In 2017 the African Development Bank (AfDB) made disbursements of $6.7bn, the most it has made in a single year.
Over the past 10 years says Pierre Guislain, vice president of the bank’s, private sector, infrastructure and industrialisation department, it has funded over $33bn of investments in infrastructure. Today, the split between public and private sector disbursements is around 70-30.
With the financing gap – be it in trade or in infrastructure – remaining as large as ever, and with governments operating within a much tighter fiscal space, the role of international finance institutions and development finance institutions is only going to increase in importance. But it also means they will have to be more resourceful and innovative to be able to meet the demand.
Guislain, who spoke to African Business in May, has over 20 years’ experience in banking, having worked at the World Bank and the International Finance Corporation. At the WB he advised governments on policy to improve their business and investment climate and it is evident from his arguments that providing a stable, consistent and attractive business environment are the sine qua non of infrastructure investment and more importantly mobilising international capital.
“Infrastructure is a long-term asset, with a heavy amount of sunk cost. Stability and predictability of the policy and economic environment is absolutely essential,” he says. He also stresses the need to standardise the approach to investment in this asset class, which is what the AfDB is working to do. One area of success he points to is solar energy, where investments have moved towards a more standardised approach and investment has increased.
The AfDB is organising the African Investment Forum in Johannesburg in November with this in mind. One of the objectives is to present a pipeline of investor-ready projects to a wider pool of investors.
Towards a more
The AfDB, he says, wants to have a much more wholesale approach. Right now it’s very much a project-by-project approach. It is engaging proactively with institutional investors to identify what it will take for them to invest much more massively in infrastructure.
He points to growing interest, notably because of the low yields in more developed markets, citing the A.P. Moller African infrastructure fund, which has a substantial stake from Danish pension funds. There are also a number of private equity funds with significant institutional investors behind them, he says.
But to mobilise the sums that will make a substantial dent in the infrastructure gap, Guislain says the AfDB and partners will need to help design structures that these investors are comfortable with and, in some cases, design structures that strip away some of the risk.
The African Investment Forum, he says, is “precisely there to create a place where the project financing community can engage with these institutional investors and where the Bank, as intermediary, can help create products that will be attractive to those institutional investors.”
One of the issues that have been raised recently in terms of project financing is the tight fiscal space governments have to operate in. In the past, investors required a government guarantee. With debt levels rising and borrowing thresholds reaching their limits, this is no longer an option. Commercial risk and operating risk should really be borne by the investor, he says.
The AfDB has developed a partial risk guarantee for exactly that reason. And this is what they used to help Air Côte d’Ivoire secure a $112m loan from commercial banks.
“It really covers breaches of obligations by public authorities that then prevent the concession company or the private company from fulfilling its financial obligations. That’s been a very effective tool. We have not used it enough, but we are very keen to use it more aggressively moving forward.”
Another financial solution the AfDB is deploying, especially in low-income countries or transition or fragile states is blended finance, a blend of concessionary and commercial loans, effectively reducing the cost of capital. “It’s something that we see as increasingly necessary,” he says, “where the private sector is not comfortable investing.
Finding a grant element to make a transaction viable, where there is a public good works element like the environmental one or the climate one in the case of solar, is something that is absolutely essential.” The AfDB is looking at scaling up this blended finance approach so that it can work more effectively with concessional financiers, such as the European Union, Canada and also foundations.
Does this not crowd out commercial banks? “The goal is definitely not to subsidise the private sector,” he explains, “the goal has to be to make something happen that is economically or socially desirable that could not happen on a purely commercial basis.” And as international banks withdraw credit lines due to excessive regulation and high compliance costs, this will be an increasingly attractive solution.
No single path to industrialisation
We spoke with Pierre Guislain as he was preparing to head to Busan, South Korea, for the AfDB’s annual meetings. South Korea and other countries in South East Asia are often held up as paradigms of rapid industrialisation and, as a result, economic transformation.
Does he believe in industrialisation as a viable option? Yes, undoubtedly, even with current shifts towards service-led economies and rapid technological change, but it’s not a one-size-fits-all approach.
Countries that have strong economic governance or big domestic markets or both, have good industrial development prospects and will continue to grow. Large domestic markets, he says, create strong incentives for industrial development.
But you can’t just wake up and say “I want to industrialise”. You need to set up a whole ecosystem and a whole set of conditions that will make the market conducive to industrial investment, he says. One of these is to integrate the markets more effectively.
The success of China, he says, is due to the fact it is one huge, integrated country with strong economic governance and the ability to follow through on policies, year after year, decade after decade. “Unless we manage to integrate these markets more effectively, it’s going to be very difficult to replicate China-type solutions,” he says.
One of the priorities of the AfDB, as part of its industrial development policy, is to accompany African investors who are willing to invest outside of their home base. This, he says, will also strengthen intra-African value chains.
And it will be those regional African players and African champions that will give the public sector the impetus to push through regional integration. “That is definitely one of our priorities at the African Development Bank, we are a regional bank; we are Africa’s development bank and our mandate itself, our charter itself, calls for us to help integrate African markets.”