RAISING CAPITAL FOR AFRICA AND INFRASTRUCTURE PROJECTS

1. RAISING CAPITAL FOR AFRICA AND INFRASTRUCTURE PROJECTS BY DR. K. MLAMBO DEPUTY GOVERNOR RESERVE BANK OF ZIMBABWE

2. BACKGROUND • Africa has a huge infrastructure deficit: • In terms of supply and access, Africa lags behind other regions • Ellen Johnson Sirleaf has noted that on match day, the Cowboys Stadium in Texas uses more electricity than Liberia • The little available infrastructure is expensive • Moving freight by road in Africa costs $0.05-$0.13 per tonne-kilometer in Africa. • Elsewhere in developing regions: $0.01-$0.04 per tonne-kilometer.

3. BACKGROUND • Yet infrastructure matters for sustained economic growth and poverty reduction • World Bank: if African infrastructure catches up with that of Mauritius, per capita growth in 2013 would have been 3.7% instead of 1.5% recorded • Catching up with the level of infrastructure in Korea would have meant per capita growth of 4.1% • Investment in infrastructure is thus key to unlocking Africa’s growth potential.

4. Total $93 Billion $48 Billion IBut finance for African infrastructure remains inadequatenfrastructure Funding Requirements Funding Gap African Governments $20 Billion for Operations & Maintenance $30 Billion $10 Billion for new Infrastructure $15 Billion ODA+ Private Sector

5. BACKGROUND • For Zimbabwe, World Bank puts the infrastructure funding needs at US$33 billion over two decades: • Electricity – US$11.3 billion • Transport – US$13.39 billion • Water – US$1.81 billion • Telecom – US$6.75 billion

6. Closing the Funding Gap • How should this financing gap be closed? • Remove/reduce inefficiencies in the use of existing infrastructure • Estimated that on average about US$17 billion is lost each year due to inefficiencies, such lack of rehabilitation, poor budget execution, etc • Improving efficiencies would reduce the financing gap to US$31 billion a year (still substantial) • Countries such as Zimbabwe rely on fiscal financing • But capital budgets insufficient to meet infrastructure deficiencies in the region • Need to search for alternative/innovative ways of funding infrastructure

7. ALTERNATIVE SOURCES OF INFRASTRUCTURE FINANCING • Domestic borrowing • International borrowing • Enhancing the role of the Private Sector • Sovereign wealth funds • Diaspora financing • Engaging the new development partners

8. Domestic Borrowing • Financing infrastructure development through domestic borrowing: e.g. local infrastructure bonds • e.g. Kenya raised about US$1.6 billion (KSH 141bn) through domestic bond issues, from 2009 to September 2013. Opportunities • No foreign currency risk; • Improves intermediation of savings; and • Facilitate monetary policy implementation. Challenges • Crowds out private sector; and • High interest rates.

9. Accessing Global Capital Markets • Due to improved macroeconomic conditions, low interest rates in developed economies, African countries accessing international sovereign bond markets • Examples: • Ghana issued bonds worth US$750 million in 2007; • Senegal issued bonds in 2009 and 2011 worth US$200 million and US$500 million; • Zambia issued bonds worth US$750 million in 2012; and • Kenya raised US$2 billion in June 2014.

10. Accessing International Markets cont’d • Issuance reflects Africa’s high return potential, owing to its natural resource wealth and improved macroeconomic policies and development prospects. • Helps in benchmarks pricing of corporate bonds in international markets • Strengthens macroeconomic discipline, transparency and structural reforms • Provides access to long-term funding to help finance infrastructure • Lowers debt servicing costs

11. PRIVATE SECTOR FINANCING • Specialized infrastructure or private equity funds - funds created by established infrastructure firms, including upstream industries that invest in various infrastructure projects. • According to EY, in 2013, about US$3.2 billion was invested in 98 private equity investments in Africa. • But SSA still lags behind other regions in attracting significant amounts of private equity investments • Also average size of transactions small—between US$30million- $60 million

12. PRIVATE SECTOR FINANCING Advantages • Removes burden from the fiscus; and • Efficient allocation of resources; Challenges • High financing costs; and • Difficulties in pricing some public goods e.g. toll fees.

13. Securitization of natural resources • Natural resources lend themselves easily to securitization • Growing trend by Investors and new donors to adopt this form of financing • Chinese investments in: • Angola, Nigeria, and Sudan are backed by oil; • Gabon backed by iron; • Ghana backed by cocoa; and • Democratic Republic of Congo backed by copper. • Note: • critical for Governments to negotiate equitable deals that correctly value the resources assigned. • Otherwise, risk of mortgaging minerals at highly discounted levels

14. Sovereign Wealth Funds (SWF) • SWF represent a large and growing pool of savings, esp. in NR rich countries • Globally, SWF control about US$30 trillion • Africa experiencing the strongest growth in SWFs • Some of the countries with SWF include Algeria ($77bn); Libya ($65bn); Botswana ($6.9bn); Angola ($5bn); Nigeria ($1bn); Gabon ($380m); Mauritania ($300m); Ghana ($100m) and Eq. Guinea ($80m) • Potential for more to be set up as countries in east and west Africa continue to make oil&gas discoveries • Asset allocation shifting towards long-term investments to close the infrastructure gap

15. Sovereign Wealth Funds (SWF) • SWFs from other regions also beginning to invest in Africa • e.g. the Investment Corporation of Dubai recently invested $300m in Nigerian based Dangote Group focus will be on agriculture and infrastructure • But challenges remain • The funds are relatively small (the Norwegian SWF is $900 billion). • Governance issues, esp. regarding transparency and accountability in the admin of the fund. • Not all countries can set SWF—need excess forex reserves

16. Securitizing Diaspora Remittances • Africa has a large growing diaspora, estimated at over 140 million by the AfDB • Remittances by Africans to their home countries exceed ODA flows • In 2012 total remittances to Africa stood at US$60 billion • ODA to SSA amounted to US$44.6 billion • According to the WB, Africa could potentially raise US$17 billion annually from securitization of future export flows and remittance

17. Diaspora as catalyst to develop and deepen local capital markets • Zimbabwe has a large diaspora population living and working in countries such as South Africa, UK, Australia, and USA, among others. • Diaspora remittances have become a major source of foreign inflows, amounting to US$750 million in 2013. • To improve the investment instruments available to the diaspora, all non-resident Zimbabweans are now permitted to invest in any listed counter on the Zimbabwe Stock Exchange, without any limit (i.e. up to 100%).

18. Engaging new development partners • New development partners, such as China, India and Brazil increasingly playing a prominent role in the global economy • Chinese investments to Africa increased from $317m in 2004 to $2.5bn in 2012 • But only 4.3% of its global total—potential to grow • Only 5 countries dominate Chinese investment in Africa—South Africa, Zambia, Nigeria, Algeria, and Angola. • Brazil and India also expanding their reach into Africa: emphasize shared colonial legacy, shared identity (Brazil) and longer history on the continent

19. CONCLUSION • To attract additional financing: • African countries must institute sound economic policies to attract investors • Policies that facilitates development and deepening of capital markets to attract long term capital • Strengthens governance systems and capacity building in contract negotiation; and • Addresses adverse factors which increase country risk profile.

20. Thank you