African Development Bank Group

1. Strategies for Regional Infrastructure Development and Economic Growth Prof. Mthuli Ncube Vice President & Chief Economist African Development Bank African Development Bank Group AfDB Presentation to the “Economic Growth and Employment” Seminar Mozambique, February 10, 2011

2. Presentation Outline • The state of infrastructure in Africa & Implications for economic growth • Financing infrastructure development & AfDB’s Role • Lessons learnt from AfDB’s interventions • Strategies for infrastructure development and further engagement with the AfDB

3. THE STATE OF INFRASTRUCTURE IN AFRICA & IMPLICATIONS FOR ECONOMIC GROWTH

4. Mozambique lags behind the average coverage for Sub Saharan Africa on all but 2 dimensions (mobile telephony and internet usage) • Ranks 42 out of the 53 according to the AfDB’s Infrastructure Index

5. Regional connectivity particularly lacking ONRI Presentation on RISPs– 05.02.2010

6. ICT: Missing links Source: AUC, AfDB, WB presentation at UN Millennium Summit, September 2010

7. Roads : Missing links Source: AUC, AfDB, WB presentation at UN Millennium Summit, September 2010

8. Power : Missing links Source: AUC, AfDB, WB presentation at UN Millennium Summit, September 2010

9. Power: Export Potential Capacity Source: AUC, AfDB, WB presentation at UN Millennium Summit, September 2010

10. Why infrastructure? • Good infrastructure creates an enabling environment for economic activity: • Lowers costs of doing business • Improves global competitiveness of local production • Promotes FDI and partnerships • Promotes cross border investments and trade Hence promotes productivity and growth: • African firms could achieve productivity gains of up to 40 percent with adequate infrastructure • GDP growth could be enhanced by as much as 2% per year

11. Mozambique’s growth has not been inclusive, in part due to infrastructure bottlenecks (high transportation and energy costs) • Competitiveness of the economy is low (ranked 131 out of 139 economies – Global Competitiveness Index, 2010)

12. Why infrastructure? • Added pressure from consistent growth of African economies, which has led to: • Larger cities and increased urbanization • Growing consumer markets • Broader ties to the global economy Infrastructure stock must increase to support this growth

13. Why infrastructure? • Linkages to local industry • Manufacturing • Construction • Financial markets • Labor Hence growth in infrastructure development activities has direct GDP growth implications • Infrastructure expected to become the 4th largest contributor to revenues in Africa by 2020

14. FINANCING INFRASTRUCTURE DEVELOPMENT & AfDB’s ROLE

15. US$ 93 billion required annually to finance infrastructure in Africa • Current expenditure = US$ 45 billion • Potential efficiency savings = US$17 billion • Financing gap = US$ 31 billion

16. Innovative Financing Instruments • Traditional Design-Bid-Build approaches given way to new and often long-term arrangements • Attracting private players into infrastructure provision through different forms of PPPs (DB, DBOM, DBFO, BOO, BOT, BOOT, Full Delivery OR Program Management) Advantages: • Cost savings • Fully integrated client services • Transferring risks • Innovation • Better asset management • Better level of service • Partnering potential • Developing a new industry • Benefits of economy of scale

17. Innovative Financing Instruments • While long-term arrangements are attractive they have disadvantages too: • Costly tendering process • Longer tendering periods • Reduction of competition (social justice), usually for large contractors • Uncertainty of long term relationships • Mobilization issues need to be addressed • Loss of control & flexibility Source: PekkaPakkala (2002)

18. Other innovative sources include • Local currency bonds • Commodity-linked bonds • Diaspora bonds • External sovereign bonds • Sovereign wealth funds • Require strong institutions , credible policy environment • Yet have benefits • Government maintains control • Reduce risk of sovereign debt stress • Reduce instability of financing flows • Deepen domestic financial markets

19. AfDB’s Support to Infrastructure • Lending • Sovereign incl. regional operations pool • Non-sovereign (loans and equity) • Grants for technical assistance • FAPA (US$ 16 million per year towards private operations) • IPPF (US$ 15 million per year towards regional infrastructure operations) • MIC (US$ 16 million for operations in middle income countries) • Risk Instruments • Guarantees • Hedging products • Coordination • Hosts the Infrastructure Consortium for Africa (ICA) • Executing agency of the Program for Infrastructure Development in Africa (PIDA)

20. AfDB’s Approved Financing by Sector – Ongoing as at 31.01.2011 Infrastructure sectors now attract the lion’s share (46 %) of AfDB’s financing

21. 2009 Infrastructure Loans & Grants • Recent Key Regional Projects Funded • Kenya-Ethiopia Highway • Mozambique-Malawi-Zambia Highway • Kenya-Tanzania Highway • Burundi-Rwanda-DRC-Kenya-Uganda Power Interconnection US$6.05 Billion to Infrastructure Projects US$700 Million to Regional Infrastructure • Other Key National Projects Funded • US$2.3 billion Power Project in RSA • Power Projects in Botswana, Kenya, Uganda, Ethiopia, Lesotho • Transport, power and water projects in Mozambique ONRI Presentation to COMESA-EAC-SADC 2010

22. AfDB’s regional infrastructure operations • UA 1.17 billion in 2009, an increase of 57.9% over the 2008 level of UA 741.10 million • 20 percent of ADF-12 resources allocated to the Regional Operations pool • Increasing participation by private sector investors widening the resource base • But innovations are necessary

23. AfDB’s Support for Infrastructure in Mozambique *Includes one multinational project, Nacala Road Corridor (UA 102.7 million) • Mozambique’s transport sector historically the biggest beneficiary of AfDB’s funding • Project pipeline shows continued strong support to infrastructure (43 % of total allocation) MZFO, 2011

24. Productivity and efficiency gains from infrastructure investments Cost effectiveness of regional operations Alleviation of public investment constraints through private participation LESSONS FROM AfDB’S INTERVENTIONS

25. Case 1: Senegal’s Infrastructure PPPs Project objectives and financing: • Four public-private projects approved in energy and transport between 2009 and 2011 • The objective was to improve access and efficiency, and lower costs of power and transport services • EUR 1.1 billion financing mobilized from private sector, DFIs (including AfDB), and Public sector

27. Case 2: Other 3 billion Networks (O3b), Multinational Project objectives and financing: • The project involved the design, construction, launch and operation of a constellation of 8 medium orbit satellites • Objective: delivering affordable, high bandwidth, high quality internet and cellular access to inland markets in developing countries and island economies • One-third of capacity dedicated to Africa including 1st wave off-takers from: Nigeria, DRC, Kenya, Tanzania, Malawi, Zambia, Cameroon, Sierra Leone, and Ghana • Financed entirely by DFIs and private investors (US$1.1 billion) on a limited recourse basis

28. O3b: Key Development Outcomes • Reach ‘white areas’ and fragile states with high quality ICT infrastructure • Improved access to mobile telephony, broadband and data networks in 9 Africa countries e.g. connect 18 million households to cellular backhaul • Lower costs of ICT on the continent. • Cost savings versus the equivalent capacity from high orbit satellites estimated at US$1.3 billion net present value • Regional integration through expansion of broadband internet and cellular access across several Africa countries

29. Case 3: North-South Corridor Program Selected development outcomes: • Lower indirect costs of trade e.g. reduce time for clearance of goods from up to 5 days in 2009 to 37 hours • Improve port capacity e.g. increase cargo handled at Nacala port from 0.9 million tons in 2009 to 1.6 million tons in 2015 • Lower transport and transit costs by 25 percent in 2015 on Nacala corridor

30. Case 4: Urban Water Supply, Sanitation & Institutional Support Project in Mozambique Project objectives & financing: • To improve the coverage of water and sanitation in four towns: Chókwè, Xai-Xai, Inhambane and Maxixe • Financing of UA 19.06 million (ADF Loan + Grant) Development Outcomes: • Improved access to safe water and sanitary facilities e.g. 284 595 new uses served with potable water • Lower costs of service delivery e.g. non-technical losses reduced from 55% to about 30%

31. Mobilize domestic resources Attract private capital Invest in regional infrastructure Invest in clean energy STRATEGIES FOR INFRASTRUCTURE DEVELOPMENT & FURTHER ENGAGEMENT WITH THE AfDB

32. Strategies for Mozambique Performing more of the old functions better • Improve efficiency in use of allocated resources • An estimated 17$ billion per year lost through inefficiency in Africa’s infrastructure sectors • Increase public allocation to capital expenditures for both new investments and maintenance The Bank’s role: • Policy-based lending, e.g. Nigeria power sector reform program • Technical assistance, e.g. FAPA TA grant accompanying a private sector operation

33. Strategies for Mozambique Domestic resources mobilization • Infrastructure bonds in local currency • Example – Kenya’s long-term government infrastructure bonds • Three bonds valued at (US$1 billion) successfully issued since 2009 The Bank’s role: • Treasury / MFW4A developing financial markets on the continent e.g. TA for bond issues, plans to invest in local currency bonds issued in RMCs • Policy-based lending for financial sector reforms

34. Strategies for Mozambique Attract (foreign) private capital • PPP model • Example: Senegal Dakar Toll Highway • Total cost EUR 223 million (DFIs, foreign concessionaire, local commercial bank, government) • Bankability improved by (i) long-tenor foreign currency financing from DFIs (ii) viability gap subsidy from the state The Bank’s role: • Financier • Lead arranger e.g. Lake Turkana wind farm in Kenya • Honest broker e.g. Markala sugar plantation in Mali • Risk management through currency and maturity matching

35. Strategies for Mozambique Attract foreign private capital • Private equity funds, external sovereign bonds, emerging markets investors • Example: Africa Infrastructure Investment Fund 2 (AIIF-2) • US$ 500 million fund; US$5 billion in additional financing mobilized • Equity investments of US$ 10 – 100 million in up to 15 projects • Target: power and transport projects in southern Africa The Bank’s role: • Equity and loan financing e.g. AIIF-2, Argan Infrastructure Fund • Influence geographic reach of infrastructure PEFs /emerging partners • Influence practice and standards of infrastructure PEFs / emerging partners

36. Strategies for Mozambique Invest in regional infrastructure • Regional hydropower projects are the continent’s least-cost power development strategy & Mozambique has large potential • Transport corridors capitalizing on coastal access, e.g. North-South corridor The Bank’s role: • Financier e.g. about US$ 1 billion for N-S corridor projects. (Already supporting Nacala road corridor with US$150 mn) • Project preparation and TA support, e.g. US$ 11.6mn under NEPAD-IPPF for N-S corridor projects • Honest broker

37. Strategies for Mozambique Develop clean energy • Capitalize on clean and renewable energy resource endowment (hydro, wind), bio-energy potential • Tap into clean technology finance The Bank’s role: • Experience in project structuring and financing e.g. financed Cabeolica wind farm in Cape Verde, and Markala sugar plantation in Mali • Public and private sector financing • Risk management facilities

38. THANK YOU Office of the Chief Economist African Development Bank