Infrastructure development is critical for Africa’s economic growth and poverty reduction. Yet there is a significant funding gap to fulfil the continent’s infrastructure needs, which cannot be met by current official sources of funding alone. In particular, the proportion of official development finance (ODF) in total infrastructure spending is modest, with reduced likelihood of further increase in a context of tightening budgets in countries that provide assistance. Private investment, on the contrary, offers some promising way to close the funding gap for Africa’s infrastructure. Historically, the role of private investment in African infrastructure has been limited, particularly due to the weak enabling environment that underpins infrastructure development.
The enabling environment encompasses: the policy framework; regulations that include tariff setting and procurement; and sound public institutions for the management of infrastructure systems. As several OECD guidance indicate, development partners can leverage private investment both by strengthening the enabling environment and using financial instruments to mitigate investment risks.
At the same time, in promoting private investment, some development agencies face challenges and dilemmas in ensuring that their aid remains untied. Others have little incentive to leverage other financial sources. In the survey conducted by the OECD DAC and Investment Committee secretariats for this project, several point to obstacles such as political instability, weak public administration, unreliable legal frameworks, corruption, the low capacity of project promoters, bankability of projects, lack of longterm financing, and insufficient resources for project preparation. Particularly for fragile states, some development agencies mention that peace and security are prerequisites for improving the enabling environment.
Nevertheless, the OECD Creditor Reporting System data show that development agencies allocate roughly a quarter of ODF for Africa’s infrastructure to the enabling environment. This support mostly consists of capacity building by deploying experts or training government staff in various stages of planning and operations. Although not all ODF to these ‘soft’ aspects is provided specifically to promote private investment, examples show that many activities have this aim, including for regional infrastructure.
The survey shows that Development finance institutions (DFIs), international organisations and specialised government agencies also use a wide range of financing instruments such as investment funds, blended grants, guarantees and export credits to draw in private investors who might otherwise be reluctant to invest in Africa’s infrastructure by mitigating the risks in bankable projects. Investment funds are usually set up by DFIs by using official sources that are then managed by private companies who invest in funds targeted towards African infrastructure projects. As for blending, some DAC members and European Union institutions are making use of this approach to combine concessionary funding with financing from market-based sources. Export credits and guarantees from Export Credit Agencies can reduce investors’ concerns about doing business abroad, but as they are normally limited to investors from the home countries, they can undermine fairness in competition if rules on their use, such as those set by the OECD Arrangement on Export Credits, are not respected.
In addition to DAC members, multilateral organisations and the private sector, a number of emerging economies such as China, India and the Arab countries, have been increasingly active in Africa’s infrastructure sectors. In particular, some estimates suggest that China has outpaced the World Bank as the leading funder of Africa’s infrastructure. The active engagement of emerging economies in Africa’s infrastructure sectors reflects these countries’ own focus on developing infrastructure domestically as part of their growth strategies.
In the context of the Paris Declaration on Aid Effectiveness, it is important to establish common approaches, agree on lead development partners and reduce aid fragmentation to support a country-led approach in the infrastructure sectors. For Africa’s infrastructure in general, the largest donors, i.e., World Bank, European Union institutions, African Development Bank, Japan, Germany and France, together provided more than 80% of ODF disbursements, which excludes financing from the emerging economies.
On the other hand, disaggregation of data into different categories by sub-region of North Africa and Sub-Saharan Africa, as well as ‘hard’ and ‘soft’ aspects, for each infrastructure sector shows a varied picture in terms of the largest donors. As data also show that there is significant aid fragmentation, effective division of labour needs to be addressed, particularly considering the increasingly important role of the emerging economies in Africa’s infrastructure.
While development agencies state that they align to partner country priorities, most of them express challenges due to the disconnect between country and regional priorities, lack of co-ordination and capacity among partner government ministries and regional communities, and inadequate country systems.
On harmonisation, many bilateral donors resort to multilateral organisations, specialised programme funds, and multi-donor platforms to minimise duplication, leverage other donors’ resources, build consensus, facilitate transactions, and disseminate good practice. While these can be effective approaches to reduce transaction costs and fragmentation, the proliferation of specialised programme funds could also become another source of aid fragmentation. In terms of domestic harmonisation, while some development agencies co-ordinate with other parts of the government that promote investments abroad, others try to maintain a distance between development objectives and promotion of national business interests.
In managing for results, measuring the leveraging effects of ODF on private investment to Africa’s infrastructure by supporting the “soft” aspects is difficult. It is first hard to establish causal linkages, particularly since increased investment and infrastructure development can take time. In addition, broader issues such as reduced corruption or a developed financial sector may impact more effectively than direct support to the infrastructure sectors. A major bottleneck in assessing results is the lack of disaggregated data on foreign direct investment and various financial instruments due to confidentiality of commercial interests.
It is important to remember that the ultimate goal is sustainable growth and poverty reduction in Africa, as opposed to simply increased private investment. However, when the latter is deemed to contribute to the former through a specific infrastructure plan, then development partners should collectively look at what they can do more to help improve the enabling environment and provide effective financing instruments. This could be done through enhanced dialogue among African governments, the private sector, development agencies, development finance institutions, civil society, as well as the emerging economies on better co-ordination, harmonisation, and division of labour, in line with the Paris Declaration principles.
The objective of this paper is to present an overview of support by development partners as well as financial instruments that are promoting private investment for Africa’s infrastructure. It is delivered within the framework of the New Economic Partnership for Africa’s Development (NEPAD)-OECD Africa Investment Initiative, building on past efforts by the two committees.
The joint project takes place in the international context of the 2002 Monterrey Consensus on Financing for Development, which established the importance of non-aid resources for meeting the Millennium Development Goals (MDGs). Furthermore, the 2009 DAC Reflection Exercise recommended the need for the Committee to work on leveraging other sources of development finance using Official Development Assistance (ODA). The 2011 Ministerial Council Meeting also encouraged closer collaboration among different policy communities to ensure coherent and multidimensional approaches to development, including in mobilising financial resources and fostering a favourable investment climate.
On the African side, most recently, leaders agreed on a common position for the Busan High Level Forum on Aid Effectiveness that affirmed their aim to exit from aid dependency in the long run.
This requires using aid as a catalyst for development, with the private sector playing a key role in turning-around Africa’s economy. They further deemed that, in order to realise this, capacity development for both public and private sectors was necessary.
This paper is largely based on responses from a questionnaire that was developed by the secretariats of the DAC and Investment Committee (IC) and sent to DAC participants in November 2010. The questions covered: Members’ strategies for infrastructure in Africa, including mobilising private investment; special considerations for fragile states, environment, regional approaches, and lessons from other developing regions; specific project activities for the enabling environment; application of principles of the Paris Declaration on Aid Effectiveness; and domestic co-ordination and coherence for Africa’s infrastructure investment. DAC Members’ responses were supplemented by interviews with officials from a number of multilateral and bilateral agencies. In addition, the paper is based on desk reviews as well as data analysis from the Creditor Reporting System (CRS).
The rest of Part I describes the importance of infrastructure for Africa’s development, as well as some international initiatives to support it. It then provides an overview of official development finance for Africa’s infrastructure. Part II presents the need for private investment to fund the financing gap for Africa’s infrastructure as well as donor efforts to use aid to leverage it. It also shows that there is aid fragmentation in the support to Africa’s infrastructure. This part also provides information on donor activities in support of the enabling environment for infrastructure investment.
Part III presents information on other official financing instruments as well as other development partners active in Africa’s infrastructure. Finally, Part IV refers to the application of the Paris Declaration on Aid Effectiveness to the area and some conclusions.
* Extracted from: MAPPING SUPPPORT FOR AFRICA'S INFRASTRUCTURE INVESTMENT, OECD, 25 November 2011. The report, 57 pages, can be accessed (right click) here.
* This report is part of a joint project by the Development Assistance Committee and the Investment Committee within the framework of the NEPAD-OECD African Investment Initiative. Discussion on the the findings of this report is planned to be held on 6 December 2011 at a Working Lunch Session of the Global Forum on International Investment. Investment Committee members, Development Assistance Committee members, officials of African embassies, representatives of development finance institutions and the private sector have been invited. Members of both Committees are also requested to provide factual corrections and comments to the respective Secretariat staff by c.o.b. 23 December 2011.
* Other documentation prepared for the meeting can be accessed here.