The AfDB is to start arranging project finance jointly with commercial banks, and selling maturing debt in its portfolio, as it battles to bridge a vast gap between Africa’s infrastructure needs and lenders’ weak appetites.
Tim Turner, the AfDB’s head of private sector operations, told Emerging Markets in an interview that the two initiatives would boost the bank’s ability to make projects it is working on creditworthy.
The AfDB will later this year lead a E430 million syndicated loan deal to finance a wind power project in Turkana, Kenya. It will lend E100 million itself and arrange a E330 million syndicated loan, he said. The bank is also developing a syndicated loan structure for the Egyptian Refining Company.
“Our operations are a drop in the ocean given the vast infrastructure needs – so they need to focus primarily on demonstrating and catalyzing private sector appetite for African projects,” Turner said.
The AfDB’s objective in selling to commercial banks maturing debt in its loan portfolio – such as projects in the operating stage that are generating stable cash-flows – is to free up new capital for infrastructure.
“The business model of development finance institutions will need to change. The classic model of originating loans and placing them on your books needs to be adapted to free up resources and encourage private sector participation,” Turner said.
In the 2010 fiscal year, 40% of an estimated $2 billion of new lending will be in infrastructure, 30% in industries and services and 30% in financial services.
Turner said the composition of investments will not change in the next three years, but the AfDB’s expected 200% capital increase will allow it to expand investments by 5% to 10% annually from the projected $2-2.5 billion in 2011.
The AfDB will also seek to increase lending to low-income countries from 40% to 50-60% of its overall investments in this three-year period, he said.
Research published in November from the World Bank-backed Infrastructure Consortium for Africa said that sub-Saharan Africa needed to double infrastructure spending to $93 billion a year to upgrade roads, water and power networks. But the high cost of bank capital and new financial regulations have reduced Western bank appetite.
Bill Appleby, Citi’s head of infrastructure and energy finance for Europe, Middle East and Africa, said: “The most significant change to the project finance market has been the reduction in the number of players and consequent reduction in capacity.
“Many banks have struggled through 2008-09, and now they have more aversion to committing long-term capital. The multilateral agencies and export credit agencies are more important.”
Citing Citigroup and HSBC’s African infrastructure finance business, Turner said: “These banks see the attractive margins and fee-generating opportunities in Africa and so I expect them to come back and commit financing though it will take time for them to return.”
The African Financing Partnership – set up by the AfDB and the Canadian International Development Agency, to coordinate project finance initiatives with other development finance institutions – is leading to a greater harmonization of due diligence and environmental standards that is speeding up project approvals, its coordinator, Preeti Sinha, said.