US’s new Africa policy will increase competition to fund infrastructure

On December 13, the US outlined its new Africa strategy, stating that 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” lending to promote Chinese and Russia interests in Africa. While there are risks of polarisation — making countries “choose” between US or Chinese investment, for example — we expect that higher levels of US development finance lending in Africa will succeed in attracting more commercial bank lending than policy lending by Chinese or Russian policy lenders, providing a multiplier effect that should mean a net overall increase in funding for African infrastructure projects over the next decade. The US had fallen considerably behind China in funding African infrastructure over the past decade.

Out of all investment from development finance institutions (DFIs) flowing into African power projects in the past 10 years, Chinese lenders provided more than half of it (53 per cent), followed by multilaterals (22 per cent) such as the International Finance Corporation. US-based DFIs and export credit agencies (ECAs) only contributed 3 per cent of the funding. Chinese policy lenders put $8.7bn in sub-Saharan Africa infrastructure projects in 2017 alone. This is not to say the US has been absent, simply more diffuse. It has played a major role co-funding projects with commercial banks and other players, especially in power. Its Power Africa programme reported recently that since its inception five years ago it has helped to fund 80 transactions valued at more than $14.5bn that are now either online, under construction, or have reached final close. The programme successfully leveraged public funds to attract mostly private capital.

Now the renewed US policy of long-term engagement with key allies is backed with real money to close the gap. The new US International Development Finance Corporation absorbs the Overseas Private Investment Corporation to become the primary US development finance institution for emerging markets, but with twice the previous lending capacity — circa $60bn.

This move — the biggest in US development policy for decades — was bipartisan legislation that prioritises countering China’s growing influence in Africa, both to promote economic development that may help to make the US more secure and to create markets for US companies. When the US Export-Import Bank’s board of directors is back up at full strength, it will bring its $70bn balance sheet to bear on African projects. While US DFIs and ECAs tend to partner with other DFIs and commercial banks, Chinese policy banks in contrast have often acted as sole lenders on projects, with different levels of due diligence and fewer impact investing criteria than many DFIs.

For borrowers, this can mean a quicker process but with less of the multiplier effect that comes from attracting private capital. Interestingly, lenders saw US moves coming. A survey by my employer Baker McKenzie with infrastructure data provider IJGlobal, conducted before the policy shift, asked 434 executives in 105 countries which country would be the biggest funder of African power projects over the next decade. The US came out top, despite its 3 per cent funding contribution over the past decade.

Key questions now will be about how this money should be put to good use and where. The Chinese perspective Against a background of a global geopolitical shift in trade relations, China has noted that it is looking to work with African countries in a participative and inclusive way. Chinese President Xi Jinping’s tour of Africa earlier this year is proof of the increasing interdependence of the maturing but still fast-growing Chinese economy and developing economies in Africa. 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 which China is providing.

African economies as partners, not pawns Setting aside global politics and tensions between superpowers, Africa still suffers from massive under investment. According to the African Development Bank (AfDB), poor infrastructure has cost the continent a cumulative 25 per cent in growth in the past two decades.

The World Bank estimates that the continent needs more than $90bn per year to begin bridging the infrastructure gap. Investments in energy and infrastructure are often big ticket, long-term commitments with fixed locations, fixed revenue streams and structures, which require substantial financial buy-in from all parties and stakeholders. Because of market volatility, low credit ratings and a lack of exposure to private investors, emerging markets, and Africa in particular, require innovative financing solutions. Both global and regional DFIs are becoming more innovative as they seek to bridge the infrastructure gap in Africa.

Recently the AfDB bought insurance on a $1bn loan portfolio from hedge funds, reducing the amount of capital it holds against loans and freeing up lending capacity. Meanwhile, Afreximbank has introduced an African fund for export development to attract more private equity, and a project preparation facility to address project development-related constraints.

The way in which DFIs, ECAs and commercial banks interact is also changing, with a growing emphasis on partnerships, especially on larger projects. With its new Africa policy, the US has explicitly linked its economic and security interests with its investment and aid in Africa. From an African perspective, however, real progress will still require a plurality of investors and strong partnerships — as well as a movement towards the strong legal and regulatory frameworks required to make projects bankable for the long term. US policy developments are a positive part of this picture. Jim O’Brien is global head of major projects, Baker McKenzie.