African Policy Seminar on Fiscal Elements of Growth and Development Durban, 7 September 2007

1. Investing in Economic Infrastructure: The Role of Dev. Finance Institutions African Policy Seminar on Fiscal Elements of Growth and DevelopmentDurban, 7 September 2007 Alex RUGAMBA Coordinator

2. Outline of the Presentation • Africa’s infrastructure situation • Trends in financing infrastructure projects • Role of development finance institutions • Trans-border infrastructure projects and regional integration • Conclusions

3. Africa’s infrastructure situation is a key impediment to poverty reduction On-going Africa Infrastructure Diagnostic Study (AICD) sponsored by the ICA shows: • Africa’s infrastructure costly and uncompetitive: high power costs, road freight 2-4 times as high as US, road freight delays 2-3 times as long as in Asia, high but falling ICT costs. • Low access to power and low reliability – negative impact on growth in Africa due to the energy crisis • Infrastructure has been identified as a key impediment to Africa achieving 7% growth rate necessary for attracting investments, reducing poverty and meeting the other MDG goals

4. Regional integration is central to the infrastructure agenda • Power – uneven distribution of energy resources and need for economies of scale • Transport – 15 landlocked countries with high transport costs and issues with cross-border transit facilitation; need for improved air safety • Water – 60 international rivers • ICT - limited intra-African broadband connectivity and low access to global cable network

5. Most infrastructure sectors remain severely under-financed… • 28 countries affected by energy crisis • 44% of SSA countries likely to miss MDG water target and 85% the sanitation target • Fewer km of roads today than 30 years ago • Only 30% of rural population in SSA have access to all-season road Source: World Bank calculations based on PPI database and OECD/ICA sources on ODA to infrastructure

6. Outline of the Presentation • Africa’s infrastructure situation • Trends in financing infrastructure projects • Role of development finance institutions • Trans-border infrastructure projects and regional integration • Conclusions

7. Trends in infrastructure financing are encouraging although still insufficient • Spending on cross-border projects on the rise but demand growing faster than available resources – unfunded pipeline of projects • PPI trends are encouraging but only in certain niches • New players – China and India making an important contribution • Public expenditure has improved but maintenance still under-funded • Considering all sources, we now stand at about 40% of investment needs • Transport and Water sectors remain under-funded

8. Outline of the Presentation • Africa’s infrastructure situation • Trends in financing infrastructure projects • Role of development finance institutions • Trans-border infrastructure projects and regional integration • Conclusions

9. Development Finance Institutions generally have a three faceted role in infrastructure development A catalytic financier An adviser A strategic partner

10. Since Gleneagles, the infrastructure scale up has been driven mostly by multilaterals Total commitments to infrastructure ($M) Source: ICA Annual Report, 2006

11. In addition, most resources to regional projects come from multilateral agencies

12. AfDB’s Programme 2007 includes key regional integration projects

13. World Bank Programme 2008 includes regional projects across 4 sectors

14. EU-Africa Partnership on Infrastructure finances.. • Transboundary basin management through AMCOW/RBO • Flood preparedness programmes • Knowledge and monitoring of water resources Water Supply &Sanitation • Trans-African corridors and regional networks • Maritime ports, although airports not excluded • Facilitation programmes Transport • Power generation • Connecting energy surplus areas to deficit areas • Capacity building to Power Pools, continental energy bodies, regulatory institutions, etc Energy • Support to regulatory reform • Investment in broadband infrastructure • Non-commercial e-applications: e-government - telemedicine ICT

15. For Scaling up Investment in Infrastructure Projects in Africa We need a combination of: • Adequate budgetary allocations from governments and particularly for operations and maintenance • Increased resources from Multilateral Donors Replenishment of IDA-XV and ADF-XI is key • Scaled-Up Participation by Bilateral Donors • Increased Private Sector Participation

16. Enhancing the impact of DFIs in infrastructure • Collaboration among DFIs alongside government funding • Increase use of SWAPs and other coordinated approaches • More co-financing, greater harmonization of procedures • Developing more consistent results framework and measurement efforts • Jointly engaging new actors, and drawing them into coordinated approaches: China, India, Arab Funds • Leveraging the private sector • new PPI approaches • IFC, AfDB support in structuring of investments • Using more innovative instruments and approaches • Equity funds (e.g., Pan African Infrastructure Dev. Fund) • Identifying and collaborating on analytical agenda as foundation for scale up, i.e. flagships on energy, irrigation, climate change

17. Challenges faced by DFIs in infrastructure development in Africa • Inadequate legal and policy frameworks of governments: Does the law allow private sector participation or PPP? • Rule of law and governance Is the enforcement of contracts secured by the law? • Need for strong project ownership of the governments and inclusion of infrastructure needs in national and sectoral development plans • General cost of doing business still high in many countries making it hard for Africa to compete: e.g. 47% of firms use generators

18. Outline of the Presentation • Africa’s infrastructure situation • Trends in financing infrastructure projects • Role of development finance institutions • Trans-border infrastructure projects and regional integration • Conclusions

19. Trans-border Infrastructure Projects and Regional Integration • Regional Public Goods (RPGs) are services or resources whose benefits are shared by neighbouring countries. RPGs are more effectively dealt with at the regional level through the regional economic communities (RECs) with the support of regional development banks • Examples of RPGs include coordination of transport infrastructure among neighbouring countries and regional energy cooperation • Increased attention to RPGs is now possible through use of resources earmarked for multinational operations, anchored on regional and country assistance strategies

20. Increased focus on improving connectivity in Africa • Through NEPAD – STAP and MLTSF • Creation of larger markets and greater cross-border transactions through FTA and Customs Union initiatives of RECs - COMESA, SADC, EAC, ECOWAS etc. – aim a single FTA • Regional infrastructure being used to support market integration – Aid for Trade • Increased possibilities of infrastructure development through Public-Private Partnership - reducing debt burden

21. Improved environment and better coordination give hope … • On-going initiatives for improving the business climate in Africa – Investment Climate Facility • Reduced conflicts on the continent allowing the preparation of projects – e.g. Inga Dam Project • Improved coordination for infrastructure development among African institutions - AU • Improved coordination between RECs – example of COMESA, EAC and SADC in infrastructure sector – Tripartite Task Force • Collaboration among the project preparation facilities – tunnel of funds – IPPF/DBSA/AFD/IFC/EIB/WB etc.

22. … and confidence to propose new forms of support • International commitments to scaling up expenditure on infrastructure in Africa including for capacity building and project preparation facilities • New financing instruments – EU-Africa Infrastructure Trust Fund, PAIDF etc. • Increased support for private participation in infrastructure in Africa - PPIAF • Local currency sources offer a new potential for infrastructure projects – local capital markets – example of KenGen IPO

23. Key Challenges related to Investment Climate • International Private Businesses - Regulatory arrangements over the long term - Transparency of contract award procedures - Expropriation risk, Foreign Exchange Risk - Division of risks with other parties concerned - Steady supply of raw materials • Local Private Businesses - Transparency of contract award procedures - Fair regulation, contract enforcement, timeliness of government payment

24. Additional challenges stem from complexity and lack of capacity • Lack of projects with appropriate scale • Complexity of mounting and implementing regional projects • Insufficient capacity of governments and regional institutions to prepare and develop projects to bankable level • Need to take into account the climate change agenda in infrastructure development

25. Finally, different types of law create a key challenge for regional projects civil law common law mixed Islamic law

26. Outline of the Presentation • Africa’s infrastructure situation • Trends in financing infrastructure projects • Role of development finance institutions • Trans-border infrastructure projects and regional integration • Conclusions

27. Conclusions • Shared strategic vision, political will and strong commitment among countries concerned is key for the success of infrastructure projects that are presented to DFIs for funding • Good coordination among DFIs, national line ministries, regional sector institutions, RECs, AU and other stakeholders is essential • DFIs will continue their support for harmonisation of the policy, legal and regulatory regimes between countries • DFIs have a key role in the development of new funding instruments and mechanisms for implementing cross-border projects

28. Thank youAfrican Development BankPO Box 3231002 TUNIS BELVEDERETUNISIAwww.afdb.org