What financial tools do African countries have at their disposal to finance infrastructure projects? Exploring the role of development finance in addressing Africa’s infrastructure needs

1. Paul Jjombwe Page 1
DEVELOPMENT FINANCE IMPACT – ARTIFACT PROJECT
What financial tools do African countries have at their disposal to finance infrastructure projects?
Exploring the role of development finance in addressing Africa’s infrastructure needs
There are too many gaps and too little money
A critical challenge facing many African countries is that of closing huge development gaps especially in
educational attainment, access to health care services and infrastructure like energy, roads and water
among others.
According to Africa Infrastructure Country Diagnostic (AICD) estimates, Africa’s total infrastructure
financing needs amounted to US$ 93 billion a year in 2008, with only $45 billion financed. It is abvious
that huge financial resources are required to finance these developments to close these gaps.
Traditionally, African governments have budget constrains which make them unable to finance such
infrastructure out of government purses.
Private financial institutions are typically underdeveloped or they are not structured to finance such
developments. In addition, these institutions have used traditional methods to price financial
interventions based on perceived or real risk which have resulted in them primarily catering for the
needs of the small corporate sector and a few privileged individuals. Therefore it is not surprising that
there is substantial poverty of close to 60% and high inequality in Africa even though some gains have
been made in poverty reduction.
Need for development finance
It is obvious that new financing plans and strategies are required. Here, development finance offers a
promising path. Development finance relates to a wide range of financing mechanisms that target
environments in which the public sector has limited financing resources and which private financial
markets fail due to risks or high costs. The first critical element of development finance is to provide
capital to firms and projects that fail to attract funding is largely due to the poor and underdeveloped
financial markets, high transaction cost, information asymmetry and high risks in African economies. The
other important element of development finance is the provision of inclusive financial services such as
credit, insurance, savings and payment services to the poor.
The attractiveness of development finance lies in its ability to innovatively reduce or cover transaction
costs, risks and information asymmetry and to mobilize and pool huge financial resources in a less costly
manner while financing Small and Medium Enterprises (SME), Infrastructure projects, social
development and inclusive finance.
Development finance interventions can be structured in various ways, for example, governments and/
or multilateral development agencies can collaborate with private financial institutions to reduce market
imperfections by creating alternative or specific funds and programmes to directly supply capital to

2. Paul Jjombwe Page 2
those markets, projects and firms which the private institutions cannot serve. Similarly, development
can be financed by private institutions or by development finance institutions.
Some of the notable examples of development finance modes may include microfinance, project
finance, mobile banking, Foreign Direct Investment (FDI), Agricultural Value Chain finance, Official
Development Assistance (ODA) and structured trade finance and many others. Each mode of
interventions is unique and addresses specific development goals. In this paper, I will highlight the role
of project finance in addressing Africa’s ever increasing infrastructure gap.
Using project finance to make progress
Project finance has the ability to raise funds to finance most if not all infrastructure projects. The major
challenges in financing infrastructural developments in Africa include the fiscal pressure by
governments, underdeveloped financial markets and the perceived risk and the high transaction costs in
a typical straight debt or aid financing of such projects.
Yet, project finance obviates most of these challenges. For example, project finance can raise huge
financial resources which are difficult to raise in poor are underdeveloped financial markets typical of
most African economies. Project finance can allocate capital effectively to finance infrastructure projects
such as energy, transport and water.
Project finance also helps to reduce transaction costs from information asymmetry and risks. Indeed the
design of project financing is based on effectively dealing with risks. It is flexible in this regard as specific
project finance modes, like public-private partnerships, deal with effective pricing and risk sharing across
private and public partners. If most governments in Africa pay attention to this kind of intervention, a
significant amount can be achieved by way of financing energy and transport infrastructure projects.
Development finance as a Way forward
To conclude, the benefits of just one development finance intervention as highlighted above, show
massive potential if such financial tools are harnessed and cultivated well. Unfortunately, not much has
been done in most African countries with regard to encouraging the use of project finance as a tool to
deliver strategic infrastructure projects.
Between 2003 and 2013, the World Bank reports that only 158 project finance deals valued at $59
billion (representing a mere 3% of the 5,000 deals globally valued at $2 trillion) have been closed in Sub-
Saharan Africa.
It is time that governments and private financial institutions in Africa realize the potential of
development finance and upscale the deployment of development finance as a tool to finance growth
and social development if Africa is to achieve the 2030 Sustainable Development Goals (SDGs).