Many private sector early-stage funders of infrastructure in African countries are forced to eventually walk away from projects because it takes up to five years to negotiate, Alastair Herbertson from the Emerging Africa Infrastructure Fund said yesterday.
Speaking at the Infrastructure Africa Conference held in Cape Town yesterday, he provided some insights from a private sector funders’ point of view about investing in infrastructure projects on the continent. Most African governments, including South Africa, admit they do not have the money to develop sufficient infrastructure and they will need to attract private sector funding to deliver services to their populations.
Herbertson said the global financial sector was “awash with cash” for investment, but very little of this was going towards investments in Africa.
He said that often over the long period of negotiations with governments, the private funder had to fund salaries and jobs associated with the funding of the project, and such a long time elapsed that it also often became essential to redo the feasibility study of the project in question.
All of this added substantial costs and risks to the potential investor in the project, he said
Herbertson said also there often seemed to be misconceptions about the role of private sector funders and “for as long as we prevent early-stage capital from getting a return on a project, we won’t see any capital coming to the continent.”
He said funders also often did not understand the political environments of the African countries concerned when it came to infrastructure development, and this often saw funders involved in negotiations for three to five years with no success at the end of it. The operating environments in many African countries were also difficult for global funders.
Development Bank of SA representative, Mohan Vivekanandan, said typically countries invest about 6% to 8% of GDP on infrastructure, and while South Africa was close to this, substantial investment in African countries was required to get anywhere near these percentages.
He said about 40% of the DBSA’s annual funding went on projects across South Africa’s borders. He said it was important to realise that if governments’ paid for projects, the money needed to be repaid in the form of higher government debt, while private sector investors required a return on their investment.
Ryno Verster of IPEX Bank, a funding unit owned by the German government, said they typically viewed a decision to participate in an infrastructure project by assessing the risk involved, and they assessed projects from all over the world such as in the Asia Pacific region, where risks on these projects were very low.
He said sovereign risk ratings in African countries tended to fluctuate more frequently than other countries, raising the cost of capital and levels of uncertainty. Infrastructure typically took a long time to develop, and often in African countries, there was political risk associated with the project as a result.
There was also often too high expectations from African governments about the levels of operational risks that private funders and developers would need to take on projects, issues that could easily be resolved by a proper negotiation, he said.
Vivekanandan admitted that “there are a lot of hurdles to cross” when accessing DBSA funding, but this was because the organisation did not have a great deal of capital to invest and it wished to see that capital invested in the right projects.
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