CIF approved a grant of $950,000 to assist Nigeria with preparations for a proposed project to revamp Abuja’s mass transit system.
The Government of Nigeria together with the AfDB submitted the request for funding to the CIF. This is the first time the CIF has approved a sustainable transport project preparation grant within Africa and marks the way forward for the transport sector. This is part of the AfDB and CIF’s work to help Africa move toward low-carbon and climate-resilient development.
According to the AfDB, Africa has the lowest electrification rate of all regions, which prevents social and economic development. It hampers enterprise development and the expansion of other opportunities, while undermining competitiveness and thus impeding access to regional and global markets for African producers.
The AfDB believes that it is critical and urgent to address the continent’s energy needs in order to unlock its development potential. As much as it has made infrastructure development a priority, the bank is also funding other projects, such as renewable energy. The AfDb’s CIF will provide Nigeria with $50 million for renewable energy concerns.
According to an AfDB report, Nigeria’s CIF endorsed plan from 2010 “will be used to stimulate investment in downstream opportunities that would lead to greater energy efficiency through a range of technologies including industrial energy efficiency investments, renewable energy, renewable-based hybrid systems and cleaner fuels and combustion processes.”
The AfDB has adopted a strategy where the underlying philosophy is that Africa’s prosperity can only be assured by economic growth, trade and investment. “We understood that every country on Earth was poor at some point. What made the difference was tapping into global trade and capital markets, and Africa could not be an exception,” says Kaberuka. “Our strategy has therefore centred around removing those impediments to investment and to liberating the growth drivers. Hence, we decided to focus the bank on infrastructure, economic, integration, private sector development and technical/ higher education and skills development.”