Africa's infrastructure gap as an investment opportunity: plugging Africa's infrastructure gap presents opportunities for international financiers if they can locate bankable projects and navigate the risks.

Author:Sekandi, Andrew
Position:PERSPECTIVE: INVESTMENT

In 2009, a World Bank report revealed that Africa required $93bn per year to meet demand for adequate infrastructure. This figure has become part of the infrastructure debate, both in terms of the challenge it poses and the opportunity for investment it represents. Important progress has been made and infrastructure investment has reached record levels in recent years. But there are still significant challenges. Seven years on, less than half of the $93bn annual requirement is being met by existing sources. Furthermore, the limitations of raising funds from multilateral institutions are beginning to show, while China has scaled back funding due to the slowing of its own economy.

This presents a significant opportunity for international financiers to play a larger role in plugging the infrastructure gap--but only if they can locate bankable projects and navigate the inherent risks involved.

Mitigating risk

Early identification and management of the key risks can be the difference between a successful project and unforeseen delays and costs. Risks especially relevant to projects in Africa include the following:

Political risk--These risks arise from the action or inaction of central or local government and include policy or regulatory changes that occur during the life of the project. These changes can adversely impact upon both the risk profile and/or financial returns of the project. Many countries have complex overlapping consent processes, which can involve various ministries and elongated time frames.

Land issues--Land ownership in many parts of Africa is complex and unclear. Land acquisitions can be a slow process and it is common for unregulated third party claims to emerge during the acquisition process.

Local legal issues--A clear understanding of local legal issues relevant to the project is essential. Each jurisdiction will have different legal requirements that will impact upon the structuring of a project. These can include a requirement that all insurances are placed in the local market before being reinsured or a statutory cap on the level of interest that an investor can charge on any facility. Investors will also need to consider their ability to enforce their contractual positions under the relevant local...

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