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African Development Bank Group

AfDBPresentation to the “Economic Growth and Employment”

Seminar

Mozambique, February 10, 2011

Strategies for Regional Infrastructure Development

and Economic Growth

Prof. Mthuli Ncube

Vice President & Chief Economist

African Development Bank

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Presentation Outline

1. The state of infrastructure in Africa & Implications for

economic growth

2. Financing infrastructure development & AfDB’s Role

3. Lessons learnt from AfDB’s interventions

4. Strategies for infrastructure development and further

engagement with the AfDB

THE STATE OF INFRASTRUCTURE IN AFRICA & IMPLICATIONS FOR ECONOMIC GROWTH

Mozambique lags behind the average coverage for Sub Saharan Africa on all but 2 dimensions (mobile telephony and internet usage)

Ranks 42 out of the 53 according to the AfDB’s Infrastructure Index

Regional connectivity particularly lacking

ONRI Presentation on RISPs– 05.02.2010

Source: AUC, AfDB, WB presentation at UN Millennium Summit, September 2010

Source: AUC, AfDB, WB presentation at UN Millennium Summit, September 2010

Source: AUC, AfDB, WB presentation at UN Millennium Summit, September 2010

Source: AUC, AfDB, WB presentation at UN Millennium Summit, September 2010

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Why infrastructure?

(i) Good infrastructure creates an enabling environment for economic activity:Lowers costs of doing businessImproves global competitiveness of local productionPromotes FDI and partnerships Promotes cross border investments and trade

Hence promotes productivity and growth:• African firms could achieve productivity gains of up to

40 percent with adequate infrastructure• GDP growth could be enhanced by as much as 2% per

year

Mozambique’s growth has not been inclusive, in part due to infrastructure bottlenecks (high transportation and energy costs)

Competitiveness of the economy is low (ranked 131 out of 139 economies – Global Competitiveness Index, 2010)

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Why infrastructure?

(ii) Added pressure from consistent growth of African economies, which has led to: Larger cities and increased urbanization Growing consumer marketsBroader ties to the global economy

Infrastructure stock must increase to support this growth

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Why infrastructure?

(iii) Linkages to local industry Manufacturing ConstructionFinancial marketsLabor

Hence growth in infrastructure development activities has direct GDP growth implicationsInfrastructure expected to become the 4th largest

contributor to revenues in Africa by 2020

FINANCING INFRASTRUCTURE DEVELOPMENT & AfDB’s ROLE

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US$ 93 billion required annually to finance infrastructure in Africa Current expenditure = US$ 45 billion Potential efficiency savings = US$17 billion Financing gap = US$ 31 billion

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Innovative Financing Instruments • Traditional Design-Bid-Build approaches given way to new

and often long-term arrangements• Attracting private players into infrastructure provision

through different forms of PPPs (DB, DBOM, DBFO, BOO, BOT, BOOT, Full Delivery OR Program Management)

Advantages: • Cost savings• Fully integrated client services• Transferring risks• Innovation• Better asset management• Better level of service• Partnering potential• Developing a new industry• Benefits of economy of scale

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Innovative Financing Instruments

Source: Pekka Pakkala (2002)

While long-term arrangements are attractive they have disadvantages too:•Costly tendering process•Longer tendering periods •Reduction of competition (social justice), usually for large contractors•Uncertainty of long term relationships•Mobilization issues need to be addressed•Loss of control & flexibility

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Other innovative sources include – Local currency bonds – Commodity-linked bonds– Diaspora bonds – External sovereign bonds– Sovereign wealth funds

• Require strong institutions , credible policy environment

• Yet have benefits– Government maintains control– Reduce risk of sovereign debt stress – Reduce instability of financing flows– Deepen domestic financial markets

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AfDB’s Support to Infrastructure• Lending

– Sovereign incl. regional operations pool – Non-sovereign (loans and equity)

• Grants for technical assistance – FAPA (US$ 16 million per year towards private operations)– IPPF (US$ 15 million per year towards regional infrastructure

operations)– MIC (US$ 16 million for operations in middle income countries)

• Risk Instruments– Guarantees– Hedging products

• Coordination– Hosts the Infrastructure Consortium for Africa (ICA) – Executing agency of the Program for Infrastructure Development

in Africa (PIDA)

AfDB’s Approved Financing by Sector – Ongoing as at 31.01.2011

• Infrastructure sectors now attract the lion’s share (46 %) of AfDB’s financing

Agriculture36%

Finance3%

Ind/Mini/Quar13%

Multi-Sector1%

Social Total1%

Power23%

Transport14%

Water & Sanit.9%

Share of Approved Amount by Sector

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2009 Infrastructure Loans & Grants

US$6.05 Billion to Infrastructure

Projects

US$6.05 Billion to Infrastructure

Projects

US$700 Million to Regional

Infrastructure

US$700 Million to Regional

Infrastructure

Recent Key Regional Projects Funded

• Kenya-Ethiopia Highway• Mozambique-Malawi-Zambia Highway• Kenya-Tanzania Highway•Burundi-Rwanda-DRC-Kenya-Uganda Power Interconnection

Recent Key Regional Projects Funded

• Kenya-Ethiopia Highway• Mozambique-Malawi-Zambia Highway• Kenya-Tanzania Highway•Burundi-Rwanda-DRC-Kenya-Uganda Power Interconnection

Other Key National Projects Funded

•US$2.3 billion Power Project in RSA•Power Projects in Botswana, Kenya, Uganda, Ethiopia, Lesotho•Transport, power and water projects in Mozambique

Other Key National Projects Funded

•US$2.3 billion Power Project in RSA•Power Projects in Botswana, Kenya, Uganda, Ethiopia, Lesotho•Transport, power and water projects in Mozambique

ONRI Presentation to COMESA-EAC-SADC 2010

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AfDB’s regional infrastructure operations

• UA 1.17 billion in 2009, an increase of 57.9% over the 2008 level of UA 741.10 million

• 20 percent of ADF-12 resources allocated to the Regional Operations pool

• Increasing participation by private sector investors widening the resource base

• But innovations are necessary

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AfDB’s Support for Infrastructure in Mozambique

Communications Water Supply / Sanitation Power Transport* TOTAL

Historic Operations - 1977-2010(UA million)

35,230,787 92,874,810 82,403,884 295,112,906 505,622,387

Ongoing Operations – as at Jan 2011(UA million)

18,000,000 48,402,000 30,100,000 96,502,000

Recently Approved Operations (UA million)

10,250,000 135,350,000 140,620,000

*Includes one multinational project, Nacala Road Corridor (UA 102.7 million)

• Mozambique’s transport sector historically the biggest beneficiary of AfDB’s funding

• Project pipeline shows continued strong support to infrastructure (43 % of total allocation)

MZFO, 2011

LESSONS FROM AfDB’S INTERVENTIONS

Productivity and efficiency gains from infrastructure investments Cost effectiveness of regional operations Alleviation of public investment constraints through private participation

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Case 1: Senegal’s Infrastructure PPPs

Project objectives and financing:• Four public-private projects approved in energy and

transport between 2009 and 2011• The objective was to improve access and efficiency,

and lower costs of power and transport services• EUR 1.1 billion financing mobilized from private

sector, DFIs (including AfDB), and Public sector

Project Key Development OutcomesDakar Container Terminal (EUR 210 million)

Increased terminal capacity and productivity e.g. capacity increased by 50%

Lower indirect costs of trade e.g. average waiting time for berthing reduced from 15 hours to 1.7 hours.

Dakar Toll Highway (EUR 209 million)

Increased road capacity Lower indirect costs of transport by alleviating congestion e.g. average

travel time from Dakar to Diamniadio from 2 hrs to 45 minutes. Cost saving to the users estimated at EUR 165.2 million in NPV.

Senegal Coal Power Plant (EUR 195 million)

Increase power generation capacity e.g. 925 GWh of electricity generated, about 40% of national consumption in 2008

Improve quality of electricity services e.g. reduce annual power shortages from the 176 days reported in 2008 to 40 days by 2014

Improve national electrification coverage (target: from 46% in 2008 to 66% in 2015)

Blaise Diagne International Airport (EUR 525 million)

Increase air freight and passenger traffic capacity e.g. annual capacity growth of 3 million passengers and 53,000 tons of cargo freight (x3 capacity increase).

Improve quality and cost effectiveness of air transportation e.g. eliminate over-capacity operation at existing airports.

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Case 2: Other 3 billion Networks (O3b), Multinational

Project objectives and financing: • The project involved the design, construction, launch and

operation of a constellation of 8 medium orbit satellites• Objective: delivering affordable, high bandwidth, high quality

internet and cellular access to inland markets in developing countries and island economies

• One-third of capacity dedicated to Africa including 1st wave off-takers from: Nigeria, DRC, Kenya, Tanzania, Malawi, Zambia, Cameroon, Sierra Leone, and Ghana

• Financed entirely by DFIs and private investors (US$1.1 billion) on a limited recourse basis

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O3b: Key Development Outcomes

• Reach ‘white areas’ and fragile states with high quality ICT infrastructure

• Improved access to mobile telephony, broadband and data networks in 9 Africa countries e.g. connect 18 million households to cellular backhaul

• Lower costs of ICT on the continent. – Cost savings versus the equivalent capacity from high orbit

satellites estimated at US$1.3 billion net present value• Regional integration through expansion of broadband internet

and cellular access across several Africa countries

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Case 3: North-South Corridor Program

Selected development outcomes:

• Lower indirect costs of trade e.g. reduce time for clearance of goods from up to 5 days in 2009 to 37 hours

• Improve port capacity e.g. increase cargo handled at Nacala port from 0.9 million tons in 2009 to 1.6 million tons in 2015

• Lower transport and transit costs by 25 percent in 2015 on Nacala corridor

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Case 4: Urban Water Supply, Sanitation & Institutional Support Project in Mozambique

Project objectives & financing:• To improve the coverage of water and sanitation in four

towns: Chókwè, Xai-Xai, Inhambane and Maxixe• Financing of UA 19.06 million (ADF Loan + Grant)

Development Outcomes:• Improved access to safe water and sanitary facilities e.g.

284 595 new uses served with potable water• Lower costs of service delivery e.g. non-technical losses

reduced from 55% to about 30%

STRATEGIES FOR INFRASTRUCTURE DEVELOPMENT & FURTHER ENGAGEMENT WITH THE AfDB

Mobilize domestic resourcesAttract private capital Invest in regional infrastructureInvest in clean energy

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Strategies for MozambiquePerforming more of the old functions better • Improve efficiency in use of allocated resources

– An estimated 17$ billion per year lost through inefficiency in Africa’s infrastructure sectors

• Increase public allocation to capital expenditures for both new investments and maintenance

The Bank’s role: • Policy-based lending, e.g. Nigeria power sector reform

program • Technical assistance, e.g. FAPA TA grant accompanying

a private sector operation

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Strategies for MozambiqueDomestic resources mobilization • Infrastructure bonds in local currency • Example – Kenya’s long-term government

infrastructure bonds– Three bonds valued at (US$1 billion) successfully issued

since 2009

The Bank’s role:• Treasury / MFW4A developing financial markets on the

continent e.g. TA for bond issues, plans to invest in local currency bonds issued in RMCs

• Policy-based lending for financial sector reforms

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Strategies for MozambiqueAttract (foreign) private capital • PPP model • Example: Senegal Dakar Toll Highway

– Total cost EUR 223 million (DFIs, foreign concessionaire, local commercial bank, government)

– Bankability improved by (i) long-tenor foreign currency financing from DFIs (ii) viability gap subsidy from the state

The Bank’s role:• Financier • Lead arranger e.g. Lake Turkana wind farm in Kenya • Honest broker e.g. Markala sugar plantation in Mali • Risk management through currency and maturity matching

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Strategies for MozambiqueAttract foreign private capital • Private equity funds, external sovereign bonds, emerging markets

investors • Example: Africa Infrastructure Investment Fund 2 (AIIF-2)

– US$ 500 million fund; US$5 billion in additional financing mobilized– Equity investments of US$ 10 – 100 million in up to 15 projects– Target: power and transport projects in southern Africa

The Bank’s role:• Equity and loan financing e.g. AIIF-2, Argan Infrastructure Fund• Influence geographic reach of infrastructure PEFs /emerging

partners• Influence practice and standards of infrastructure PEFs / emerging

partners

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Strategies for MozambiqueInvest in regional infrastructure• Regional hydropower projects are the continent’s least-cost

power development strategy & Mozambique has large potential

• Transport corridors capitalizing on coastal access, e.g. North-South corridor

The Bank’s role:• Financier e.g. about US$ 1 billion for N-S corridor projects.

(Already supporting Nacala road corridor with US$150 mn) • Project preparation and TA support, e.g. US$ 11.6mn under

NEPAD-IPPF for N-S corridor projects• Honest broker

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Strategies for MozambiqueDevelop clean energy • Capitalize on clean and renewable energy resource

endowment (hydro, wind), bio-energy potential • Tap into clean technology finance

The Bank’s role: • Experience in project structuring and financing e.g.

financed Cabeolica wind farm in Cape Verde, and Markala sugar plantation in Mali

• Public and private sector financing• Risk management facilities

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THANK YOU

Office of the Chief Economist African Development Bank