Download Infrastructure for Development - Africa

Infrastructure for Development
Meeting the Challenge in Africa
November 14th 2012
Dr Mattia Romani
Senior Visiting Fellow Grantham Research Institute
London School of Economics and Political Science
and
Director, Green Growth Planning and Implementation
Global Green Growth Institute
Contents
▪
Why infrastructure for Africa? The needs
▪
The gap
▪
The risk profile
▪
Potential solutions
1
Contents
▪
Why infrastructure for Africa? The needs
▪
The gap
▪
The risk profile
▪
Potential solutions
2
Why infrastructure for Africa?
1. Infrastructure contributed over half of Africa’s improved growth performance (1999-2005). IT
contributed significantly more than any other structural policy in the continent.
2. Africa’s infrastructure lags well behind that of other developing countries, particularly in terms of
pave roads and power generation. On the latter, it started from similar levels to South Asia in the 1960s,
and is significantly behind now.
3. Africa’s infrastructure services are twice as expensive as elsewhere. This is true across tariffs for
different types of infrastructure. This is particularly severe for power and water, where average tariffs
are a multiple of tariffs in South Asia.
4. Today Africa faces a resource gap of approx $35bn/year. This includes taking into account the
potential for efficiency improvements (as much as $20bn). This gap could double in the coming decade
due to growth, as well as limited public funding and lack of private capital.
Source OECD (2012) Romani, Bhattacharya and Stern (2012)
3
Global scale and nature of needs
▪ the incremental investment spending across emerging markets and developing
countries is estimated at around $1 trillion a year more than what is currently spent.
▪ This excludes investment in maintenance and upkeep.
Annual Infrastructure Spending in the Developing World ($tr, 2008)
1.8–2.3
0.2–0.3
0.8 - 0.9
Estimated current
annual
spending,
2008
Additional investments for
climate mitigation
and adaptation
1.6–2.0
Estimated annual infrastructure
spending need,
2020
NOTES: $ trillion per year, (2008 real prices), capital investments only (excl. operation and maintenance costs)
SOURCE: Current spending from Fay et al. (2010), “Infrastructure and Sustainable Development”; Estimated annual infrastructure
spending need for 2020 calculated by taking the Fay et al (2010) estimate and assuming a 4% annual growth rate from
4
2013-20
Global scale and nature of needs
▪
▪
East Asia will require up to 50% of the total – in the region of $2tn a year
▪
If maintenance was included, then the transport sector requirements would be much
larger
More than half is required for the power sector, across generation, transmission and
distribution; water and land transportation also are very prominent sectors
Annual infrastructure spending requirements in the developing world ($tr, 2008)
1.8–2.3
EAP
35-50%
ECA
5-15%
LAC
MENA
10-15%
5-10%
SA
20-25%
SSA
5-15%
Split by
region
1.8–2.3
Transport
15-25%
Telecomms
10-15%
1.8–2.3
Construction 90-95%
Electricity
45-60%
Water
15-30%
Split by
sector
Preparation
5-10%
Split by
phase
NOTES: $ trillion per year, (2008 real prices), capital investments only (excl. operation and maintenance costs)
SOURCE: the by region, sector, and phase are authors’ own calculations taking ranges from Yepes (2008), MDB
G20 working group on infrastructure (2011), and Foster and Briceño-Garmendia (2010); note the
$200-300 billion annual requirement for sustainability is assumed split in the same ratio as the other
5
investments across regions, sectors and phases
Contents
▪
Why infrastructure for Africa? The needs
▪
The gap
▪
The risk profile
▪
Potential solutions
6
The gap: existing institutions and financial architecture are not
adequate to meet the needs
▪ Currently, an estimated $0.8-0.9 trillion is invested annually, mostly financed by
public sector budgets, with lesser shares provided by the private sector and foreign
countries through development finance
▪
Private sector investment heavily concentrated in the ICT sector
▪
95% of all private finance is
concentrated in middle-income
countries (Estache 2010)
▪
Public-Private Investments concentrated
in ICT, other sectors investments dried
up during the crisis
Private sector
Other developing
countries’ financing
Concessional ODA
MDB financing
Government
budgets
1,800–2,300
1,000-1,400
800–900
150-250
20-30
20-30
<20
500-600
Estimated split of
current annual investment,
2008
Future annual investment needs,
2020
NOTE: Split by sources of finance are approximate ranges only and don’t add to exactly to the totals given for
that reason
SOURCE: Split of current sources of finance is a G-24 own assessment based on various estimates including
7
Estache (2010); MDB working group paper on infrastructure (2011); Macquarie (2009).
Today’s need for capital expenditure in SSA is in the region of $60bn,
likely to increase substantially over the next decade.
SOURCE: WB and AFD (2010). Africa’s infrastructure: a time for transformation
8
The gap in SSA: current capital expenditure is $25bn, gap is $35bn
▪
▪
ICT receives more than 2/3 of total private sector investment in Africa (7 out of 9bn)
▪
ODA and MDB financing are relatively small (3.8bn), other developing is not
insignificant (2.4bn)
The financial crisis reduced substantially the already small amounts going to other
sectors
Africa’s infrastructure capital investment, by source of finance (real $bn, 2006)
8.5
Private sector
Other developing
countries ‘ financing
7.0
0.5
Concessional ODA
1.4
4.7
MDB financing
4.6
Government
budgets
0.2
0.5
0
0
4.5
0.9
2.4
1.3
Information &
Communication
Technology
0.2
0.3
1.1
Power
Transport
Water, Sanitation,
Sewerage
SOURCE: Adapted from Briceño-Garmendia, Smits, and Foster 2008, splitting ODA financing between 75%
MDB financing and 25% concessional ODA based on Foster and Briceño-Garmendia (2010)
9
In SSA, the unmet need to support infrastructure development is for both
debt and equity
Estimated current infrastructure financing need for Sub-Saharan Africa
$ billion per year
ICT
60
7
25
7
5
Unmet capital need
9
Power
27
0
Transport
WSS
Irrigation
5
35
9
22
15
0
10
3
3
Annual
need
Current
spend
Total of $ 4-5 billion needed
in equity for unmet
infrastructure demand
22
13
~1
Unmet need Unmet need
that could
be met by
public
sources1
Unmet need
that could
be met
by private
sources1
Estimated
unmet need
for project
development equity2
3-4
Estimated
unmet need
for other
equity2
8-9
Estimated
unmet
need for
debt2
1 ‘Public sources’ includes government financing, ODA, and non-OECD financing (e.g., from China). Public-private split is assumed same as current
spending and, as such, may understate the potential private sector contribution
2 Split of equity and debt is approximate, based on 30-40% equity (including c.5-10% of total for project development equity), 60-70% debt
SOURCE: Adapted from Foster and Briceño-Garmendia (2010)
1
Can SSA afford its infrastructure?
▪
To meet needs, approximate
payment of 0.40 dollars per day
in Sub-Saharan Africa
▪
Equal to 35-50% of individual
income where a significant
proportion of the population
lives off less than $1-2 per day
▪
If we add the additional cost of
finance on this, the figures look
even more worrying
Source Climate Policy Initiative (2011). The Landscape of Climate Finance.
▪
Concessionality, intergenerational
transfers of financial burden, cash
transfers to enable people to pay
fees, ODA to cover fees from donor
countries are all potential
mechanisms to alleviate this
issue
▪
This adds a layer of political
uncertainty on the sustainability of
user fees which discourages
investment: will subsidies be
removed or reduced? Will the
government have enough liquidity
to pay out cash transfers for the
foreseeable future?
11
In 2011 private investment in developing country infrastructure
fell by more than half due to the financial crisis
PPI in infrastructure, all developing countries, $ billion per year
Others
DAC I & II
180
160
140
-51%
120
100
80
60
40
20
0
1990
1995
2000
2005
2010
NOTE: 2011 data has been estimated by doubling H1 data for 2011 in PPI database.
SOURCE: World Bank PPI database
12
Contents
▪
Why infrastructure for Africa? The needs
▪
The gap
▪
The risk profile
▪
Potential solutions
13
Experience shows that complex infrastructure projects are plagued
by risks
Under-estimate of;
▪ Environmental and safety
concerns
▪ Construction costs
▪ Capital costs for
development 140% higher
▪ Re-financing delayed and costly
due to;
– Governance structure leading
to delay in turnaround plans
– Debt holders did not want to
take on more risk
Budget overrun
of over 80%
▪ Caused partly by design
6 month delay
on delivery
Financing and
governance
issues
▪
Economic loss >
€10 billion
Unforeseen
▪ Several major issues;
disasters
– Train stuck in tunnel
– Major Fire in 2008
– Asylum seekers leading
▪
to loss of capacity
Litigation with insurers still
in process (> €250 mln)
Demand
forecasts 200%
off
SPV (MTL) separate
from operating SPV
(Eurotunnel)
18 months of unreliable
service after opening
▪ Passenger volume forecast
▪
at >15 mln in 1st year, yet 10
mln mark not reached today
Partly underestimated
competition from ferries and
airlines
SOURCE: CIA Factbook, EIB, UN, National Resources Defense Council, Gates Foundation, WEF, McKinsey
14
Infrastructure finance underwrites risks along the life of the project
Enabling
environment
Project
development
Financing
Construction
Early
operations
Mature
operations
Risks
Demand /
revenue
▪
▪
▪
▪
▪
Inaccurate revenue forecasts
Change in environment e.g. customer requirements
Unforeseen competition
▪
Market
▪
▪
▪
Fluctuation in interest and/or exchange rates
Increase in input (e.g. fuel, commodities, labour) costs and availability
High inflation
Credit
▪
▪
▪
Financing terms
Availability of financing
Liquidity challenges
Regulatory
& legal
▪
▪
▪
▪
Suboptimal regulation
Change in regulation
Contractual conditions/interpretation of contract
Regulatory oversight & (stakeholder) conflict
▪
Operational
▪
▪
▪
▪
▪
▪
Construction
▪
Political &
external
Inaccurate revenue forecasts
Change in environment e.g.
customer requirements
Unforeseen competition
▪
▪
▪
▪
Project-related external (strike, sabotage,
theft)
Rise in wages, taxes or labour-related costs
Inefficiencies due to process or organisation
Other counterparty and procurement risks
(e.g., corruption)
Incomplete / optimistic budget
Lack of project / supplier control
EPC quality, technological or equipment
issues
Incomplete planning & permitting status
Political unrest, war, terrorism, corruption
Natural disaster, outbreak of disease
Nationalisation
Embargoes, supply chain disruption
15
The risk profile: the nature of risk for infrastructure makes it a
complex proposition for investment
Preparation
Construction
Operation
Description
▪
Developer/government organizes
feasibility studies; models cash
flows, finances; organizes
contracts with utilities, operators
and construction firms
▪
Construction firms build the
project to specifications
▪
Separate operating company
takes over operation and
maintenance of the project
Main risks
▪
▪
▪
Macroeconomic & political risks
Technical risks to project viability
Environmental and planning risks
▪
▪
Macroeconomic & political risks
Construction risks (e.g., of
overrun, delay)
▪
▪
▪
▪
Macroeconomic & political risks
Demand / traffic risks
Operating risks
Policy risks (e.g., tariff changes)
Cash flows
(stylized)
Source: AGF Report (2011)
16
The risk profile: the nature of risk for infrastructure makes it a
complex proposition for investment
Preparation
Description
Main risks
Construction
Operation
investors
in the early
phases (greenfield) need▪ to
consider
▪ Developer/government
organizes ▪ Construction firms build the
Separate operating company
models
project
to specifications
takessince
over operation
allfeasibility
risks studies;
across
thecash
different
stages
of the projecta and
flows, finances; organizes
maintenance of the project
return
on
their
investment
will
only
be
possible
if
the return
contracts with utilities, operators
and construction firms
profile
of the later stages of the project life are sufficiently
▪ Macroeconomic
political risks
& politicalrisks
risks
▪ Macroeconomic & political risks
attractive
to &make
up for▪ Macroeconomic
the early stage
▪ Technical risks to project viability ▪ Construction risks (e.g., of
▪ Demand / traffic risks
▪
Environmental and planning risks
overrun, delay)
▪
▪
Operating risks
Policy risks (e.g., tariff changes)
Cash flows
(stylized)
Financing
moments
During project preparation
and feasibility studies the
developer seeks patient
capital or, often, public funds
Once project is ‘bankable’
the developer will seek equity
investors and debt providers
to finance the project
Source: AGF Report (2011)
Once construction is complete and
started to operate project can be
refinanced to reflect the changing
risk profile
17
The upfront investment often relies on a very uncertain future cash flow
Base Case + Volatility
Base case + volatility
5.000.000
4.000.000
3.000.000
2.000.000
1.000.000
1
2
3
4
5
6
7
8
9
1
11
-1.000.000
-2.000.000
-3.000.000
SOURCE: McKinsey
18
Most recent and future projects are greenfield
Already today, opportunities are mostly in
greenfield…
And the pipeline is even more skewed
towards new construction projects
Projects 2005-10
Average number p.a.
Projects since 2010
Projected number
415
29%
61%
Greenfield
Mature1
Greenfield2
Mature3
▪ The prospective increase in the scale of ‘greenfield’ investments that are required in
developing countries – which typically have higher risks than ‘brownfield’ expansions - means
that the risks of a substantial bottleneck where financiers are not ready to invest are
greater.
1 Includes Secondary stage and Brownfield
2 Includes Greenfield (112) and Expansion (12)
3 Includes Asset Acquisition, M&A, Brownfield, Privatisation
SOURCE: Preqin, Infrastructure Journal, Public Works Financing, Infrastructure Investor
19
The risk profile: constraints to matching demand of investment with
supply of available financial instruments
▪
Infrastructure investment projects in
developing countries have high risks
across most of the above categories
▪
Macroeconomic and political risk in
developing countries compounds with
high risks of early phases of
investment
▪
This problem is further compounded by
the fact that many potential financiers
have few if any benchmark projects to
serve as comparison for pricing these
risks.
Difficult to match
project needs and
financial archetypes,
making investment at
scale unfeasible
20
Contents
▪
Why infrastructure for Africa? The needs
▪
The gap
▪
The risk profile
▪
Potential solutions
21
The shift in wealth has implications for asset allocations:
Most emerging market investors have very low allocations to equities
Asset allocation by investor, 2010
%; $ trillion, 2010 exchange rates
Traditional investors
100% =
Other
Cash and
deposits
Fixed income
43.6
6
28.3
5
19
Emerging investors
4.3
6
15
39
29
45
2.7
3
3.5
6.5
8
9
65
54
Compound
annual growth
rate, 2000–10
%
4
5.9
10
76
74
90
13
52
34
14
Western
Sovereign
Europe
wealth
pensions funds
and private
investors
3
24
32
18
US
pensions
and private
investors
1.8
54
29
23
Equities
3.6
0
15
Developed MENA
Asian
private
private
investors
investors
9
23
14
Latin
American
private
investors
16
5
12
13
Chinese
private
investors
Emerging
Asian
private
investors
16
11
14
Emerging
market
central
banks
22
1 Includes Singapore, Hong Kong, Korea, and Taiwan. Excludes Japan, where private
investors have 10% in equities
22
The BRICS are now playing a larger role in infrastructure financing and are
taking a new approach
China is now a larger contributor to infrastructure financing in Africa than the World Bank
Infrastructure financing in Africa
$ billion
▪
World Bank Group
China
9.0
8.1
▪
▪
3.3
2.5
▪
1.9
1.3
2004
2007
China and Gulf countries
offer cheap capital and turnkey solutions conditional to
geo political objectives rather
economics
Chinese commitments are
15% of total African
infrastructure investment
Chinese commitments
including non-infrastructure
sectors are even higher at
$15.9bn in 2010
Two-thirds of Chinese infrastructure financing is in
energy and transport
2010
SOURCE: Infrastructure Consortium for Africa 2010 annual report; ICA 2010 annual report; World Bank, “Building
bridges: China’s growing role as infrastructure financier for sub-Saharan Africa” (2008); World Bank Group,
Infrastructure Strategy Update paper (2011)
23
Potential solutions: reforming IFIs and need for new institutions
① Innovative public finance instruments (project
preparation funds, political risk guarantees, etc)
FINANCE
② Complementing private finance instruments
(both debt and equity)
③ Financial solutions that combine these public
and private instruments effectively at low
transactional cost
④ Large data-banks providing benchmark for
assessing risk-return of projects
PROJECTS
⑤ Governance of public money that allows a more
efficient use of scarce public finance resources
⑥ Project preparation facilities that support
countries in creating a healthy pipeline of
investable projects
⑦ Mechanisms to guarantee revenues from user
fees at the end of the investment cycle
Current IFIs :
• ensure that current money
made available by members
is leveraged more efficiently
• Change governance to
reflect both new geopolitics
and current risk frameworks
New institution(s):
• Institutions that reflect in
their governance, capital
and instruments the new
economic and financial
reality of the world and use
resources from emerging
and developing countries
efficiently
⑧ Excellent data rooms on projects to facilitate
assessments of risk and returns for private
investors
24
Rationale for a new a bank fit for purpose: modern in its mandate,
instruments and ownership
o Resolving the infrastructure challenge for the next 2 decades means laying the
foundations for global growth.
o Most greenfield infrastructure projects in developing and emerging markets face
upfront risks that current market players are unable to take on. A new institution could
have the scale of capital, the portfolio of projects and the instruments required to take
on this risk and unlock private investment.
o Public finances under pressure and domestic financial systems relatively young. New
bank can help deepen domestic financial markets, channel savings to profitable
investment and reduce exposure to currency risk, particularly with respect to $US/Euro
o BRICS keen to expand their commercial and strategic links with resource rich countries,
mostly pursuing this through bilateral deals. A new bank could help achieve such
objective with less financial and political exposure with a multi-lateral approach
o Existing IFIs not in a position to take on scale (due to institutional limits and
governance) and nature (long term financing, large proportion of equity) although can
be good partners
o Project preparation is not happening at the scale and quality required which results in
a poor pipeline of bankable projects. A successful new institution needs to develop
world-class, global project preparation facilities over time
Source Romani and Stern (2011)
25
Proposed G24-GGGI work program in collaboration with other
partners
1. Deepening the assessment of infrastructure investment needs – by region, country,
sector
2. Risk analysis framework: assessing the risk return profiles of projects across regions,
sectors, phases
3. Evaluating experience on existing financial instruments: what works and what doesn’t
4. Assessing the constraints on the development of a strong pipeline of investable
projects across different sectors, countries, regions; explore experience on project
preparation facilities and technical assistance
5. Assessing the existing financial architecture and its delivery:
1.Public finance (budgets)
2.MDBs and RDBs
3.National Development Banks
4.Private finance
6. Considerations and implications on developing new institutional arrangements: range
of functions, instruments, membership, governance, capitalization, etc
Source Romani and Stern (2011)
26