Webinar Report & Playback: The Infrastructure Financing Trends in Africa
On July 2nd, 2020, the Making Finance Work for Africa (MFW4A) partnership, the Infrastructure Consortium for Africa (ICA) and TCX Fund hosted a webinar on “The Infrastructure Financing Trends in Africa” based on the ICA’s annual flagship report titled “Infrastructure Financing Trends in Africa (IFT) - 2018”. The session was a follow-up to a previous webinar held on, February 7th 2020 which outlined how financing was spread between regions and sectors, explored the different sources of financing and identified sectorial challenges specifically in the water and transport sectors.
The 2018 IFT report suggests that financing of infrastructure in Africa has never been as high as in 2018 when it reached $100.8bn, (24% higher than in 2017) and thus passing the $100bn mark for the first time. However, even with the significant increase in commitments in 2018, there remains a total financing gap of $52bn to $92bn per year. This second webinar aimed to discuss possible reasons why the financing gap persists, highlight the effects of currency mismatch issues on infrastructure financing and discuss potential solutions, and provide additional/new viewpoints to improve the study into Africa’s infrastructure financing.
Although African governments contributed approximately 37.2% ($37.5bn) towards Infrastructure financing in 2018, there is a need to do more. In addition to the need for increased public funding, funding by the private sector is expected to help narrow the financing gap. The private sector is already quite involved in ICT and in electricity, with a strong focus on renewables (solar, wind), and in some dimensions of transport (airports, ports). However, the challenge of financial sustainability is a major obstacle to its stronger participation. One of the constraints to increasing private sector financing is currency mismatch issues.
To be economically and financially viable, infrastructure projects require long-term capital often raised in foreign currencies, however the revenues are typically collected in local currency, hence creating currency mismatches and long-term foreign exchange risk. This phenomenon increases the risks and cost of infrastructure financing. This is without mentioning the risk of currency devaluation, which can in some instances lead to the collapse of projects.
Therefore, infrastructure, including energy, should be financed in the same currency as the revenue that it generates. Utility sectors in particular, should not be exposed to currency risk; it is incompatible with their mandate to deliver a stable utility service. The supply of local currency in African markets has dramatically widened and improved over recent decades. Domestic capital markets to some extent, but even more so international hedging and lending markets, can support local currency infrastructure finance in all required volume and tenors. Governments and developers have the choice to finance infrastructure in their own local currency, from domestic and international sources. Making that choice will lead to more financially sustainable and more reliable infrastructure.
The Q&A session included questions regarding the impact of the COVID-19 crisis on infrastructure financing markets and on currency values and local currency markets as a whole, in particular in emerging countries. The panelists were also able to elaborate on the role African commercial banks and governments can play along with development institutions to address local currency issues.
Carvalho De Melo Epifanio _ The Infrastructure Consortium for Africa (ICA)
Per Van Swaaij, SVP Structuring _ The Currency Exchange (TCX) Fund
Olivier Vidal, Financial Sector Advisor _ Making Finance Work for Africa (MFW4A)
A copy of the 2018 IFT report can be downloaded below:
The recording of the webinar is available below. The presentation slides are also available here.