BY DR. K. MLAMBO DEPUTY GOVERNOR RESERVE BANK OF ZIMBABWE RAISING CAPITAL FOR AFRICA AND INFRASTRUCTURE PROJECTS

BACKGROUND o Africa has a huge infrastructure deficit : In terms of supply and access, Africa lags behind other regions  Ellen Johnson Sirleaf has noted that on match day, the Cowboys Stadium in Texas uses more electricity than Liberia o The little available infrastructure is expensive Moving freight by road in Africa costs $0.05-$0.13 per tonne-kilometer in Africa. Elsewhere in developing regions: $0.01-$0.04 per tonne-kilometer.

BACKGROUND o Yet infrastructure matters for sustained economic growth and poverty reduction World Bank: if African infrastructure catches up with that of Mauritius, per capita growth in 2013 would have been 3.7% instead of 1.5% recorded Catching up with the level of infrastructure in Korea would have meant per capita growth of 4.1% o Investment in infrastructure is thus key to unlocking Africa’s growth potential.

I But finance for African infrastructure remains inadequate nfrastructure Funding Requirements $48 Billion $30 Billion $15 Billion Funding Gap African Governments ODA+ Private Sector $20 Billion for Operations & Maintenance $10 Billion for new Infrastructure Total $93 Billion

BACKGROUND o For Zimbabwe, World Bank puts the infrastructure funding needs at US$33 billion over two decades: Electricity – US$11.3 billion Transport – US$13.39 billion Water – US$1.81 billion Telecom – US$6.75 billion

Closing the Funding Gap o How should this financing gap be closed? Remove/reduce inefficiencies in the use of existing infrastructure  Estimated that on average about US$17 billion is lost each year due to inefficiencies, such lack of rehabilitation, poor budget execution, etc  Improving efficiencies would reduce the financing gap to US$31 billion a year (still substantial) o Countries such as Zimbabwe rely on fiscal financing o But capital budgets insufficient to meet infrastructure deficiencies in the region o Need to search for alternative/innovative ways of funding infrastructure

ALTERNATIVE SOURCES OF INFRASTRUCTURE FINANCING Domestic borrowing International borrowing Enhancing the role of the Private Sector Sovereign wealth funds Diaspora financing Engaging the new development partners

Domestic Borrowing o Financing infrastructure development through domestic borrowing: e.g. local infrastructure bonds o e.g. Kenya raised about US$1.6 billion (KSH 141bn) through domestic bond issues, from 2009 to September Opportunities No foreign currency risk; Improves intermediation of savings; and Facilitate monetary policy implementation. Challenges oCrowds out private sector; and oHigh interest rates.

Accessing Global Capital Markets o Due to improved macroeconomic conditions, low interest rates in developed economies, African countries accessing international sovereign bond markets o Examples: Ghana issued bonds worth US$750 million in 2007; Senegal issued bonds in 2009 and 2011 worth US$200 million and US$500 million; Zambia issued bonds worth US$750 million in 2012; and Kenya raised US$2 billion in June 2014.

Accessing International Markets cont’d Issuance reflects Africa’s high return potential, owing to its natural resource wealth and improved macroeconomic policies and development prospects. Helps in benchmarks pricing of corporate bonds in international markets Strengthens macroeconomic discipline, transparency and structural reforms Provides access to long-term funding to help finance infrastructure Lowers debt servicing costs

PRIVATE SECTOR FINANCING o Specialized infrastructure or private equity funds - funds created by established infrastructure firms, including upstream industries that invest in various infrastructure projects. o According to EY, in 2013, about US$3.2 billion was invested in 98 private equity investments in Africa. o But SSA still lags behind other regions in attracting significant amounts of private equity investments o Also average size of transactions small—between US$30million- $60 million

PRIVATE SECTOR FINANCING Advantages o Removes burden from the fiscus; and o Efficient allocation of resources; Challenges o High financing costs; and o Difficulties in pricing some public goods e.g. toll fees.

Securitization of natural resources o Natural resources lend themselves easily to securitization o Growing trend by Investors and new donors to adopt this form of financing  Chinese investments in: Angola, Nigeria, and Sudan are backed by oil; Gabon backed by iron; Ghana backed by cocoa; and Democratic Republic of Congo backed by copper. o Note: critical for Governments to negotiate equitable deals that correctly value the resources assigned. Otherwise, risk of mortgaging minerals at highly discounted levels

Sovereign Wealth Funds (SWF) o SWF represent a large and growing pool of savings, esp. in NR rich countries Globally, SWF control about US$30 trillion o Africa experiencing the strongest growth in SWFs Some of the countries with SWF include Algeria ($77bn); Libya ($65bn); Botswana ($6.9bn); Angola ($5bn); Nigeria ($1bn); Gabon ($380m); Mauritania ($300m); Ghana ($100m) and Eq. Guinea ($80m) Potential for more to be set up as countries in east and west Africa continue to make oil&gas discoveries o Asset allocation shifting towards long-term investments to close the infrastructure gap

Sovereign Wealth Funds (SWF) o SWFs from other regions also beginning to invest in Africa e.g. the Investment Corporation of Dubai recently invested $300m in Nigerian based Dangote Group  focus will be on agriculture and infrastructure o But challenges remain The funds are relatively small (the Norwegian SWF is $900 billion). Governance issues, esp. regarding transparency and accountability in the admin of the fund. Not all countries can set SWF—need excess forex reserves

Securitizing Diaspora Remittances o Africa has a large growing diaspora, estimated at over 140 million by the AfDB o Remittances by Africans to their home countries exceed ODA flows In 2012 total remittances to Africa stood at US$60 billion ODA to SSA amounted to US$44.6 billion o According to the WB, Africa could potentially raise US$17 billion annually from securitization of future export flows and remittance

Diaspora as catalyst to develop and deepen local capital markets Zimbabwe has a large diaspora population living and working in countries such as South Africa, UK, Australia, and USA, among others. Diaspora remittances have become a major source of foreign inflows, amounting to US$750 million in To improve the investment instruments available to the diaspora, all non-resident Zimbabweans are now permitted to invest in any listed counter on the Zimbabwe Stock Exchange, without any limit (i.e. up to 100%).

Engaging new development partners o New development partners, such as China, India and Brazil increasingly playing a prominent role in the global economy o Chinese investments to Africa increased from $317m in 2004 to $2.5bn in 2012 But only 4.3% of its global total—potential to grow Only 5 countries dominate Chinese investment in Africa— South Africa, Zambia, Nigeria, Algeria, and Angola. o Brazil and India also expanding their reach into Africa: emphasize shared colonial legacy, shared identity (Brazil) and longer history on the continent

CONCLUSION o To attract additional financing: o African countries must institute sound economic policies to attract investors o Policies that facilitates development and deepening of capital markets to attract long term capital o Strengthens governance systems and capacity building in contract negotiation; and o Addresses adverse factors which increase country risk profile.