The Battle for Influence in African Infrastructure Lending

Global challenges such as ever-changing geopolitical conditions, fluctuating commodities prices, urbanisation, population growth and climate change are more keenly felt in emerging markets than in developed markets. Key to achieving the robust economic growth required to overcome these challenges – and to enable emerging market economies to make the most of their opportunities – is infrastructure

Infrastructure financing

According to African Development Bank (AfDB), poor infrastructure has cost Africa a cumulative 25% in growth in the last two decades. The World Bank estimates that the continent needs more than USD 90 million per year to begin bridging the infrastructure gap.

Our new report, ‘A Changing World: New trends in emerging market infrastructure finance’ looks at trends in infrastructure finance. It shows that development finance lending is the most important factor in the funding of infrastructure projects in Africa. It also outlines the battle for influence on the continent between policy lenders from China and the US.

China’s role

China has targeted sub-Saharan Africa in recent years, both in the context of its need for natural resources and as part of the Belt and Road Initiative (BRI). Chinese policy banks loaned USD 19 billion to energy and infrastructure projects in the region from 2014-2017, almost half of which was in 2017.

Against a background of a global geopolitical shift in trade relations, China said it was looking to work with African countries in a participative and inclusive way. The relationship is seen to be mutually beneficial, China needs natural resources and new markets for its exports, and Africa needs funding for infrastructure investment.

The US – a major player

The US is also seen as a major player in infrastructure investment in Africa. The US recently set up a new USD 60 billion agency to invest in developing countries.

Further, the Power Africa program reported that since its inception five years ago it has funded 80 transactions valued at more than USD 14.5 billion.

In December 2018, the US outlined its Africa strategy by reiterating its commitment to strong partnerships with key countries in Africa. The US said it would seek to promote intraregional trade and commercial ties with its African allies, shifting its focus from “indiscriminate aid” to one of trade and investment and positioning itself as a more sustainable alternative to what it termed “predatory” Chinese and Russia interests in Africa. The report showed that the US is concerned about the security implications of China gaining control of strategic assets as a result of unsustainable borrowing by some developing countries.

Still, IJGlobal data shows that out of all development finance institutions (DFI) investment flowing into African power projects in the past ten years, Chinese lenders provided more than half of it (53%), followed by multilateral development finance institutions (22%). US-based DFIs only contributed 3% of the funding. However, 32% of survey respondents said that they expected US-based development finance institutions (DFIs) and Export Credit Agencies (ECAs) to be the most active lenders into African power projects – a critical part of infrastructure activity –  in the next ten years, while 29% of respondents said that they expected China-based DFIs and ECAs to be the most active.

Bridging the gap

Despite the torrent of development finance lending, sub-Saharan Africa’s infrastructure gap remains vast. Three priorities which are key to reducing the financing gap include (i) a move away from traditional funding, and recognition that alternative structures and new financial instruments are needed; (ii) an increased focus on project preparation funding and the creation of credible and predictable regulatory environments; and (iii) increased support for private equity investment. The way in which DFIs, ECAs and commercial banks interact is also changing, with a growing emphasis on partnerships, especially on larger projects. The report shows that greater cooperation between DFIs, ECAs and commercial banks leads to more projects being financed.

Read ‘A Changing World: New trends in emerging market infrastructure finance’ here.

Jennifer Stolp is a partner in the Banking & Finance Practice Group based in Johannesburg. Ms. Stolp has considerable experience in advising on general banking and finance mandates.