The Importance of Investing in Infrastructure in Africa

25Jun 2019
The Guardian Reporter
The Guardian
The Importance of Investing in Infrastructure in Africa

Today there exists consensus amongst all, and not only the development community, that infrastructure development constitutes the backbone of an economy by positively affecting both directly and indirectly, different layers of our societies i.e.; through facilitating trade, job creation etc.

However, as of today, Africa is still lagging behind in terms of infrastructure development. Although it is true that we have collectively made tremendous progress since the conception of a continental strategic framework for infrastructure development (PIDA), we note that additional effort needs to be provided to support the development of our infrastructure, especially with regards to financing our infrastructure needs.

In fact, experts estimate that the financing required by African governments for delivering on Africa’s infrastructure is over US$120 billion a year and according to a recent report from the UNDP; 15 African countries have not achieved 10% of the SDGs targets related to infrastructure. This is most unfortunate, since we know that attaining25% of the SDGs in this area would achieve more than half of the global goals, including reducing poverty, unemployment and social inequalities.

It is against this backdrop that our governments and leaders have had no choice but to explore and solicit alternative sources of funding, such as the potential financing that could be raised from our own African institutional investors (from pension funds, insurance companies, sovereign wealth funds, et cetera).

In theory, this is all aligned, as institutional investors are faced with a low interest rate environment and infrastructure projects provide them with a predictable, inflation-adjusted cash flow that has a low correlation with existing investment returns. In this context, the African Union Development Agency-NEPAD initiated a campaign endorsed by African Heads of States, aimed at increasing allocations of African asset owners to the continent’s infrastructure, from its low base of approximately 1.5% of their assets under management (AUM) to a more impactful 5% of AUM: The 5% Agenda.

However, as the biggest confidence boost a private investor can receive is in the form of a “payment guarantee” or “sovereign guarantee,” we also need to find ways to reduce the risk of pension fund investment in Africa's infrastructure. This finding has led the African union Development Agency-NEPAD, with the support of other partners to facilitate and coordinate the access to risk mitigation instruments in a new initiative; "The African Infrastructure Guarantee Mechanism".

Indeed, we truly believe that if Africa is to be successful in implementing our much needed and impactful infrastructure projects, we need to optimise the roles of all stakeholders (including institutional investors) and innovate with risk-mitigating solutions that will secure long-term affordable finance, while delivering development impact, starting first with our own pool of African institutional investors. This is precisely the objective towards which the the African Union Development Agency-NEPADhas been and will be working towards.