analysisBy James Leigland
Discussions in Group of 20 (G-20) meetings over the last several years have increasingly focused on the need for a huge scale-up in infrastructure investments in developing countries, particularly through large regional projects involving private sector participation.
The G-20 is reportedly considering a modification of the mandates of national (DFIs) and international development banks (MDBs) so that these institutions will be better incentivized to take on such "transformational" projects. A particular focus of the G-20 is the need for cross-border projects in sub-Saharan Africa (SSA), where large regional hydropower projects, for example, could generate power for a number of countries, if conducted on a regional, rather than national basis.
But tackling such projects, with 'the potential to have a transformational regional impact,' will involve much more than mandate changes. SSA's regional institutions, supported by MDBs and regional DFIs, have a long history of trying to identify and develop such projects, but only a handful of such projects have ever been successful. As the G-20 now tries to encourage greater attention to such projects, it is worthwhile keeping in mind the huge challenges that have severely constrained this work in the past.
The key challenge posed by such projects is that they are radically different from typical, national-level infrastructure projects that might attract private sector participation.
Inga III, a huge hydropower project planned for the Congo River Basin in the Democratic Republic of Congo (DRC), is a good example of these differences. Inga III tops almost every list of transformational projects in SSA because of its potential to generate power that could be exported to countries as far away as South Africa and Nigeria. But after more than a decade of international planning and negotiations, Inga III has made very little progress, while project costs have been escalating precipitously.
The problems with Inga III are typical of large transformational projects:
- size - the project is at least 15 times larger than existing hydropower projects involving private participation;
- cost - because the project will required over US$10 billion for construction, private investors and operators will not be able to cover all project costs without substantial investments by participating governments;
- timing - with construction taking 12 years, it will be difficult to get firm government power purchase commitments needed to secure the funding;
- preparation - legal, regulatory, and technical project preparation will be essential in a country like the DRC, and it will also be expensive, perhaps as much as 15% of total investment - but this work will be difficult to pay for since it is not usually covered by financiers;
- political risks - these risks are substantial for big projects anywhere in SSA and require significant (and expensive) mitigation;
- leadership - who owns and drives development of a multi-country project that is located within the borders of a single country like the DRC?
What are key actors already doing to address these challenges?
Even without mandate changes, some MDBs and DFIs are working to find ways of playing more substantial roles in such projects. At the moment, most of them do not have the capital required to finance large shares of project investment costs. In addition, most have prudential limits that restrict funding to individual countries, and relatively small envelops for regional or multi-country projects. The World Bank is reportedly developing a global infrastructure facility to focus on such projects. The African Development Bank (AfDB) has recently launched Africa50, a one-stop-shop that will prepare such projects and sell bonds to raise funding for project investment. As a separate corporate entity, Africa50 may avoid some of the prudential funding limits that restrict AfDB's participation in such projects.
Because governments will have to make substantial financing contributions to these projects, even if private partners are involved, some government officials are experimenting with ways of raising needed finance. Infrastructure bond issues are being sold by some SSA countries, and sovereign wealth funds are increasingly being used to ring-fence and manage the resources required. Other countries are experimenting with innovative project financing modalities. The West African Gas Pipeline for example, was a public-private partnership (PPP) carried out on a corporate finance basis rather than using traditional project finance, meaning that equity and shareholder loans were used rather than debt finance.
Successfully attracting private finance has also been problematic in SSA, where infrastructure PPPs have been much less common than in other regions. Finding private partners for transformational projects like Inga III will require innovative approaches for mitigating the key risks perceived as most important by prospective private partners. One way of doing this on large infrastructure projects in SSA is to employ various kinds of political risk guarantees, a common feature on the few regional PPPs that have been done on the continent.
A final challenge is to find ways of paying for project preparation. Lack of funding for preparation means that bankability may not be fully established and financing will not be available, at least not at affordable costs. Africa50 plans to have preparation costs repaid by governments or private partners, but this approach has not been widely successful in poor countries. It is also unlikely to work on a project like Inga III, where someone would be expected to repay as much as $1.5 billion in preparation costs. The World Bank is currently proposing to access surplus Industrial Development Association (IDA) funding to pay for preparation of regional projects on a grant basis in IDA countries.
Efforts by the G-20 to encourage work on transformational infrastructure projects are welcome, but only a small first step in tacking the many challenges associated with such projects.
James Leigland is a SAIIA research associate and a Technical Adviser at Private Infrastructure Development Group (PIDG).