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MOBILIZING PUBLIC FINANCING INFRASTRUCTURE AND STRUCTURAL

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MOBILIZING PUBLIC FINANCING INFRASTRUCTURE AND STRUCTURAL Powered By Docstoc
					                                      United Nations
                    Economic Commission for Africa
      Subregional Office for Eastern Africa (SRO-EA)




   MOBILIZING PUBLIC FINANCING
INFRASTRUCTURE AND STRUCTURAL
    TRANSFORMATION IN AFRICA



                  Mr Soteri Gatera
             gsoteri@uneca.org
                INTRODUCTION
• Much of Africa’s current infrastructure is in poor
  state, depressing productivity by 40% and
  contributing to higher cost of doing business
• Inadequate availability of energy, inefficient
  functioning of ports, deficiencies in transport
  infrastructure and in ICTs further constrain
  Africa’s economic growth
• Strengthening infrastructure in Africa require
  massive investments: Rehabilitation costs and
  Construction of new infrastructure
  CURRENT STATE OF AFRICA’S
      INFRASTRUCTURE
• Highly inadequate, fragmented and expensive

• Power supply and road networks: most deficient

• Infrastructure in SSA is far less developed than in
  other low income countries

• Power consumption is about 10% of the
  consumption in the developing world

• More than 30 African countries experience power
  shortages and regular interruptions to services
AFRICA’s INFRASTRUCTURE
          DEFICIT
                              Low Income countries
                       Sub Saharan                Rest of the world
                         Africa
Paved road density     31                     134
Total road density     137                    211
Mainline density       10                     78
Mobile density         55                     76
Internet density       2                      3

Generation capacity    37                     326
Electricity coverage   16                     41
Improved water         60                     72
Improved sanitation    34                     51

                           Source: Yepes et al (2008)
• Road density is extremely low

• Rail density is low, variations in gauge types, most
  pre-existing rail lines damaged or destroyed

• Poor transport infrastructure accounts for 40%
  increase in transport costs for coastal countries, up
  to 60% for landlocked countries

• 80 Ports, small, inaccessible by large modern
  vessels, inadequately dredged, inappropriate
  berths; old merchant fleet

• 15 States with no access to ports; Africa’s freight
  costs at about 250% of the global average
  AFRICA’s INFRASTRUCTURE SPENDING
           NEEDS ( in billions of USD)
Infrastructure      Capital     Operation &                                     Total
Sector              Expenditure Maintenance                                     Spending
                                                                                Needs
ICT                          7.0                           2.0                        9.0
Irrigation                   2.9                           0.6                       3.5

Power                       26.7                         14.1                       40.8
Transport                    8.8                           9.4                      18.2

Water Supply                14.9                           7.0                      21.9
& Sanitation
Total                       60.4                         33.0                       93.3
                 Source: Africa Infrastructure Country Diagnostic, World Bank
                 CURRENT SPENDING ON AFRICA’s
             INFRASTRUCTURES ( in billion of USD)
                 Operation                                  Capital Expenditure                       Total
                 &Maintenance                                                                         Spending

Infrastructure         Public Sector         Public     ODA       Non-OECD         Private    Total
    Sector                                   Sector               Financiers       Sector

ICT              2.0                        1.3         0.0       0.0             5.7        7.0      9.0

Power            7.0                        2.4         0.7       1.1             0.5        4.7      11.7

Transport        7.8                        4.5         1.8       1.1             1.1        8.5      16.3

Water Supply     3.1                        1.1         1.2       0.2             2.1        4.6      7.7
& Sanitation
Irrigation       0.6                        0.3         -         -               -          0.3      0.9


Total            20.4                       9.4         3.7       2.4             9.4        25.1     45.6



                           Source: Africa Infrastructure Country Diagnostic, World Bank
        SPENDING NEEDS…..
• Needs far outstrip current spending

• Price tag: US$93 billion a year (about 15% of
  Africa’s GDP)

• 40% of spending needs are for power

• After power, water supply & sanitation, and
  transport are the most significant items

• 2/3 is for capital expenditure, 1/3 for
  operation and maintenance requirements
  INFRASTRUCTURE FINANCING GAP
     FOR AFRICA ( in billion of USD)
Infrastructure Total                             Total Current                  Financing Gap
    Sector     Spending                          Expenditure
               Needs
ICT              9.0                         9.0                                0.0

Irrigation       3.4                         0.9                                2.5

Power            40.8                        11.7                               29.1

Transport        18.2                        16.3                               1.9

Water Supply &   21.9                        7.6                                14.3
Sanitation
                 93.3                        45.6                               47.7
Total

                 Source: Africa Infrastructure Country Diagnostic, World Bank
  FINANCING GAP…………………
• 65% of current spending (USD29.8 billion out of USD 45.6
  billion) is from African taxpayers and infrastructure users

• 21% (USD 9.4 billion) is by private sector, mostly in
  telecommunications

• 14% is by external sources (ODA: USD 3.6 billion & Non
  OECD: USD 2.5 billion)

• Annual financing gap for infrastructure development is about
  US$ 48 billion

• Given recent spikes in oil prices and escalations in
  Infrastructure unit costs, these estimates may be low
 FINANCING AFRICA’S INFRASTRUCTURE
        GAP – Sources and Issues
• Harnessing efficiency gains
  Delivery inefficiencies : US$ 3.3 billion
   spent on ICT infrastructure ( private sector
   could provide)

  Execution inefficiency: only 2/3 of allocated
   budget absorption. US$ 1.9 billion could be
   saved in timely execution
HARNESSING EFFICIENCY GAINS...
 • Timely preventive maintenance could release
   US$ 2.4 billion spent on rehabilitation (roads)

 • Distribution losses, under-collection of revenues
   and overstaffing estimated at US$ 4.4 billion
   (energy & water)

 • Under-pricing power & water services: US$ 4
   billion in uncollected revenues

 Africa could save US$ 17 billion to reduce the
   funding gap to US$ 31 billion a year.
INCREASING PRIVATE PARTICIPATION IN
   INFRASTRUCTURE (PPI) PROJECTS :
         CURRENT SCENARIO
CAPTURE OF PPI ACROSS SSA
INCREASING PRIVATE PARTICIPATION IN
  INFRASTRUCTURE (PPI) PROJECTS
• Limitations for Africa’s ability to tap into capital markets
  (both global& domestic)

• Low sovereign credit ratings ( risks: political, commercial,
  technical and currency exposure)

• Local capital markets don’t have the depth and range of
  instruments to raise large long-term infrastructure financing

• Energy and Transport projects have very long pay-back and
  build-out periods: susceptible to political and regulatory
  interference

• Large long-term projects risk mitigatory factors are
  necessary to secure financing
    INCREASING PPI…………………
More issues:
• How should countries mitigate against exchange
  rate volatility for projects that earn local
  currency?

• How can the financial markets be reformed to
  better undertake large projects in power and
  transport?

• Could Governments offer more debts
  guarantees for PPPs to maintain debt
  sustainability?
 RAISING LEVELS OF LOCAL SOURCES
  FOR INFRASTRUCTURE FINANCING
• The biggest source of finance for Africa’s
  infrastructure is Africa itself!

• Institutional Funds:
   African Pension Funds estimated at US$ 40 billion

   Sovereign Wealth Funds are close to US$ 5 billion

    Issues: what regulatory reforms and institutional
    vehicles are required to unlock the liberal flow of
    pension and insurance funds into long-term
    infrastructure projects?
       LOCAL SOURCES…………………..

• Local Banks & Domestic Institutional Investors
     Local currency debt providers requires risk
        mitigation from official agencies
     Need for long-term financial instruments and risk
        mitigation vehicles

• Natural Resources for Infrastructure Development
      Introduce “SUPER PROFIT TAX” on windfall
       earnings from mineral resources…40+ mining
       countries in Africa!

• Establish more Commodity-Linked Debt Financing
  Instruments …(Standard Bank Group of South Africa)
WIDENING THE ROLE OF MULTILATERAL
       SOURCES OF FINANCE
• The World Bank Group

   IBRD & IDA: Financial support for both public and
    private sector projects
   IFC: Loans and Equity in private ventures only
   MIGA: Guarantee for foreign equity and debt
    investments to cover political risks


• The European Union (EU): Financial Assistance
  in support of Infrastructure Development
     MULTILATERAL SOURCES………

• The African Development Bank (AfDB)
   Finances national projects with regional spill over
    effects (eg THK, TAH)
   Lead in financing NEPAD Infrastructure Program;
    PIDA

• Limited contribution so far from The Multilaterals!

• AfDB being African, should take the lead role:
   Addressing the risk aversion of the private sector
   Develop domestic and Regional Financial Markets
   Promote Local Currency Bonds
   Support Local Development Banks Institutions
BROADENING BILATERAL SOURCES OF
            FINANCE
• South- South and Triangular Cooperation
  among Non-OECD economies

  Notably China, India and Arab States: US$ 8 billion in
   2006

  Concentrate on infrastructure that support natural
   resources extraction (power & transport)

  Integrated Natural Resources Development Strategy
   (eg Large mining precipitating hydro power Dam construction …. Electricity ;
    agricultural irrigation ; commercial fishing. Bulk mining export precipitate rail and
    port facilities development)
           SSC &TC………………

• Issues with SSC

  Highly discriminatory approach – narrow
   geopolitical economic interests

  Opaque deals and conditions: worries about
   the equity of the deals. Are the right economic
   values for natural resources being assigned to
   secure windfall benefits from high commodity
   prices?
THE AFRICAN INFRASTRUCTURE FINANCING FACILITY:
      EQUITY & RISKS MITIGATION VEHICLES


  Source of funds                    Infrastructure Fund                           Capital market

Government                                                                            Listing on
                                                                     Potentially   Stock Exchange
World Bank     Guarantees                Guarantees
                   Sub. debt
   DFIs\IFC        Guarantees             Senior debt
                                                                                   Local currency
  MIGA         Guarantees            Subordinated debt                              bond issue
  SWF          Equity                        Equity

                                                                            Pension Insurance Foreign
                                                                             funds     Co’s   investors


                                Independent fund manager

                             Infra-    Infra-    Infra-     Infra-
  Users of funds           structure structure structure structure
   July 24, 2008            Project   Project   Project   Project
         IN CONCLUDING…………

• Africa’s infrastructure financing deficit is
  huge, but can be bridged

• Sources of finance and measures
  indicated are more than sufficient to bridge
  the financing gap

• Creativity and political will required to
  unlock the sources
–Thank you