Investment
How to Attract Private Finance to Africa’s Development By Abebe Aemro Selassie, Luc Eyraud, and Catherine Pattillo
AFRICAN ECONOMIES ARE AT A PIVOTAL juncture. The COVID-19 pandemic has brought economic activity to a standstill. Africa’s hard-won economic gains of the last two decades, critical in improving living standards, could be reversed. High public debt levels and the uncertain outlook for international aid limit the scope for growth through large public investment programs. The private sector will have to play more of a role in economic development if countries are to enjoy a strong recovery and avoid economic stagnation. Heads of state from Africa made this one of their resounding messages during the recent summit on “Financing African Economies” held in Paris in May. Infrastructure—both physical (roads, electricity) and social (health, education)—is one area where the private sector could be more involved. Africa’s infrastructure development needs are huge—in the order of 20% of GDP on average by the end of the decade. How can this be financed? All else equal, the main source of financing would be more tax revenue collections, something that most countries are working towards. But, given the scale of the needs, new financing sources will have to be mobilized from the international community and the private sector. Africa is a continent that holds immense opportunity for private investors. It has a young and growing population and abundant natural resources. Cities are seeing massive growth. Many countries have launched long-term industrialization and digitalization initiatives. But significant investment and innovation are necessary to unlock the region’s full potential. Recent research published by IMF staff shows that the private sector could, by the end of the decade, bring additional annual 68
July-August 2021
financing equivalent to 3% of sub-Saharan Africa’s GDP for physical and social infrastructure. This represents about $50 billion per year (using 2020 GDP) and almost a quarter of the average private investment ratio in the region (currently 13 percent of GDP).
What constrains private finance now? At the moment, the private sector is not involved much in financing and delivering infrastructure in Africa, compared to other regions. Public entities, such as national governments and state-owned enterprises, carry out 95% of infrastructure projects. The volume of infrastructure projects with private sector participation has significantly declined in the past decade, following the commodity price bust. The limited role of private investors is also apparent from an international comparison perspective: Africa attracts only 2% of global flows of foreign direct investment. And when investment does go to Africa, it is predominantly to natural resources and extractive industries, not health, roads, or water. To attract private investors and transform the way Africa finances its development, improvements in the business environment seem critical. Our research shows that three key risks dominate international investors’ minds: Project risk. Despite Africa presenting a wealth of business opportunities, the pipeline of projects that are truly “investment-ready” remains limited. These are projects sufficiently developed to appeal to investors that do not want to invest in earlystage concepts or unfamiliar markets. Financial and technical support by donors and development banks can help countries fund feasibility studies, project design and other preparatory activities that
DAWN
www.africabusinessassociation.org
