Last week, the U.N. Conference on Trade and Development (UNCTAD) released its semi-annual report on FDI flows, which reflected generally dismal results: global FDI declined by 8 percent, with a 5 percent decrease for the developing world in particular. I found it interesting that South Africa’s significant decline in FDI seemed to catch a good deal of media interest. Yes, the continent’s darling and the usually one of the highest recipients of FDI saw a drastic drop (by 43%); admittedly this deserves more than a glance. But I wonder why Finland and Ireland’s numbers, at 96.2 and 42.8 percent respectively, didn’t make much news. South Asia’s inflows also fell by 40 percent as a result of declines across nearly all countries in the subcontinent. In India, inward FDI fell from US$18 billion to US$10 billion. Why South Africa? In my opinion, the flow of investment to sub-Saharan Africa is often reported as a sign that the doors of the last frontiers are being approached.
There is a much-accepted school of thought that the developing world needs foreign investment to become economically sustainable. Partnership with the private sector is encouraged to provide access to new technology, expertise, and—most imperatively—capital needed for vital infrastructure expansion. African countries reportedly lag behind other countries in the developing world when it comes to infrastructure provision especially in the availability of paved roads, telephone lines, and power generation. The effects of this lag are compounded by the region’s strong population growth and the increasing rate of urban migration without a corresponding expansion of basic infrastructure.
A fundamental cause of the lack of infrastructure and services is a funding mismatch. The key sources of funding for the provision of water, sanitation and electricity services include government tax revenues, usage fee revenues, and aid—but the funding allocated to these services is not adequate. Public spending for water and sanitation services in sub-Saharan Africa typically equals less than 0.5% of GDP and is as low as 0.1% in some countries. In addition, the dominance of public enterprises has led to a monopolistic market environment and the ensuing dearth of competition has been blamed for inefficiency and the dreadful state of these services. Moreover, these enterprises often price services below cost, contributing to the lack of willing capital and investment in infrastructure.
Unfortunately, many challenges stand in the way of attracting investments in the infrastructure sector from global investors. In comparison to other continents, Africa has a low overall population density, low rates of urbanization, numerous small economies, and an absence of basic services. This makes capital outlay very high in comparison to other regions. Better roads, for example, could make it cheaper to build and maintain water and sanitation facilities in rural areas.
Thus, the sub-Saharan Africa infrastructure quandary begets itself, as—without good infrastructure—it is much more difficult to lure investors. In order for the continent to achieve its economic potential, increase growth, and progress from being an exporter of raw materials to a producer of finished goods, service delivery must improve. Perhaps an idea could be the participation in local capital markets with a two-pronged objective: to stimulate the markets and to increase access to finance for infrastructure projects. This could be done by issuing themed bonds where the proceeds could be aligned to specific infrastructure projects. There are surely other innovative means to offer investors comfort and opportunity while at the same time providing access to capital for crucial projects.
Here, a good example is MIGA’s recent support of a U.S.-dollar cross-currency swap arrangement between Standard Bank Plc and the government of Senegal. MIGA has insured against a failure by the government of Senegal to honor its obligation to make requisite payments under the swap—a hedge against currency risk exposure related to the 10-year tenor, $500 million Senegal Eurobond issued in May 2011. The proceeds of the Eurobond will be used to finance new infrastructure projects such as a 19-kilometer extension of the Diamniadio Toll Road to the new Blaise Diagne International Airport project and critical energy sector investments.
Indeed, acknowledging the importance of service and infrastructure provision, 58% of MIGA’s new business volume this year was in the infrastructure sector. Among our new projects, an important example is the agency’s support to the Henri Konan Bedie toll bridge in Côte d’Ivoire, the country’s first public-private partnership since the civil conflict began.
Sure, not too long ago markets were merry and risk appetites began to grow. Then, as is often said in financial street parlance, the music stopped but everyone kept on dancing. Initially, those who sought higher returns considered South Africa their only stop, perhaps for logical reasons. Elsewhere on the continent, the valuation conundrum thickened: the ability to value potential assets given the lack of known variables, historical performance, ratings—together with murky investment climates—hindered the ability to determine an appropriate discount rate. Once the global markets turned sour, investors took to their heels and fled the much-untapped African markets.
But times have moved on and the continent’s investment climate is continually improving. For those pioneering investors in the African frontier markets, creative structures could very well fill a gap.