Unlocking private sector financing for job creating economic growth
Correspondent | Friday July 28, 2017 15:17
A number of years ago it was reported that six of the 10 fasted growing economies in the world were African states. Despite the reported and impressive economic growth record, African states face many challenges on their way to arriving as the new global economic forces. One of these challenges is infrastructure deficit across Africa. According to a 2009 World Bank report titled - “Africa’s Infrastructure: A Time for Transformation” - Africa’s annual infrastructure investment output stands at USD45billion.
The study suggested that this was not enough to bridge Africa’s infrastructure gap with other parts of the world. It is reported that only one in three rural Africans have access to an all-season road and one in five people in Sub-Saharan Africa have access to electricity. To address the infrastructure development challenges, the World Bank recommendation is for Africa to double the annual construction output reported in 2009 to USD93billion over a 10-year period to enable increased investment on power, transportation, water and Information & Communication Technology projects.
Another impediment to Africa being the new global economic force is the level of the continent’s Gross Domestic Products (GDP) and trade as a proportion of the World’s total for GDP and trade. Studies have found that although Africa constitutes 12% of the global population, the continent only accounts for 1 percent of the world’s GDP and two percent of global trade.
In my view, the low levels of Africa’s trade and economic output compared to other parts of the world and the reported infrastructure gap across Africa are what will cripple the continent and derail it on its cause as the rising star of the world economy. I maintained that the key to addressing the challenges of infrastructure deficit and the low economic output in Africa is financing. Given the public sector fiscal budget constraints, it is important that we urgently find ways of unlocking private sector finance to expand the fiscal space for infrastructure investment, boosting industrialisation and the fostering of manufacturing.
There is nothing – certainly as we look at it from a private sector perspective - that is a challenge for Africa which the private sector expertise, innovation and technology does not serve. Additionally, funding is not any issue in the private sector. I know from working with a number of development finance institutions across Africa - operating in the infrastructure project finance space - that the African financial service market is in a liquidity and capital strength position. Furthermore, the developed world is awash with capital. Insurers, sovereign wealth funds and pension funds are all looking for investments to suit their long investment horizons and return requirements.
Hence, it is evident that the lack of infrastructure investment, the under development of the manufacturing sector and the slow industrialisation pace in Africa are not driven by lack of capital, but by a lack of good projects. In this opinion piece, I am going to share my views - based on my experience as a Lender’s Technical Advisor for various financial institutions - on why a lot of projects structured to be funded via project finance never reach financial close, what is required to achieve project bankability and the role governments can play in de-risking investments, unlocking private sector funding and ensuring the flow capital into the infrastructure and manufacturing sectors.
Before an investor or financial institution embarks on a project, all aspects of the project must be carefully studied and documented as part of the investment appraisal process. The process typically involves undertaking a due diligence on the feasibility study of the proposed project.
A detailed feasibility study is essential to the lender’s because it will typically contain a number of key elements required for the investment appraisal process, including technical specification and design, environmental and social impact assessments, market study, financial and economic analysis, and legal, regulatory and institutional analysis. The quality and the detail on the feasibility study is what determines the success of project financing.
However, feasibility studies required to meet the conditions set by financial institutions to achieve financial close are costly, and in most cases good business ideas and projects do not come to fruition because of the prohibitive costs of project preparation i.e. undertaking a bankable feasibility study. In the context of infrastructure project finance – project preparation is the process of transforming a business idea into an attractive investment opportunity in the eyes of a potential investor.
Project preparation is an area in the investment value chain where governments can participate to unlock private sector financing in the infrastructure and manufacturing sectors. This is of particular relevance and importance to Botswana given our government’s aspirations for economic diversification. If we are to meaningful develop our manufacturing sector and boost industrialisation, our government should consider setting up a project preparation grant facility to provide the necessary funding and technical assistance for project preparation.
This will go a long way in creating a sustained pipeline of bankable projects and attracting private sector finance in our infrastructure, manufacturing and industrial projects – not only from domestic sources but also from regional and international financial institutions.
The proposed project preparation grant facility will not only be a catalyst for GDP upsurge and job creating economic growth - it will also reduce our import bill as unlocking private sector financing will enable us to grow our manufacturing capacity and develop industries that will produce most of the goods we import. A unit can be established under the Ministry of Investment, Trade and Industry to manage the implementation and take custody of the project preparation grant facility.
The grant facility can also be extended to investments on research and development to ensure the identification and commercialisation of innovation that is prevalent amongst Batswana. If well planned and sufficient investment is made on institutional capacity building, the proposed project preparation grant facility can set a new economic trajectory for our country and will go a long way in realising the aspirations of our citizen economic empowerment policies.
There is an abundance of private sector capital waiting to be poured into our infrastructure projects and the manufacturing sector to enable industrialisation and job creating economic growth – all that is require is a pipeline of good projects. We need to unlock private sector financing by creating a grant facility that will assist in turning good business ideas into de-risked and bankable projects that are capable of attracting competitive interest in the financial service market. It’s time to open the floodgates.
*Batho Mohwasa is a chartered Quantity Surveyor working for Mott MacDonald Africa (part of the Mott MacDonald Group) as a Senior Advisor – Transaction Advisory and PPP. He has experience in Public Private Partnership (PPP), Lender’s Technical Advisory and Construction Commercial Management. He writes in his personal capacity.