by Grete Faremo
17 July 2015
There has been a lot of discussion in Addis about how to finance Africa’s $100 billion per year infrastructure needs – and mainly how to attract private sector money. Everybody seems to have ideas for what needs to be done. Many have proposals for projects, large and small. However, so far, few have so far come up with readily investable projects; projects that would actually be realistic to present to institutional investors.
Why is that so hard to do?
For institutional capital to invest in infrastructure in developing country emerging markets, several things must be in place and several of them are tricky.
First of all, institutional investors of the kind being talked about rarely consider investments of less than $100 million.
These projects should provide affordable services and utilities for all, even for the poorest, while ensuring a viable return to investors.
Still, many investors back out because of the risk – and merely the perception of risk. The real risks need to be mitigated – not only to keep the costs down, but to tempt potential investors. Yet, at the same time, all parties need to accept a fair risk allocation. Projects that load all the risk onto a government or a bilateral donor may attract private capital, but neither are they fair, nor viable.
Then there may be regulatory and policy challenges. Well-meaning attempts to build off-grid electricity solutions for rural districts may run into unintended limitations brought on by laws and regulations written long before the technology to build solar or wind-powered solutions paid for through mobile phones was developed. Finding projects that do not run into such obstacles that may delay execution by years while they are being resolved is not easy.
This calls for new types of collaboration and a new type of blended finance that enhances the interests of public and private investors.
The United Nations could take on a new role in this context, as the honest broker who brings the private sector, aid agencies and governments together, safeguards against corruption and ensures that ordinary people benefit. UN organizations will be trustworthy partner, bringing in UN values and integrity.
Coming out of Addis, the focus must be on bringing the few investable projects to reality. We will learn and be inspired by them so that the successful ones can be adapted and replicated.