Issue 114 • 18 May 2007

AfDB can help to raise impact, reduce hype of infrastructure funds

The African Development Bank is sharpening up its act under president Donald Kaberuka, showing renewed interest at its annual meetings in Shanghai this week in both infrastructure development and supporting fragile resources producers, as well as such hot policy issues as further strengthening China-Africa links. The apparently reinvigorated pan-African bank is aiming to work with a new generation of private financiers, as well as its traditional partners, in maintaining the pace of the continent’s six-year economic upturn. This commitment to partnering with private capital is being reflected in a growing number of operations, notably the AfDB’s recent $51m commitment to the new Pan-African Infrastructure Development Fund (PAIDF) (AE 113/18).

Private investors are looking to attractive margins from instruments like the Mauritius-registered PAIDF, now in its first $450m capital-raising phase. The AfDB said the 15-year equity fund – led by South Africa’s biggest pension fund Public Investment Corporation, with Development Bank of Southern Africa, SA utility Eskom’s pension fund, and insurers Sanlam and Metropolitan – was looking to raise a total $1bn over eight years, which could catalyse additional investments of $9bn-14bn. The AfDB has commented that it “could represent an attractive investment opportunity”, with a targeted 15% return on equity. Plans include going out to the international investor community for the PAIDF’s second phase funding.

The need for major new infrastructure financing is beyond doubt and commercial funders, as well as multilaterals and bilateral development finance institutions (DFIs), are keen to support a new generation of project finance instruments, which are expected to include Nigeria’s planned project bonds. These are planned to be launched on the Nigerian capital markets in a move to help to soak up the rising liquidity from Nigeria’s pension fund industry.

Money is available and wants a place to invest; the demand is there with Africa crying out for infrastructure. But can supply and demand be brought together in a coherent manner, in African markets that so often seen to defy economic logic?

The performance of infrastructure-focused funds so far has been discouraging. In African Energy’s recent canvassing of leading funds, few executives were prepared to discuss specifics such as performance to date. “Hedge funds and investment banks are piling in because they want the sort of margins Africa can offer,” said a banker who declined to be identified: “Whether the capacity’s there is a very different question.” Very limited information is available, but sources suggest the performance of established suppliers of capital such as the AIG African Infrastructure Fund, Emerging Africa Infrastructure Fund (EAIF) and New Africa Infrastructure Fund is lacklustre. EAIF has recently admitted to an embarrassing level of spare liquidity – although a new loan in Tanzania, reported in Power above, will help – while the AIG fund has grown at a slow pace since its inception in 1999.

“Plenty of finance is available for new projects if these projects can be moved along,” said a senior investor source: “The DFIs generally have plenty of money that they would like to invest, but there is a lack of well-structured, creditworthy opportunities.” The executive was sceptical about PAIDF too: “It’s a [New Partnership for Africa’s Development] Nepad initiative – and most of these are mega-projects that sound good to politicians, but never go anywhere.” Clearly, there is demand for well-structured deals, which means starting from the planning stage, where too many African states still lack the capacity to lead their own developments or stand up to dizzying external and domestic pressures.

A revived AfDB can help to improve this situation. Since Kaberuka assumed the presidency, in September 2005, the bank has looked to substantially increase its operational capacity, by increasing its flows of loans and credits, and providing technical assistance and other knowledge-based support. According to vice president for sector operations Zeinab El Bakri, this will include greater focus on resource-rich but fragile states, where the AfDB is developing a new strategy that could include creating a “rapid response advisory facility” to help projects get off the ground, and even seconding experts to help under-resourced governments better negotiate with multinationals.

A more dynamic bank focused on the continent can also push national and regional infrastructure projects. The AfDB is hosting the new Infrastructure Consortium for Africa (ICA) secretariat, intended to synchronise projects that will be jointly financed by G8 countries and DFIs. China is being brought into this process, having attended its first ICA meeting in January as an observer.

It is also supporting traditional projects such as the Benin-Togo power interconnection, whose final AfDB loan agreement was signed in Shanghai on 17 May. By buying into the PAIDF, the pan-African bank is now positioning itself as a player in the next generation of public/private initiatives to help get Africa over its infrastructure deficit while keeping an eye on the bottom line.

If the bold words expressed during the AfDB’s excursion into Asia do not flatter to deceive, it will be good to see the senior African DFI starting to punch at its weight in the heavyweight contest to rebuild the continent.

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