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Strategies for Regional Infrastructure Development and Economic Growth African Development Bank Group Prof. Mthuli Ncube Vice President & Chief Economist AfDB African Development Bank Presentation to the “Economic Growth and Employment” Seminar Mozambique, February 10, 2011 1 Presentation Outline 1. The state of infrastructure in Africa & Implications for economic growth 2. Financing infrastructure development & AfDB’s Role 3. Lessons learnt from AfDB’s interventions 4. Strategies for infrastructure development and further engagement with the AfDB 2 THE STATE OF INFRASTRUCTURE IN AFRICA & IMPLICATIONS FOR ECONOMIC GROWTH Infrastructure Coverage in Mozambique and Sub Saharan Africa 350 300 Mozambique Sub-Saharan Africa Normalized units 250 Other low-income countries 200 150 100 50 0 Paved road density Total road density Mainline density Mobile density Internet density Generation capacity Electricity coverage Improved water Improved sanitation Mozambique lags behind the average coverage for Sub Saharan Africa on all but 2 dimensions (mobile telephony and internet usage) Ranks 42 out of the 53 according to the AfDB’s Infrastructure Index Regional connectivity particularly lacking Missing links for physical integration of the African continent (AICD) Region Large hydropower (MW) Central 1,383 East 10,968 Southern 8,912 Western 3,758 Total 25,021 Power transmission (MW) Road upgrades (kms) Fibre optic links (kms) 3,700 2,257 2,524 3,565 11,100 5,158 5,804 1,905 23,129 12,885 1,662 27,755 23,839 11,250 64,506 ONRI Presentation on RISPs– 05.02.2010 Source: AUC, AfDB, WB presentation at UN Millennium Summit, September 2010 Source: AUC, AfDB, WB presentation at UN Millennium Summit, September 2010 Source: AUC, AfDB, WB presentation at UN Millennium Summit, September 2010 Source: AUC, AfDB, WB presentation at UN Millennium Summit, September 2010 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: • African firms could achieve productivity gains of up to 40 percent with adequate infrastructure • GDP growth could be enhanced by as much as 2% per year 10 GDP and Real GDP Growth in Mozambique Real GDP growth (annual %) 10.00 11.1 30 20 14.7 12.6 9.2 7.5 6.8 8.4 6.5 8.7 7.0 6.8 3.3 2 5.4 6.5 7.55 10 0 6.00 -10 -15.1 4.00 -20 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 -40 1993 0.00 1992 -30 1991 2.00 1990 GDP (current, billion USD) 12.00 8.00 40 GDP (current billion US$) Real GDP growth (annual %) 14.00 Year Mozambique’s growth has not been inclusive, in part due to infrastructure bottlenecks (high transportation and energy costs) Competitiveness of the economy is low (ranked 131 out of 139 economies – Global Competitiveness Index, 2010) Why infrastructure? (ii) Added pressure from consistent growth of African economies, which has led to: Larger cities and increased urbanization Growing consumer markets Broader ties to the global economy Infrastructure stock must increase to support this growth 12 Why infrastructure? (iii) Linkages to local industry Manufacturing Construction Financial markets Labor Hence growth in infrastructure development activities has direct GDP growth implications Infrastructure expected to become the 4th largest contributor to revenues in Africa by 2020 13 FINANCING INFRASTRUCTURE DEVELOPMENT & AfDB’s ROLE Current Sources of Infrastructure Financing 1.6 % of Sub Saharan Africa GDP 1.4 1.2 1 non-OECD 0.8 OECD Private 0.6 Public 0.4 0.2 0 WWS Energy ICT Transport Sector US$ 93 billion required annually to finance infrastructure in Africa Current expenditure = US$ 45 billion Potential efficiency savings = US$17 billion Financing gap = US$ 31 billion 15 Innovative Financing Instruments • Traditional Design-Bid-Build approaches given way to new and often long-term arrangements • Attracting private players into infrastructure provision through different forms of PPPs (DB, DBOM, DBFO, BOO, BOT, BOOT, Full Delivery OR Program Management) Advantages: • Cost savings • Fully integrated client services • Transferring risks • Innovation • Better asset management • Better level of service • Partnering potential • Developing a new industry • Benefits of economy of scale 16 Innovative Financing Instruments While long-term arrangements are attractive they have disadvantages too: • Costly tendering process • Longer tendering periods • Reduction of competition (social justice), usually for large contractors • Uncertainty of long term relationships • Mobilization issues need to be addressed • Loss of control & flexibility 17 Source: Pekka Pakkala (2002) Other innovative sources include – – – – – Local currency bonds Commodity-linked bonds Diaspora bonds External sovereign bonds Sovereign wealth funds • Require strong institutions , credible policy environment • Yet have benefits – – – – Government maintains control Reduce risk of sovereign debt stress Reduce instability of financing flows Deepen domestic financial markets 18 AfDB’s Support to Infrastructure • Lending – Sovereign incl. regional operations pool – Non-sovereign (loans and equity) • Grants for technical assistance – FAPA (US$ 16 million per year towards private operations) – IPPF (US$ 15 million per year towards regional infrastructure operations) – MIC (US$ 16 million for operations in middle income countries) • Risk Instruments – Guarantees – Hedging products • Coordination – Hosts the Infrastructure Consortium for Africa (ICA) – Executing agency of the Program for Infrastructure Development in Africa (PIDA) 19 AfDB’s Approved Financing by Sector – Ongoing as at 31.01.2011 Share of Approved Amount by Sector Water & Sanit. 9% Transport 14% Power 23% Social Total 1% Agriculture 36% Finance 3% Multi-Sector Ind/Mini/Quar 13% 1% • Infrastructure sectors now attract the lion’s share (46 %) of AfDB’s financing 2009 Infrastructure Loans & Grants US$6.05 Billion to Infrastructure Projects Water & Sanitation, 8% US$700 Million to Regional Infrastructure Communication , 2% Transportation, 33% Recent Key Regional Projects Funded • Kenya-Ethiopia Highway • Mozambique-Malawi-Zambia Highway • Kenya-Tanzania Highway •Burundi-Rwanda-DRC-Kenya-Uganda Power Interconnection Other Key National Projects Funded Power Supply, 57% •US$2.3 billion Power Project in RSA •Power Projects in Botswana, Kenya, Uganda, Ethiopia, Lesotho •Transport, power and water projects in Mozambique 21 ONRI Presentation to COMESA-EAC-SADC 2010 AfDB’s regional infrastructure operations • UA 1.17 billion in 2009, an increase of 57.9% over the 2008 level of UA 741.10 million • 20 percent of ADF-12 resources allocated to the Regional Operations pool • Increasing participation by private sector investors widening the resource base • But innovations are necessary 22 AfDB’s Support for Infrastructure in Mozambique Communications Historic Operations - 1977-2010 (UA million) Ongoing Operations – as at Jan 2011 (UA million) Recently Approved Operations (UA million) 35,230,787 Water Supply / Sanitation Power Transport* TOTAL 92,874,810 82,403,884 295,112,906 505,622,387 18,000,000 48,402,000 30,100,000 10,250,000 96,502,000 135,350,000 140,620,000 *Includes one multinational project, Nacala Road Corridor (UA 102.7 million) • Mozambique’s transport sector historically the biggest beneficiary of AfDB’s funding • Project pipeline shows continued strong support to infrastructure (43 % of total allocation) 23 MZFO, 2011 Productivity and efficiency gains from infrastructure investments Cost effectiveness of regional operations Alleviation of public investment constraints through private participation LESSONS FROM AfDB’S INTERVENTIONS Case 1: Senegal’s Infrastructure PPPs Project objectives and financing: • Four public-private projects approved in energy and transport between 2009 and 2011 • The objective was to improve access and efficiency, and lower costs of power and transport services • EUR 1.1 billion financing mobilized from private sector, DFIs (including AfDB), and Public sector 25 Project Key Development Outcomes Dakar Container Terminal (EUR 210 million) Dakar Toll Highway (EUR 209 million) Increased road capacity Lower indirect costs of transport by alleviating congestion e.g. average travel time from Dakar to Diamniadio from 2 hrs to 45 minutes. Cost saving to the users estimated at EUR 165.2 million in NPV. Senegal Coal Power Plant (EUR 195 million) Increase power generation capacity e.g. 925 GWh of electricity generated, about 40% of national consumption in 2008 Improve quality of electricity services e.g. reduce annual power shortages from the 176 days reported in 2008 to 40 days by 2014 Improve national electrification coverage (target: from 46% in 2008 to 66% in 2015) Blaise Diagne International Airport (EUR 525 million) Increased terminal capacity and productivity e.g. capacity increased by 50% Lower indirect costs of trade e.g. average waiting time for berthing reduced from 15 hours to 1.7 hours. Increase air freight and passenger traffic capacity e.g. annual capacity growth of 3 million passengers and 53,000 tons of cargo freight (x3 capacity increase). Improve quality and cost effectiveness of air transportation e.g. eliminate over-capacity operation at existing airports. Case 2: Other 3 billion Networks (O3b), Multinational Project objectives and financing: • The project involved the design, construction, launch and operation of a constellation of 8 medium orbit satellites • Objective: delivering affordable, high bandwidth, high quality internet and cellular access to inland markets in developing countries and island economies • One-third of capacity dedicated to Africa including 1st wave off-takers from: Nigeria, DRC, Kenya, Tanzania, Malawi, Zambia, Cameroon, Sierra Leone, and Ghana • Financed entirely by DFIs and private investors (US$1.1 billion) on a limited recourse basis 27 O3b: Key Development Outcomes • Reach ‘white areas’ and fragile states with high quality ICT infrastructure • Improved access to mobile telephony, broadband and data networks in 9 Africa countries e.g. connect 18 million households to cellular backhaul • Lower costs of ICT on the continent. – Cost savings versus the equivalent capacity from high orbit satellites estimated at US$1.3 billion net present value • Regional integration through expansion of broadband internet and cellular access across several Africa countries 28 Case 3: North-South Corridor Program Selected development outcomes: • Lower indirect costs of trade e.g. reduce time for clearance of goods from up to 5 days in 2009 to 37 hours • Improve port capacity e.g. increase cargo handled at Nacala port from 0.9 million tons in 2009 to 1.6 million tons in 2015 • Lower transport and transit costs by 25 percent in 2015 on Nacala corridor 29 Case 4: Urban Water Supply, Sanitation & Institutional Support Project in Mozambique Project objectives & financing: • To improve the coverage of water and sanitation in four towns: Chókwè, Xai-Xai, Inhambane and Maxixe • Financing of UA 19.06 million (ADF Loan + Grant) Development Outcomes: • Improved access to safe water and sanitary facilities e.g. 284 595 new uses served with potable water • Lower costs of service delivery e.g. non-technical losses reduced from 55% to about 30% 30 Mobilize domestic resources Attract private capital Invest in regional infrastructure Invest in clean energy STRATEGIES FOR INFRASTRUCTURE DEVELOPMENT & FURTHER ENGAGEMENT WITH THE AfDB Strategies for Mozambique Performing more of the old functions better • Improve efficiency in use of allocated resources – An estimated 17$ billion per year lost through inefficiency in Africa’s infrastructure sectors • Increase public allocation to capital expenditures for both new investments and maintenance The Bank’s role: • Policy-based lending, e.g. Nigeria power sector reform program • Technical assistance, e.g. FAPA TA grant accompanying a private sector operation 32 Strategies for Mozambique Domestic resources mobilization • Infrastructure bonds in local currency • Example – Kenya’s long-term government infrastructure bonds – Three bonds valued at (US$1 billion) successfully issued since 2009 The Bank’s role: • Treasury / MFW4A developing financial markets on the continent e.g. TA for bond issues, plans to invest in local currency bonds issued in RMCs • Policy-based lending for financial sector reforms 33 Strategies for Mozambique Attract (foreign) private capital • PPP model • Example: Senegal Dakar Toll Highway – Total cost EUR 223 million (DFIs, foreign concessionaire, local commercial bank, government) – Bankability improved by (i) long-tenor foreign currency financing from DFIs (ii) viability gap subsidy from the state The Bank’s role: • Financier • Lead arranger e.g. Lake Turkana wind farm in Kenya • Honest broker e.g. Markala sugar plantation in Mali • Risk management through currency and maturity matching 34 Strategies for Mozambique Attract foreign private capital • Private equity funds, external sovereign bonds, emerging markets investors • Example: Africa Infrastructure Investment Fund 2 (AIIF-2) – US$ 500 million fund; US$5 billion in additional financing mobilized – Equity investments of US$ 10 – 100 million in up to 15 projects – Target: power and transport projects in southern Africa The Bank’s role: • Equity and loan financing e.g. AIIF-2, Argan Infrastructure Fund • Influence geographic reach of infrastructure PEFs /emerging partners • Influence practice and standards of infrastructure PEFs / emerging partners 35 Strategies for Mozambique Invest in regional infrastructure • Regional hydropower projects are the continent’s least-cost power development strategy & Mozambique has large potential • Transport corridors capitalizing on coastal access, e.g. North-South corridor The Bank’s role: • Financier e.g. about US$ 1 billion for N-S corridor projects. (Already supporting Nacala road corridor with US$150 mn) • Project preparation and TA support, e.g. US$ 11.6mn under NEPAD-IPPF for N-S corridor projects • Honest broker 36 Strategies for Mozambique Develop clean energy • Capitalize on clean and renewable energy resource endowment (hydro, wind), bio-energy potential • Tap into clean technology finance The Bank’s role: • Experience in project structuring and financing e.g. financed Cabeolica wind farm in Cape Verde, and Markala sugar plantation in Mali • Public and private sector financing • Risk management facilities 37 THANK YOU Office of the Chief Economist African Development Bank 38