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OECD presentation at APF Business Roundtable
- Infrastructure development is critical for Africa‘s economic growth and poverty reduction. Yet there is a significant funding gap to fulfil the continent‘s infrastructure needs, which cannot be met by current official sources of funding alone. In particular, the proportion of official development finance (ODF) in total infrastructure spending is modest, with reduced likelihood of further increase in a context of tightening budgets in countries that provide assistance. Private investment, on the contrary, offers some promising way to close the funding gap for Africa‘s infrastructure.
- Historically, the role of private investment in African infrastructure has been limited, particularly due to the weak enabling environment that underpins infrastructure development. The enabling environment encompasses: the policy framework; regulations that include tariff setting and procurement; and sound public institutions for the management of infrastructure systems. As several OECD guidance indicate, development partners can leverage private investment both by strengthening the enabling environment and using financial instruments to mitigate investment risks.
- At the same time, in promoting private investment, some development agencies face challenges and dilemmas in ensuring that their aid remains untied. Others have little incentive to leverage other financial sources. In the survey conducted by the OECD DAC and Investment Committee secretariats for this project, several point to obstacles such as political instability, weak public administration, unreliable legal frameworks, corruption, the low capacity of project promoters, bankability of projects, lack of long-term financing, and insufficient resources for project preparation. Particularly for fragile states, some development agencies mention that peace and security are prerequisites for improving the enabling environment.
- Nevertheless, the OECD Creditor Reporting System data show that development agencies allocate roughly a quarter of ODF for Africa‘s infrastructure to the enabling environment. This support mostly consists of capacity building by deploying experts or training government staff in various stages of planning and operations. Although not all ODF to these 'soft' aspects is provided specifically to promote private investment, examples show that many activities have this aim, including for regional infrastructure.
- The survey shows that Development finance institutions (DFIs), international organisations and specialised government agencies also use a wide range of financing instruments such as investment funds, blended grants, guarantees and export credits to draw in private investors who might otherwise be reluctant to invest in Africa‘s infrastructure by mitigating the risks in bankable projects. Investment funds are usually set up by DFIs by using official sources that are then managed by private companies who invest in funds targeted towards African infrastructure projects. As for blending, some DAC members and European Union institutions are making use of this approach to combine concessionary funding with financing from market-based sources. Export credits and guarantees from Export Credit Agencies can reduce investors' concerns about doing business abroad, but as they are normally limited to investors from the home countries, they can undermine fairness in competition if rules on their use, such as those set by the OECD Arrangement on Export Credits, are not respected.
- In addition to DAC members, multilateral organisations and the private sector, a number of emerging economies such as China, India and the Arab countries, have been increasingly active in Africa‘s infrastructure sectors. In particular, some estimates suggest that China has outpaced the World Bank as the leading funder of Africa's infrastructure. The active engagement of emerging economies in Africa's infrastructure sectors reflects these countries‘ own focus on developing infrastructure domestically as part of their growth strategies.
- In the context of the Paris Declaration on Aid Effectiveness, it is important to establish common approaches, agree on lead development partners and reduce aid fragmentation to support a country-led approach in the infrastructure sectors. For Africa's infrastructure in general, the largest donors, i.e., World Bank, European Union institutions, African Development Bank, Japan, Germany and France, together provided more than 80% of ODF disbursements, which excludes financing from the emerging economies. On the other hand, disaggregation of data into different categories by sub-region of North Africa and Sub-Saharan Africa, as well as 'hard' and 'soft' aspects, for each infrastructure sector shows a varied picture in terms of the largest donors. As data also show that there is significant aid fragmentation, effective division of labour needs to be addressed, particularly considering the increasingly important role of the emerging economies in Africa's infrastructure.
- While development agencies state that they align to partner country priorities, most of them express challenges due to the disconnect between country and regional priorities, lack of co-ordination and capacity among partner government ministries and regional communities, and inadequate country systems. On harmonisation, many bilateral donors resort to multilateral organisations, specialised programme funds, and multi-donor platforms to minimise duplication, leverage other donors' resources, build consensus, facilitate transactions, and disseminate good practice. While these can be effective approaches to reduce transaction costs and fragmentation, the proliferation of specialised programme funds could also become another source of aid fragmentation. In terms of domestic harmonisation, while some development agencies co-ordinate with other parts of the government that promote investments abroad, others try to maintain a distance between development objectives and promotion of national business interests.
- In managing for results, measuring the leveraging effects of ODF on private investment to Africa‘s infrastructure by supporting the 'soft' aspects is difficult. It is first hard to establish causal linkages, particularly since increased investment and infrastructure development can take time. In addition, broader issues such as reduced corruption or a developed financial sector may impact more effectively than direct support to the infrastructure sectors. A major bottleneck in assessing results is the lack of disaggregated data on foreign direct investment and various financial instruments due to confidentiality of commercial interests.
- It is important to remember that the ultimate goal is sustainable growth and poverty reduction in Africa, as opposed to simply increased private investment. However, when the latter is deemed to contribute to the former through a specific infrastructure plan, then development partners should collectively look at what they can do more to help improve the enabling environment and provide effective financing instruments. This could be done through enhanced dialogue among African governments, the private sector, development agencies, development finance institutions, civil society, as well as the emerging economies on better co-ordination, harmonisation, and division of labour, in line with the Paris Declaration principles.