Strategising and mobilising financial resources for public projects in Africa is a constant challenge for decades. Traditionally, local governments tap into income raised from the country’s resources and taxing its residents as a major source of finance. In addition, some countries leverage pension funds to finance projects. This, however, is not feasible in majority of the African countries whose pension schemes which have poor performance. Non-government and non-profit organisations, not interested in the common cases of bureaucracy and corruption in government processes, have often taken a solo run in taking up public projects by soliciting donor funds. Government funding coupled with donor contributions have been the lifeline of public project capital, options that overtime have proven not to be sufficient especially as the scale of public projects increases. Needless to say, innovative ways of raising capital then became necessary.
One such way is tapping into foreign financing, a follow-up popular option in Africa. China, for example has been a considerable financial supporter to African countries, its sectors and their associated mega projects. Recent research shows that China is the single largest financier of African infrastructure at 20% of projects.
Loans from local Central banks and international banks such as the World Bank, and the African Development Bank (ADB), continue to represent an important alternative source of finance to African public projects as well. These organisations encourage the input of both public and private funds in raising capital required then loaning it out to governments and private companies at reasonable interest rates in comparison to foreign country financiers.
Mortgage companies, investment companies and Insurance companies like International Finance Corporation (IFC), African Re-insurance companies and Shelter Afrique mobilise funds in the private sector to offer non-bank funding alternatives. Green Bond Programs are an innovative creation by IFC in 2010 to help catalyse investment by private sector in support of sustainable projects that tap into renewable energy and energy efficiency.
In the last decade, however, African governments are turning to the private sector for funding- one way being tapping into private equity funds. This requires governments and banks to rethink financing and evolve their expertise in policies, processes and transactions to tap into the potential of the private sector. Joint partnerships between the government and private developers or between the government and private investors (wealthy individuals) unlock money available within the private sector. These Public-Private Partnership (PPP) frameworks when efficiently setup can leverage both local and international private entities to bridge the additional finance required. Herein, the goal of the government being to supply public services while that of the private sector is to get a reasonable return on their investment.
For Africa to attract financing from these developers, investors and financiers issues faced in implementation of public projects should thoroughly be dissolved. It is common to hear investors pulling out mid-project, mismanagement of projects and funds (corruption), poor feasibility studies, conflicting visions between parties involved and many other implementation issues. These are major kinks that keep financiers away from public projects in Africa. In order to restore confidence in public project investment, sustainability and economic feasibility should be determined. Detailed research during the project preparation stage should be thoroughly done to establish the bigger picture in terms of projected operating costs and the ideal cash flow required to furnish the loans taken and provide a return on investments to the project sponsors.
Investors are essentially looking to make money and it is important to focus on packaging the bankability of the public project before sourcing for project developers and financiers who can then take on the projects to successful completion. To evaluate its bankability, investors take on financial advisors who review the needs of the project before approval. They determine, from feasibility reports submitted, whether the investment is needed and any likelihood of changes in these requirements. The initial costs, benefits, risks, affordability, potential market interest, and value for money come into play in selecting funds directed into public projects.
A disciplined approach in establishing the scope, requirements and risks involved in a public project enable financiers to focus on deliverability and the potential complexity of the work in relation to the project and the funds available. Their decision to lend will be reliant on this due-diligence.
Which funding areas do you thinkAfrican nations can capitalise on? Let me know in the comments section.
