Private finance key for projects

Africa's infrastructure development needs to go full-steam ahead to keep pace with its population boom and rapid urbanization, experts say, and the continent is eyeing Chinese private investors to inject such robustness into the lucrative sector.

At least 85 percent of Chinese investors in Sub-Saharan Africa are private, but few are engaged in building roads, energy facilities, ports and railways. Instead, they have settled into manufacturing.

"The infrastructure boom in China attracted the participation of public and private enterprises," says Tanaka Chitsa, an economist working in Zambia. "Efforts to scale up globally and competition have resulted in China producing some of the largest contractors and engineering companies in the world. Their entry into Africa will definitely transform the landscape."

The cost of addressing Africa's infrastructure needs will require about $93 billion a year, about one third of which would be for maintenance, according to a 2010 World Bank report titled, "Africa's Infrastructure: A Time for Transformation."

"This is more than twice the commission for Africa's 2005 estimates," the report says, adding that profit margins for developers are high due to lack of competition.

Chitsa says that "unlike local and other foreign private investors, Chinese entrepreneurs can leverage from their ability to access cheap loans back home. Their entry into other mature markets such as Europe and the United States has seen them buy into turnkey technology that can accelerate the development and completion of projects in Africa."

In January, China's Ministry of Commerce announced that in December, direct outward investments had reached $42 billion. According to the ministry's department of outward investment and economic cooperation, Chinese enterprises made a direct investment of $14.53 billion in countries participating in the Belt and Road Initiative

The United Kingdom is set to receive $133 billion to improve its infrastructure by 2025, according to a report by the international law firm Pinsent Masons and the Centre for Economics and Business Research. This could lead to joint ventures between UK and Chinese companies.

Unlike Africa, however, Europe and North America have attractive factors such as innovative and dynamic technologies, well-managed companies that are asset driven and, above all, stability, which ranks high among Chinese entrepreneurs, the report says.

This cannot be said about Africa. During a regional think tank conference in Nairobi, Kenya, Zhu Weigong, a researcher at the Institute for West Asia and African Studies at the Chinese Academy of Social Sciences, says a survey found that 81 percent of Chinese companies in Africa identify political uncertainty as their biggest barrier, followed by 61 percent who cite poor knowledge of African laws.

"About 60 percent of Chinese people in Africa interviewed say the laws are complicated, while 61 percent identify insecurities such as armed robbery as a barrier to their operations in Africa," says Zhu.

This is in addition to challenges facing existing players. According to Oliver Andrews, the executive director and chief investment officer of Africa Finance Corp, a Pan-African multilateral development finance institution based in Abuja, Nigeria, existing players face long periods of negotiation.

"From concept to development, an average of seven years is spent. This includes feasibility and negotiating with various stakeholders, particularly different government ministries," says Andrews, adding that the developer must harmonize different government objectives, an issue that consumes time and money.

The situation has led to demands by developers to be paid project development fees before financial closing and at levels commensurate to the risk taken by project developers. They want legislation related to this.

They say this would bring more players and much-needed finance into the sector, and they believe such payments would compensate for the lock down during the implementation period that is discouraging investors.

Kodjo Afidegnon, senior business development manager at InfraCo Africa Ltd, says that "longer negotiating time is killing deals, something Africa cannot afford any longer".

But financiers believe these engagements are long term and that paying the developers early would be akin to sabotaging the project before it is sustainable.

Other challenges include lack of government capacity to develop bankable projects and negotiate with investors; policy uncertainty; weak regulatory environments; and significant budget overruns experienced by the private investors.

"I think this is why we see only the Chinese State-owned enterprises playing a major role in Africa's transport and energy subsector," says Robert Kagiri, the director of the Center for Strategic Policy Management at the Africa Policy Institute, a think tank in Nairobi. He says most government-led projects enjoy a sovereign guarantee, which boosts confidence.

"Cooperation agreements such as those made during the Forum on China-Africa Cooperation are binding. It also ensures that participating governments implement programs according to agreement, paving way for policy and regulation reforms," he says.

While pledging $60 billion toward the implementation of developmental programs in Africa, China and Africa agreed to undertake concrete measures and give priority to encouraging Chinese businesses and financial institutions to expand investments. Among the strategies proposed were public-private partnerships and build-operate-transfer use.

Amos Phiri, a transportation expert at the New Partnership for Africa's Development, says that several transportation and energy projects under the Program for Infrastructure Development in Africa are spelled out under the Belt and Road Initiative.

To unlock private investments, Phiri says, the continent is pursuing innovative strategies to increase projects while reducing project delivery cycles. This means strengthening the capacity of institutions, promoting transparency in the procurement process and building strong mechanisms for engaging private players to ensure that interests are mutually aligned.

"I believe that Africa needs to pursue new models to insulate private players against risks. We are aware that some governments are favorably leaning toward accepting unsolicited bids, which is preferred by the Chinese, and therefore we plan to launch capacity-building programs to actually support them to manage this strategy. We are targeting both the project sponsors and regional economic communities to boost their abilities in making informed decisions," says Phiri.

The New Partnership for Africa's Development recently brought 12 projects into the market. They require $13 billion in investment spanning nine African countries: Benin, Burundi, the Democratic Republic of the Congo, Kenya, Niger, Rwanda, Tanzania, Zambia and Zimbabwe.

Phiri says that the projects have received favorable feedback from Chinese private investors. "In a recent investor conference, we received a large Chinese delegation. Their questions touched on regional stability and industrial master-plans being implemented by host governments."

A report by the Bolston Consulting Group and Africa Finance Corp demands bolder action.

It says legislation is needed to provide a more predictable investment environment for private investors. "South Africa, Rwanda, Botswana and Mauritius offer good examples of advanced and robust regulatory contexts," the report says.

The report, released in May, also calls for a clear plan for implementation. "Infrastructure that is difficult to make economically profitable should be the responsibility of governments and development partners, infrastructure that is financially viable with appropriate tariffs in place should be the responsibility of private investment via concessions or (public-private partnerships), and infrastructure that is marginally profitable, but not enough to justify a purely private investment, should be handled either through the use of PPPs or via (operations and maintenance) contracts," it says.

Developing and launching cross-border infrastructure is also gaining traction among Chinese investors, says Matia Kasaija, Uganda's finance, planning and economic development minister. "The Chinese are interested in projects that promote regional integration, as this not only opens up markets and makes the project sustainable, but also shortens the period when an investor breaks even," he says.

Kagiri, the director of the Africa Policy Institute's Center for Strategic Policy Management, says Chinese private entry will rein in rising national debts that are already bordering on unsustainable levels. It also will "increase competition, driving down costs while increasing employment opportunities for the locals", says Kagiri.

However, former Nigerian president Olusegun Obasanjo says that for all this to be attainable, Africa has to work on building a peaceful, stable and integrated continent.

lucymorangi@chinadaily.com.cn