Every infrastructure development project has its Casablanca moment, when the authority shows up and asks his men to “round up the usual suspects.”
Instead of launching into a murder investigation, project managers are identifying and pricing risks—those dramatic complications that range from mildly annoying construction delays to the kind of catastrophic financial disasters that can destroy companies and ruin reputations. These unsavory characters keep managers, financiers, and consultants up at night, because they know that their entire careers might rest on seeing the unforeseen and managing it appropriately.
The newest genre
Mitigating risk is a key challenge in any country, but across the African continent—with several rapidly emerging markets for infrastructure investment among its countries—it requires a heightened sense of awareness. Private investment in Africa’s public infrastructure is growing, but it still has significant maturing to do. Currently a large share of Africa’s infrastructure is domestically financed, with the central government budget being the main driver of investment. However, governments in the region are increasingly seeing the need to bring new sources of funding to the table, and they understand the wider benefits private capital might deliver in its public services.
Following the resource boom of the past decade, there should be sufficient capital in Africa to support commercial infrastructure investments. Many countries in the region have seen this potential increase and offer investors an attractive pipeline of growth opportunities for developing public-private partnerships (PPPs). Critically, however, most countries also lack a significant track record. More countries operating privately-owned projects and concessions are needed to instill confidence and ultimately attract cheaper, more conservative international capital.
All things being equal, African PPPs have to work harder to reach financial close than similar projects in other parts of the world. While the gap between the more mature markets in Australia, Europe, and North America and those of emerging markets is narrowing—and probably is not as great as people might think—it clearly still exists for many investors seeking long-term certainty.
Political risk is the villain
This is where development finance institutions and foreign export credit agencies have a huge role to play in progressing African infrastructure. In a line-up of the usual suspects, the more sinister looking character is always political risk. While Development Finance Institutions (DFIs) and Export Credit Agencies (ECAs) offer a variety of wider benefits (and often cheaper capital), no product or aspect of their involvement is perhaps more important to foreign private investors than their ability to mitigate political risk. Investors do not want to be left on their own if things go wrong. They want to know that these important political institutions will stand behind them and facilitate a reasonable resolution with the local government or authority should a challenge need to be overcome.
This increased emphasis on having DFIs and ECAs involved in international projects is important in the current banking climate. DFIs and ECAs have been supporting infrastructure investment for decades, but they’ve not always been seen as essential. Eight years ago, international project finance banks aggressively operated in a competitive and liquid market where it was widely believed that if a deal could be done, it could be sold on. However, as the market tightened and syndication slowed, banks became far more conservative.
Suddenly ECAs and DFIs were in the spotlight again, and developers hoped they could help fill the finance gap left by the collapse of commercial debt markets. This trend, along with the emergence of more local capital funding, is at the core of new research Infrastructure Journal and the international law firm Baker & McKenzie have just published.
The plot thickens
At the heart of the story is Africa. No longer plunged in Joseph Conrad’s darkness, the continent is evolving so fast that external finance professionals can’t keep up. According to IFC, PPPs in Sub-Saharan Africa have increased from a half a project a year between 1992-2001 to two projects a year from 2002-2010; around seven to nine in 2011; and more than 30 in 2012.
Perhaps equally as telling is the migration of professionals. Traditionally, Africa’s indigenous talent might have left the continent seeking attractive opportunities in the more mature financial markets of Europe and North America. However, people interviewed for Infrastructure Journal’s report have commented on a reversal that sees not only African executives returning to the continent, but also native European and North American professionals attracted to the wide variety of development opportunities and the region’s long-term growth potential.
What is unfolding in Africa is dramatic. Although it is still not without turbulence, never has the continent’s future seemed so bright and optimistic. Private investment is happening in infrastructure, and it looks like the beginning of a beautiful friendship.
Just keep those usual suspects in check.