New research from global law firm Baker McKenzie with data provider IJGlobal shows that development finance lending from state-backed institutions is the most important component of infrastructure funding in sub-Saharan Africa.
Baker McKenzie notes that The battle for influence on the continent between Development Finance Institutions (DFIs) and Export Credit Agencies (ECAs) from China and the United States is set to heat up over the next decade in a fierce competition that could help the continent bridge its vast infrastructure gap more quickly than expected.
The report shows that survey respondents attribute the significance of DFI-lending in sub-Saharan Africa to the growing demand for infrastructure development and to the lack of availability of commercial funding for projects in the region, due to the perceived high risks associated with these investments.
The report further notes that China put US$8.7 billion in sub-Saharan Africa infrastructure projects in 2017 alone, while the US recently set up a new US$60 billion agency to invest in developing countries.
Wildu du Plessis, head of Africa at Baker McKenzie in Johannesburg, notes that the infrastructure investment landscape in sub-Saharan Africa has changed beyond recognition in the past decade.
“The continent still suffers from massive under investment. According to African Development Bank (AfDB), poor infrastructure has cost the continent a cumulative 25% in growth in the last two decades,” he explains.
“The World Bank estimates that the continent needs more than US$90 billion per year to begin bridging the infrastructure gap.
“However, in many African countries governance has improved, which has accelerated growth and will make investment easier.
“Africa’s GDP is expected to grow to 3.7% in 2019 and countries such as Ethiopia and Ghana, for example, have enjoyed some of the world’s fastest growth recently,” he continues.
The report shows how China has targeted sub-Saharan Africa in recent years, both in the context of its need for natural resources and as part of the Belt and Road Initiative (BRI).
Chinese policy banks loaned $19 billion to energy and infrastructure projects in the region from 2014-2017, almost half of which was in 2017.
China Exim Bank was the largest policy lender in Africa in the period 2008 – 2017 and China Development Bank was the second largest bilateral investor in this period, lending nearly as much as World Bank-linked multilateral agency International Finance Corporation.
“Against a background of a global geopolitical shift in trade relations, China has noted that it is looking to work with African countries in a participative and inclusive way.
“Chinese president Xi Jinping’s tour of Africa last year is proof of the increasing interdependence of the maturing but still fast growing Chinese economy and developing economies in Africa.
The relationship is seen to be mutually beneficial, China needs natural resources and new markets for its exports, and Africa needs funding for infrastructure investment which China is providing,” notes du Plessis.
Despite the prominence of Chinese investment, the US is also seen as a major player in infrastructure investment in Africa.
Some 32% of survey respondents said that they expected US-based DFIs and Export Credit Agencies (ECAs) to be the most active lenders into African power projects – a critical part of infrastructure activity – in the next ten years, while 29% of respondents said that they expected that China based DFIs and ECAs would be the most active in Africa in the next decade.
The US Power Africa programme reported recently that since its inception five years ago it has funded 80 transactions valued at more than US$14.5 billion that are now either online, under construction, or have reached final close. The programme remains fully funded.
Still, IJGlobal data shows that out of all DFI investment flowing into African power projects in the past ten years, Chinese lenders provided more than half of it, followed by multilateral development finance institutions.
US-based DFIs only contributed 3% of the funding.
The report notes that the decision by the US in October to turn the Overseas Private Investment Corporation (OPIC) into the International Development Finance Corporation and double its lending ceiling to $60 billion could significantly accelerate the race in Africa.
In addition the report shows that the US is reportedly concerned about the security implications of China gaining control of strategic assets as a result of unsustainable borrowing by some developing countries.
By increasing the flow of finance to Africa – and bolstering competition among DFIs – the new agency is likely to provide a boost to infrastructure activity in the region.
Yet despite the torrent of development finance lending from China, the US and others, sub-Saharan Africa’s infrastructure gap remains vast.