More coordination needed
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Emerging Markets

More coordination needed

Development Banks

Multilateral development banks are looking increasingly to infrastructure investment in Africa in their battle for continued relevance. 

Institutions including the World Bank, AfDB, and the European Development Fund are stepping up their concessionary lending and provision of technical expertise following increased commitments by OECD countries.

Last year, international donors pledged $10 billion for African projects – a 20% increase from 2006. In the next three years, the African Development Bank will allocate $5 billion in loans and grants targeting the sector. This is from $2 billion during 2004 to 2007.

But with an array of different investment bodies in the region such as NEPAD (New Partnership for Africa’s Development) and the African Union as well as the flurry of international funds, there are concerns that coordination among donors and project partners could suffer. 

Moreover, multilateral lenders are governed by different rules and answerable to different governments; as a result, complex negotiations can delay project implementation and ward off private sector interest. 

 “A lot of these entities look good on paper, but their ability to respond is questionable and the time lag is woeful. This has put some investors off,” says one head of project finance at a large South African bank.

To streamline project approvals and enhance dialogue between all stakeholders, the Infrastructure Consortium for Africa (ICA) was established by the G8 in 2005. The body also seeks to integrate national development strategies, says Alex Rugamba, coordinator of the secretariat at the ICA. 

Rugamba says that development institutions are boosting local participation in projects: “Donors have steadily increased their investments, co-operation and provision of support for local projects so that these players are now gaining more confidence in managing their projects.”

Development banks and partner governments hope that local supply chains can be included into the tender strategy from the onset of project preparation. This will also support local authorities in their bid to administer the development be it a highway or toll road after construction. 

In addition, with their credit-enhancing status, multilaterals are financing big deals and boosting the private sector’s appetite for risk. For example, the 250MW Bujagali Energy hydropower project in Uganda reached financial close at the end of 2007. 

The deal had $360 million of funding from the World Bank, $175 million from the European Investment Bank, $110 million from the AfDB, $73 million from French development agency Proparco and $73 million from Dutch lender FMO. 

Encouraged by these large funding commitments and the provision of political risk coverage, Absa and Standard Chartered each invested $57.5 million. 

The deal also highlights how development institutions are seeking to increase public support for expensive commercial projects by focusing on the poor. For example, although the electricity was intended for domestic industries, the AfDB negotiated an agreement between the project company and the government distributor to extend supply to rural communities in the Bujagali area.

But with more and more development institutions targeting the sector with concessional cash, there are concerns that private players could be crowded out, say bankers. “Nevertheless, the continent is so vast and the needs are so huge that these temporary market distortions don’t devalue their vital contributions,” says Thomas Gibian, chief executive officer of Emerging Capital Partners.

Now development institutions are taking project finance in the region seriously, sustained donor commitments will be needed to ensure this does not become a passing trend.  — SV

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