African Infrastructure Rising
African infrastructure projects require project preparation to make them bankable. Currently, Africa can define the rules of engagement and take advantage of the infrastructure boom for its own economic prosperity.
This is an exciting time in Africa's history. Africa is now more connected to global markets than before with massive urbanization driving the development of economies. Investors see the continent's linkages to the markets of Europe, the United States and emerging markets like Brazil, China and India. This places Africans in a strong position where African countries could identify areas requiring development, define the rules of engagement and define the benefit of their partnerships their collaborations, and trade and investment in goods and services.
Africa is doing that through the creation of comprehensive development plans such as the African Union's Vision 2063, the Southern African Development Community's 2027 plan and the proposed development of a Tripartite Regional Economic Community plan for 26 countries from South Africa to Egypt. Interaction with international investors and development partners has become focused on what Africa needs rather than what investors think Africa needs.
One such area that has shown significant improvement in the last five years is the infrastructure sector. Across Africa, infrastructure is growing at a rapid rate with roads, ports and ICT infrastructure gaining the most traction. Rail still lags behind but is gaining ground as the costs of transport drive the choice of the mode of transport for users, and transportation costs for rail have decreased over time as the cost of road transport increases. Overall, transport costs are expensive in Africa for many reasons, among which are long overland distances and poorly maintained infrastructure, a lack of harmonisation of regulations and policy between countries and long processes and corruption at border posts.
On a positive note, infrastructure on the continent is being highlighted, financed and developed faster in a more cohesive way than before. We hear about inter-connectivity between countries and regions to boost intra-African trade and to open up landlocked countries to regional and world markets. It is now necessary to identify the infrastructure projects that will facilitate regional trade and add value to our economies. Thus far, our economic growth has relied on the export of mineral-based and agricultural commodities that have not been beneficiated. If we continue to do so, we will remain at the bottom of the economic ladder.
The Development Bank of Southern Africa, like other development finance institutions, has become more focused on value-add infrastructure that could promote regional integration and economic development. We recognize that due to the economic crisis, our investments have to have high development impact, add value to commodity-based extractive industries and provide infrastructure that will improve intra-African trade and regional integration. Industrialisation, the next step to Africa's growth trajectory, requires joint planning and development through collaboration amongst developers and financiers for real results and broad- based economic growth.
For this reason, the DBSA is looking for infrastructure projects that will meet the needs of the continent. But the main difficulty we face is that projects are not ready for finance, or what we refer to as not being 'bankable'. The onus then lies on the sponsors, with the assistance of DFIs and donors like the World Bank, to prepare projects for investment. Project preparation usually costs between 3 - 5% of total project costs, which could be unaffordable especially for transnational development corridors such as the North South Corridor, Walvis Bay Corridor, the Dakar to Djibouti Corridor, among others. These projects require significant project preparation finance that would need to be cobbled together from various project preparation facilities (PPFs), each with their own criteria and regulations.
What is needed is the consolidation of PPFs and a streamlining of regulations that will facilitate preparation finance. Without this process, financing institutions such as the DBSA will continue to search for projects that are bankable. Fortunately, there are a number of initiatives that have begun to look at creating PPFs of sufficient scale to address the project predation backlog. For example, after the 2013 World Economic Forum summit in Cape Town, the African Development Bank with NEPAD and the World Economic Forum is in the process of exploring Early Stage Project Finance and Transnational Project Management that would assist in the development of projects. SADC is also looking at strengthening its Infrastructure Project Preparation Facility (IPPF), which the DBSA manages and hosts.
It is still premature to determine the scale of these facilities or how well they will function in the region. Suffice to say, this is a timely response to a need that is growing on the continent. Projects abound, development and investment finance is available, but projects that need to be made bankable need more support. In addition to this process, African RECs need to be strengthened and capacitated to make binding decisions. Political will is important in the identification, support and development of projects. Without the championing of projects by our leaders, projects will remain in a concept stage, not be realized and regional integration will continue to be hobbled by missing infrastructure links. That said, many stakeholders working in infrastructure development are more positive about the future of infrastructure development on the continent than ever before.
Dr Michele Ruiters works in the Regional Programme at the Development Bank of Southern Africa.