FINANCING INFRASTRUCTURE: SPOTLIGHT ON AFRICAN DEBT

It is a truth universally acknowledged that there is direct correlation between the development of Africa’s infrastructure and the continent’s economic progress. The recent infrastructure investment boom and financing of development projects in Africa is of course welcomed and combined with a critical focus on debt sustainability and increased Africa based funding and controls, the situation can be a win-win for strategic investors and local economies. But there is a long way to go and there will be constant pressure to innovate and for Africa to stand up for itself by ensuring that debt is sustainable.  Many commentators have been raising concerns about debt sustainability in the context of, among other factors, the fall of commodity prices, Chinese slowdown, interest rate and currency issues, and an inability to raise local tax. These are real issues that cause tension between the critical need for infrastructure to drive growth and short to medium term risks to the economic base to pay for it.

The current spate of infrastructure investment in Africa is linked to the "Sustainable Development Goals" initiative adopted by the international community in September 2015 and propagated by the United Nations. There are 17 Sustainable Development Goals in total, including "Industry, Innovation and Infrastructure" and "Sustainable Cities and Communities" – and according to the Organisation for Economic Co-operation and Development, more than 80% of these goals rely on a form of infrastructure development. This has inevitably affected the nature and type of lending to and within the continent for infrastructure development.

Currently, African countries are actively seeking investment from external investors in a variety of forms. China, for example, is set to invest about US$60 billion in Africa over the next few years with much of this investment going into infrastructure-related (including energy) projects. And others, such as Japan, are looking to do the same as political and economic concerns combine (see https://www.hoganlovells.com/en/blogs/the-a-perspective/africa-stand-up-navigating-the-new-world-order). 

But beyond this more direct sovereign investment, there is also a marked diversity in the types of borrowing available to African countries, with some economies attracting private lenders, and others continuing to use official lenders and syndicated loans. Indeed, the scope and appetite for pension funds and private equity investment in infrastructure on the right terms is increasing. 

Furthermore, we have seen significant increase in debt financing models such as Sukuks and Eurobonds across the continent. The total value of yearly issues of Eurobonds by sub-Saharan governments rose from just about US$200 million in 2006 to about US$6.3 billion in 2014 and 2015. The slowdown in the growth of major African economies, with South Africa only growing by 0.3% last year and Nigeria contracting by -1.5% due to the fluctuation in oil and commodity prices, coupled with uncertainty both of the global markets and within certain African states, presents other opportunities, but also challenges sustainability, and thus bankability. 

Nonetheless, a recent example of the growing global appetite for Africa investment is the World Bank announcing on 19 March 2017, at a meeting of the G20 countries, a record financing package of US$57 billion over three years for sub-Saharan Africa, with a focus on infrastructure. 

In addition, the Africa Finance Corporation, an organisation aimed at addressing Africa’s infrastructure development needs while seeking a competitive return on capital for its shareholders, recently successfully issued a US$500 million seven-year Eurobond, which was oversubscribed. 

African economies have been accessing the debt market in a number of ways but the Economic Development in Africa Report 2016, published by the United Nations Conference on Trade and Development, highlights the fact that this approach should not be at the expense of debt sustainability. Debt sustainability is also a responsibility of the relevant lenders and all parties must endorse principles of responsible lending or risk ultimately losing out. 

For example, African governments need to retain their ability to raise and service debt directly as well as indirectly service any associated debt costs effectively in project finance transactions. If a government’s existing debt burden and payment obligations to project owners become unsustainable to service or affects their credit rating, this will result in future direct funding becoming more difficult to source, future project finance becoming less bankable or more expensive and existing debts requiring additional credit support, which ultimately reduces government funds that could alternatively be used for further infrastructure development. 

This challenge of debt sustainability can only be addressed holistically at a political and economic level by African states taking a key role in creating and then underpinning the right conditions for development and combining private and public sector strengths to deliver long term and sustainable projects. 

Hogan Lovells is the headline legal sponsor at AFC Live 2017, the key industry infrastructure investment summit hosted by the Africa Finance Corporation (AFC) that will take place in Abuja on 15 and 16 May 2017. A number of high level participants from both the government and the private sector are expected to attend, including the Presidents of Nigeria, Ghana and Uganda, and Andrew Skipper, head of the Hogan Lovells Africa Practice, is speaking. 

Follow Hogan Lovells Africa on twitter: @HLAfrica 

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