Ghana’s minister of finance has called on global pension funds to help meet Africa’s vast infrastructure need, easing the funding burden which has seen several African countries load up on unsustainable levels of expensive dollar debt.
The African Development Bank estimates that Africa’s infrastructure needs are between $130bn and $170bn a year. However, financing for African infrastructure currently falls short by between $68bn and $108bn per year.
“The question we need to confront is how do we get appropriate financing to be able to do that,” Ghana’s minister of finance Ken Ofori-Atta told GlobalMarkets. “The debt burden that comes with infrastructure financing is too heavy.”
Part of this funding will come from development banks such as the World Bank, European Investment Bank and IFC, and from China, but officials are urging for action from one of the world’s largest sources of private capital.
“There needs to be a sit-down with global pension funds to make infrastructure an asset class, which now it isn’t, which would be able to give certain accommodation,” Ofori-Atta said.
Private investment in Africa stood at just $8bn, out of a global spend of $90bn in 2019, according to World Bank data.
Makhtar Diop, vice president of infrastructure at the World Bank said: “There are trillions of dollars sitting in pension funds in Japan, if we manage to collectively solve that part of the puzzle, we will be able to make the huge jump we need. Plus, the rate of return is very good.”
Pension funds have been particularly reticent in part because of a lack of understanding of the macro risk in African markets, according to Bryan Carter, BNP Paribas Asset Management’s head of emerging market fixed income.
Many are focussed on investing in countries without macro risk, and are uncomfortable taking on local currency funding risk, he added. However he said that infrastructure was becoming a bigger focus for funds looking for yield. “It’s still a new market, but yes I would say the interest is there,” he said.
Still the cost of infrastructure financing in Africa is, in many cases, prohibitively expensive, but with African default rates low, experts are urging for a programme of education for investors.
“When you look at infrastructure, the default rate is very low compared to the Middle East, but the spread Africa has to pay is very high versus the rest of the world,” said Henri Fouda, a portfolio manager at Wellington Management Company. “We need to reduce that gap if we want things to move in Africa.”