At the height of the bull run that preceded the global
crisis, funding for frontier markets was in ample supply.
Western banks would blithely extend credit to African projects,
while the continents infrastructure financiers, without
other viable domestic long-term borrowing prospects, courted
foreign capital, taking out loans from global commercial
lenders and, where possible, issuing debt in capital markets to
fund their projects.
For a time, the credit boom led to a widespread belief that
Africas infrastructure challenge could be met by private
capital, the bulk of it foreign.
Just two years later and any residual notions that
Africas private-sector investment drive will somehow
remain supported by foreign capital have been dashed. The
higher cost of bank capital globally and risk aversion among
foreign lenders has undermined the investment case for many
projects, while those with high up-front construction costs and
lower margins are being snubbed as competition between global
banks falls away.
According to the latest data available from the World Bank,
just three projects closed in sub-Saharan Africa in the third
quarter of 2009. This brought total activity in the region in
the first three quarters last year to 13 projects, with
investment worth $1.4 billion, down 34% over the same period in
While western banks wake up to a tough new world of tighter
regulation and expensive credit, analysts dont expect
their appetite for frontier project finance to return any time
soon. Before the crisis, banks funded themselves largely
from short-term money markets and used that capital to lend
long term. But that link is fundamentally broken now and
hit project finance heavily, notes the head of project
finance at a Japanese bank.
Simon Jackson, syndication and co-financing officer for
AfDB, says: The next round of regulation is likely to
require banks to match more closely the tenor of their assets
and liabilities, which would have serious implications for
The western project finance market with its high
degree of leverage and sometimes slack covenants was one
of the casualties of the global crisis. But the irony is that
African project finance, in contrast, has remained relatively
resilient, says Chris Sutcliffe, Standard Chartereds
regional head of project finance syndication for Europe, Africa
and South Asia. Credit structures remained generally
robust, without ever becoming racy or stupid, so there has not
been a need for dramatic tightening [of credit
That said, Sutcliffe notes that higher liquidity premiums,
tighter credit standards and the greater bargaining power of
lenders over developers and public clients have conspired to
increase costs and transaction times.
Credit departments are more thorough, and it takes
more time to get through. Before, if we were mandated lead
arranger we could get responses from other banks within four
weeks. That has now tripled to three months, he says.
The crisis has intensified Africas reliance on
multilateral lenders in the face of dwindling private bank
participation. Bill Appleby, Citis head of infrastructure
and energy finance for Europe, Middle East and Africa, says:
The most significant change to the project finance market
has been the reduction in the number of players and consequent
reduction in capacity.
A lot of banks have struggled through 20082009,
and now they have more aversion to committing long-term
capital. The multilateral agencies and export credit agencies
are more important.
Those banks with project finance experience and balance
sheet strength now have a competitive edge. As the 2008
crisis rolled on, Standard Chartered dished out $300 million
in Islamic project financing for a container terminal at
Djiboutis main port, with the backing of Gulf banks, the
AfDB and Proparco, a French development agency. Meanwhile, the
World Banks Multilateral Investment Guarantee Agency
provided insurance, establishing the framework for a new,
lucrative source of financing to Africa in the form of
Shariah-compliant project lending.
The African Development Bank and International Finance
Corporation [IFC] have stepped up to the plate when the
commercial banks largely withdrew to their home markets. We are
still there and hoping to do more, says Jackson at the
AfDB, buoyed by an expected three-fold increase in its capital
Meanwhile, the IFC last month agreed to invest in a $100
million Africa Infrastructure Investment Fund. This equity fund
plans to raise $600 million$1 billion in unlisted equity
and equity-like infrastructure investments, including toll
roads and wind power farms, the IFC said.
But elsewhere, the headline figures for development finance
institutions (DFIs) are disappointing, according to Dirk Willem
te Velde, economist at the Overseas Development Institute. He
says part-privatized western DFIs reduced their investments
last year and failed to offset the decline in western bank
finance. FMO, a Dutch public-private development bank that
finances infrastructure, saw a 30% decline in new investments
in 2009, while UK government-backed Capital for Development
(CDC) cut back new infrastructure investments by 15%.
And oft-cited angst over bureaucratic inertia at development
banks continues to weigh on the market. Says Citis
Appleby: Multilateral finance is available; but its
a long and tortuous process to make that capital available; it
is possible if you are willing to do the work and go through
Against this backdrop, Chinese state-owned banks have
smashed into the market to provide concessional lending to
projects that favour Chinese developers from
Nigeria to South Africa. Chinese financing is channelled
through the countrys international lenders, including the
Export-Import Bank of China, which accounts for three-quarters
of the countrys infrastructure finance to Africa,
according to the World Bank. The financial support is typically
tied to the participation of Chinese contractors and offers
loans in which repayment takes the form of natural resources.
Since Chinas avowed push in 2006 to ramp up lending to
Africa, a burst of headline-grabbing promises from Chinese
leaders has buoyed the market. Most recently, China in November
said it would offer Africa $10 billion in concessional loans
over the next three years.
In January, China announced a flurry of infrastructure deals
on a whirlwind tour of the continent, including a $7 million
grant to Kenya. The east African nation said at the time the
loan would be used to develop a second port in Lamu to connect
the country with Ethiopia, Rwanda and southern Sudan
which would provide a route to export Chinese-funded oil
supplies in the conflict-ridden state.
The frenetic pace of this type of Chinese lending
which has sparked fears that debt sustainability, governance
and environmental protection in the continent could be
undermined is a boon for Africas project-hungry
policy-makers. Whats more, its unlikely to crowd
out traditional financiers and could even induce private
sponsors, says Riaan Meyer, researcher for a China in Africa
project at the South African Institute of International
Chinese financing and government involvement are akin
to multilateral agency support banks welcome them.
Instead of crowding out the market, they add to the credibility
of the project, says Meyer.
But even if Chinese lenders continue to step up their
funding, the continents needs remain vast. According to a
ground-breaking World Bank study last November, the
regions decrepit infrastructure electricity, water
supply, roads and information and communications technology
cuts national economic growth by 2% every year and
reduces business productivity by as much as 40%. The study
estimates that $93 billion is needed annually over the next
decade twice more than previous estimates. Almost half
of this amount is needed to address the continents
current power supply crisis.
According to Katherine Sierra, the World Banks
vice-president for sustainable development, only one in five
Africans has access to electricity while 30 countries typically
face blackouts due to a lack of generating capacity. As a
result, regional solutions are urgently needed for water and
transport, she says.
Promisingly, the World Bank study found that a number of
efficiency innovations could expand available financing
resources in Africa by $17 billion. But the aggregate annual
infrastructure investment target amounts to roughly 15% of the
continents gross domestic product (GDP) a tall
order given Africas illiquid banks and capital markets.
Whats more, a large portion of funding is needed to
finance electricity, power and water infrastructure in fragile
states. As a result, Chinas infrastructure investments,
which primarily focus on resource extraction, cannot plug the
regions vast infrastructure deficit.
Bank finance is urgently needed to fill the hole in the
heart of the continent. Natural resources investments, which
are driven by hard currency revenues, remain the focus for
western commercial banks and Chinese lenders. Meanwhile
telecommunications which has seen a boom in the
continent offer transactions with shorter tenors, since
profits and payback can be fast, say bankers. But roads, ports,
railways, water and electricity have proved harder to finance
due to poor regulatory regimes, limited deal flow and the
length of the concession life.
Whats more, projects such as sewage or power plants
frequently require international hard-currency financing to pay
for foreign equipment. But such projects typically generate
local currency revenues. As a result, the familiar emerging
market risk, whereby lenders face a currency mismatch between
their assets and liabilities, is creating havoc and
requires battle-weary bankers to knock on the doors of
multilaterals. Citis Appleby says: Project
financing of domestic infrastructure in Africa, such as a power
station or other project funded by domestic income streams, is
almost certain to require support from multilaterals or export
And therein lies the problem. Unless Africa mobilizes
domestic finances and raises funds globally, a prolonged
reliance on multilateral banks will torpedo the regions
ambitious infrastructure investment drive.