It was Klaus Scwabb who once observed that when it comes to Africa, the pendulum seems to have gone from a moment of high hopes and optimism, to despair, and back to ebullience. A term was even coined in the 1990s, they called it "Afropessimism." All in one generation! No, I am not here for that debate. I am here for something different.
Africa: a complex mosaic
It has taken sometime for the lexicon, classifying countries in the World into two distinct groups: developed and developing to give way to a more meaningful classification which recognizes a much more complex multipolar economic structure. Ideally the same ought to happen vis a vis Africa. African countries do indeed share a lot, and their destiny is linked because of balkanisation and fragmentation. However, for analytical purposes it would be more objective to move away from Africa as a monolithic picture, as opposed to a complex mosaic which the Continent is. From large Middle Income Countries, to frontier markets, fragile states, small island states, landlocked ones, natural resource rich, I could go on. This kind of taxonomy is what would , I believe help shape a more scientific assessment of the changes going on in each of the 54 countries and the Five regions of Africa.
Megatrends
Four trends, or megatrends are shaping each and every one of the 54 countries in Africa. They do so in different ways, but they do so everywhere.
First: The emergence of the multipolar economic world and the opportunities which that has generated, as source of investment, technology and export destination. Second: The demographic dynamics, of which you will be familiar, a young continent, one billion people, increasingly urban. The growth in the number of people with a disposable income driving domestic demand. I am aware of a rather interesting debate as to the classification of who is middle class. Are they a real middle class or just strugglers, to use Nancy Birdsall term or the floating poor, a term the AfDB prefers to describe the same phenomenon. But, that is for another day. Third: Discovery of large amounts of hitherto unknown natural wealth. The continent as a whole is said now to have 122bn barrels of proven oil reserves: 500 trillion cu ft of gas reserves, 85% of the World’s platinum. Fourth: Opportunities to leapfrog in some technologies such as the mobile phone which is having a deep and lasting impact, on service delivery and cost of doing business.
These megatrends are shaping and influencing the countries of the Continent of Africa in a way which will influence the future trajectory of many countries. They do so at a time when two decades of economic and political reforms and increased economic Integration has built a stronger shock absorbing capacity, exposing new vulnerabilities. They do so also at a time when the global landscape is in flux and so many uncertainties for every part of the globe.
Sustainability
Many people ask whether the current momentum in Africa can be kept given international uncertainties and domestic challenges. I agree that there is a whole range of internal and external factors which have seeds to potentially reverse progress of recent years. No doubt about that. They vary from country to country, they are old, they are new, not the least the current security problems in the larger Sahel from the Indian Ocean to the Atlantic.
Infrastructure
There is one binding constraint which is common to all the countries which, if not adequately resolved, has the potential to stagnation: infrastructure. Africa cannot transform by growing at 5%. It needs a minimum of 7%. It is poor infrastructure shaving off 2% each year that stands between us and that target. Sustainability of Africa’s achievements is only possible if opportunities are widely spread and jobs created. To create jobs and to anchor into the global value chains, a number of things are key: A skilled labour force and a minimum of sound infrastructure, especially power.
While it is true that Africa’s needs are large, financially speaking, that is only true in relation to public means, not in relation to private capital. Private capital does not easily flow to infrastructure. This type of project finance is not easy. Too high transaction costs. Too many political unknowns. There are not that many projects ready to go. Over the last few years, the two major players have been IFIs, China and lately capital markets sorties.
The African Development Bank itself commits 60% of all its lending to infrastructure. Chinese deals though seemingly easy to mount have taken place mostly in resource rich countries, although in a limited way elsewhere as well. IFIs as a whole have stepped up lending, even though regularly criticized by Governments for delays and onerous transaction costs.
Mitigating risk
If private sector interest in infrastructure has been limited so far, how do we explain the telecom, and IT related infrastructure sector which has attracted significant capital since the 1990s? What made it possible? It is true that the costs of entry, risks are not the same.
But what are the lessons? Increasingly energy companies are looking for opportunities, especially where the policy and regulatory arena are attractive, sound PPP frameworks, independent regulators, well-crafted smart subsidies, etc.
At an immediate financial structuring level, risk mitigation instruments can be put in place. The Bank itself has had instruments of this type for quite some time. We are deploying more, to comfort investors, to increase access to capital markets, to make it possible to do projects in high risk low income countries.
With a total value of 1 billion dollars, we estimate leveraging capacity of 1 to 6. This money is raised from donors in the context of replenishing our concessionary window last month. I refer to the African Development Fund (the equivalent if IDA). This is a very smart way for donors to use their money. This is what I call smart aid. It is still in its early stages, but we must encourage that direction of travel.
Capital markets
Confronted with large Infrastructure deficits, many countries have taken advantage of the current international market conditions to borrow for infrastructure at attractive conditions. Access to capital markets has picked up pace in the last few years as more countries got ratings, Ghana, Kenya, Tanzania, Senegal, Rwanda and several others. The exceptional market conditions have been helpful as has been a reassessment of risk in Africa which investors now know is no better or no worse than other regions of the World. It is a direction we need to encourage on two conditions: managing debt carefully and invest well. Done well this can complement, domestic resources, where again more countries are trying hard to effectively mobilize those resources and eliminate leakages.
Africa 50: A new business model for IFIs
Two lines of thinking seem to me the low hanging fruit: First, many well managed African countries can now go to capital markets and borrow competitively. The same countries are however not eligible at this stage to borrow from the IBRD or the ADB non concessional window. This is a policy dating back to over 25 years ago. At the time, this was right. But conditions have since dramatically changed. Access to MDB’s non concessional windows would have two distinct advantages. First, it is cheaper and secondly, it comes with supportive policy framework. I am aware that many Middle Income Countries disliked the "hassle factors" associated to borrowing from IFIs. It is time to take a county by country assessment and identify those who should now access IDA or IBRD.
The second line of thinking is one related to how African countries can mobilize and more optimally use their own pools of savings. The current commodity super cycle has led to accumulation of vast amounts of surpluses. These are now invested outside Africa in instruments deemed safe, liquid and giving a good return, sometimes quite significant amounts which should be financing Africa. Not every African country has such large surpluses of course. But for those who do, an opportunity to invest in Africa through a credible vehicle is a win-win. The African Development Bank has proposed a special vehicle for African Institutional investors.
This is AFRICA 50, of which I am happy to share further details. This would be deployed to finance ONLY transformational projects deemed a priority and show a good return. The AfDB which is a founder will be an investor and will help to establish a service level agreement with Africa 50 to provide its services. We consider this an opportunity for African countries to take charge of their own development.
Just imagine if donors agreed that part of the ADF is used as equity. We have just completed our fund raising for the ADF for 2014-2016. Donors tried hard but they are struggling. An agreement that a part of that money is invested in a Fund like Africa 50 would be truly the smart way to support Africa’s own efforts in this regard while reducing burden on their taxpayers. Using aid money to leverage private sector investment requires an “ideological" bridge to cross. I recall a European minister telling her audience. The way she tells the story is that when she was born, music was on the gramophone, as a teenager it was on cassette, as a young mother it was the CD, now it is i tune and the like. Her idea was aid is still deployed like a gramophone! I thought the metaphor was a powerful one.
Conclusion
Transformation that generates jobs, that enables our countries to join the global value chains begins with closing the gap in infrastructure. The turn of the Millennium and the strong economic performance has put infrastructure everywhere under pressure in Africa. There is no business as usual solution, if we are to truly move to the next level which is transformation.
When colonial powers were taking over Africa, they put considerable resources in building infrastructure to service the colonial enclave economies. In East Africa they constructed something called the "Lunatic Express" a 1700 km line from Mombasa to Uganda at a cost of £3.5 mn in 1894 (£600mn today). As for the social infrastructure, they left that to missionaries! That was the way up to Independence. After Independence, in came IFIs, who at some point also disengaged. Large emerging market countries have filled the gap of late since 2001. It is time now for a different value proposition based on African countries taking of their own development. That must begin with the Continent taking advantage of the current commodity cycle to invest wisely. It is a chance in a generation to invest in African instruments for African Development and for an attractive return.
By Donald Kaberuka
President, Africa Development Bank.