Wildu du Plessis of Baker McKenzie explains the funding transition that is taking place in Africa’s…
Wildu du Plessis of Baker McKenzie explains the funding transition that is taking place in Africa’s infrastructure sector, as the US and UK compete with Chinese finance, and new development finance players enter the market.
Baker McKenzie’s latest report – New Dynamics: Shifting Patterns in Africa’s Infrastructure Funding – shows the state of the African infrastructure market, and how the major global players’ approach to infrastructure lending on the continent is changing. While the IJ Global data shows a decline in the value of infrastructure lending in recent years, it is expected that as economies recover, new types of financing will emerge to help bridge the infrastructure gap.
The report’s data shows that multilateral and bilateral lending into Africa has declined – with investment levels falling successively in 2019 and 2020, compared to peak levels seen after the financial crisis. In 2019, bilateral and multilateral lending into Africa amounted to USD 55 billion, which dropped to USD 31 billion in 2020. Over the last six years, the decline is significant – deal values dropped from USD 100 billion in 2014 to USD 31 billion in 2020. Deal tenor also contracted – from a high of 17 years in 2019 to 13 years in 2020.
Surprisingly, given the pandemic, the data shows that lending by Chinese banks into energy and infrastructure projects in Sub-Saharan Africa saw a small uplift in 2020, although deal values are well below their 2017 peak. In 2017, Chinese banks lent USD 11 billion to African infrastructure projects, which decreased to USD 4.5 billion in 2018, USD 2.8 billion in 2019 and USD 3.3 billion in 2020.
Overall, there has been a slowdown in the number of infrastructure deals from China. In the short-term, more targeted lending is expected – involving fewer projects of a higher quality, using sophisticated structures, and new finance options, such as factoring, used to deploy Chinese capital into the region.
It is clear, however, that other international players have Africa firmly in their sights, with key political changes in the United States and United Kingdom likely to see capital flow into Africa.
The infrastructure funding gap in Africa is so large and of such strategic importance, it remains necessary to encourage international investment to fill it. African development finance institutions (DFIs) are very good at collaborating and the new US administration, UK government and New Development Bank, in particular, have expressed their willingness to work with regional institutions in this regard.
The US hasn’t kept pace with Chinese lending into Africa in the last few years. The recent change in administration, however, is likely to renew focus on impact-building and financing strategic long-term projects in the region, but bankability and risk-sharing remain a priority for US lenders.
The UK appears to be making a strong play for influence, investment and trade with Africa post-Brexit. Further to key summits held in 2020 and 2021, there are signs that finance will be redirected into Africa.
Addressing vast infrastructure gaps in energy provision, internet access and transportation have created an urgent imperative to identify and enable new sources of finance outside traditional lenders and international partners.
This funding vacuum is unlikely to be filled by commercial banks. The data shows that in 2020, just 84 projects were supported by commercial bank finance and their involvement in DFI and Export Credit Agency (ECA) deals continued on a downward trend.
Instead, local and regional banks, specialist infrastructure funds and private equity and debt are stepping in to collaborate with DFIs and access returns.
This outlines the deepening DFI involvement in the infrastructure ecosystem at large, with DFIs increasingly anchoring the infrastructure ecosystem in Africa – serving a critical function for project finance as investment facilitator and a check on capital. This is because DFIs can shoulder political risk, and access government protections and enter markets in a way that others cannot, as well as being uniquely capable of facilitating long-term lending.
Private equity, debt finance and specialist infrastructure funds are also primed to enter the market, and multi-finance and blended solutions are expected to grow in popularity as a way to de-risk deals and support a broader ecosystem of lenders.
While last year was a difficult year across jurisdictions and for investors, new patterns of infrastructure funding in Africa are expected to weave a brighter future for a region that has repeatedly noted the urgent need to address its continent-wide infrastructure gap.
Wildu du Plessis is a partner and head of Africa with Baker McKenzie in Johannesburg