Making policies work

GREAT insights Magazine

Closing the Infrastructure Gap

A Three-Pronged Approach

June 2013

Engel, A., Nelli Feroci, L. 2013. Closing the infrastructure gap: A three-pronged approach. GREAT Insights, Volume 2, Issue 4. May-June 2013. Maastricht: ECDPM

Even as crews put the finishing touches on newly built roads, ports, and power stations across Africa, the continent’s people and its growing economies are demanding more. Africa’s recent rise is highlighting — even deepening — long-standing structural problems, with infrastructure growth failing to keep pace.

The reality in many African cities is congested roads, a lack of clean water, and frequent power outages. Most of Africa’s population has no access to electricity at all. Overcoming the obstacles is also one of the keys to helping the private sector reach its potential in creating jobs, raising incomes, and improving lives. The World Bank estimates that $93 billion in annual investment in infrastructure is needed — an amount that is more than double the current rate of spending.

While often primarily the domain of government, infrastructure is also an area where the private sector can have a vital impact, providing essential services to large numbers of users, efficiently, affordably, and profitably. Private investors have brought in the capital, technology, and management expertise needed to improve the performance of high-priority infrastructure assets — giving large numbers of people their first access to electrical power, clean water, or improved transportation and communication. When incorporating high standards of environmental and social sustainability, such projects can have a great impact without depleting the fragile ecosystems on which we all depend.

The demand for such projects, and the financing needed to make them a reality, is enormous. No one institution can begin to meet it alone. Partnerships are essential as is a multi-pronged approach that tackles the many challenges involved. IFC works with its partners on every stage of the process, advising governments on structuring public-private partnerships (PPPs), supporting its clients in the preparation of new ventures, and financing projects and mobilizing resources from a wide variety of sources. In the fiscal year 2012, IFC funding for infrastructure and natural resources projects in Africa surpassed $1 billion for the first time.

Paving the way

Much of our emphasis is on structuring and introducing PPPs to improve the delivery of basic services. Developing projects requires time, effort, experience, and the ability to get the right balance between private and public interests. IFC has successfully counseled African governments, including local municipalities, on ways to engage the private sector in essential public services, and on how to restructure state-owned enterprises.

We supported Africa’s first successful airline privatization, improving transportation across the continent since the Kenyan government sold a controlling stake of its airline to KLM, and received more than $70 million. We advised the Kenyan government throughout the privatization process. IFC approached a total of 154 airlines, resulting in four major international carriers showing serious interest. The success of this joint venture led to the doubling of passenger traffic and cargo between 1995 and 2003 and a boost to tourism in the country.

Removing early stage obstacles

One of the major constraints private investors face in infrastructure projects in the world’s poorest countries is the limited availability of funds and experienced professionals dedicated to project development. To tackle this issue, in 2008 we established the InfraVentures $100 million fund to provide risk capital to finance the early stages of the development of infrastructure projects, as well as expertise in critical areas of project development. The fund therefore allows us to successfully bring both private and PPP infrastructure projects to the financing stage. Half of IFC InfraVentures’ resources are expected to be devoted to Sub-Saharan Africa.

In Mali, IFC and Scatec Solar are looking to develop 60 MW of solar power of which Mopti (10MW) is the first step. InfraVentures supports the company in the preparation of project documents, including the Concession Agreement and the Purchasing Power Agreement. Additionally, it will finance the Environmental and Social Impact Assessment in compliance with IFC’s Performance Standards. IFC co-development will result in a lower power sale price compared to the price of the current diesel-generated power in the off-grid location where the solar plant will be located and in the relief of pollution currently caused by the plant.

Financing the most difficult ones

Even once the regulatory aspect and the structuring of infrastructure projects are dealt with, some investments have difficulty in attracting financing. IFIs and donors can play a critical role in facilitating investment for those projects, in particular when they promise a positive social impact. Blended finance plays a key role in this context.

In 2012 in South Africa for example, IFC supported Abengoa’s 50MW concentrated solar power project by providing $72 million in financing and by coordinating $229 million in parallel loans from five Development Finance Institutions. Additionally, it blended $15 million in concessional financing from the Clean Technology Fund, which provided lower interest rate financing to enable climate related projects to proceed. The investment created over 300 jobs and 174,000 metric tons per year of GHG emissions are expected to be avoided, the equivalent of taking 35,000 cars off the road each year.

Infrastructure can be a vector of change in addressing some of the most systemic development challenges of today’s world. There is an urgency to work hard to close the infrastructure gap. Governments and the private sector need to work hand in hand to improve the delivery of services for their citizens; IFIs and donors can facilitate this task by supporting the different stages of the process.

Andrea Engel is a Representative, International Finance Corporation Brussels. Lorenzo Nelli Feroci is Program Analyst, IFC Brussels. 

This article was published in Great Insights Volume 2, Issue 4 (May-June 2013)

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Economic Transformation and TradeBusiness and DevelopmentDevelopment Finance and TaxationInfrastructurePrivate sectorPublic Private Partnerships (PPPs)Africa

External authors

Andrea Engel

Lorenzo Nelli Feroci