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by Emelly Mutambatsere
A regional approach to infrastructure development is potentially transformative. We have heard of the large hydropower potential of the Inga Reserve in DRC. This national resource has significant regional implications and could be a game-changer for the African electricity market, with the potential to singularly nearly double the electricity generation capacity of the continent’s largest power pool, while adding cleaner and cheaper electricity to the grid. But four decades after the commissioning of Inga 1, a mere 4% of the available potential has been harnessed.
This and other similar experiences illustrate the challenges of a regional approach to infrastructure development: it is complex and messy, involving many moving parts of which the most decisive may not be commercial. It entails markedly higher transaction costs arising from the scale of investments, multiplicity of players and complex risk factors. The execution of regional projects also requires full, effective cooperation among countries, effective coordination among countries and government entities during implementation, and in some cases, harmonization of policies, rules and regulations. These challenges are compounded in multinational projects involving the private sector.
Multilateral development banks (MDBs) have certain inherent comparative advantages which makes them the partner of choice in executing these types of projects. In leveraging their comparative advantage, MDB can play roles or bring benefits to project which are either not available on the market or cannot be offered cost-effectively. We refer to this as the “additionality” of MDBs. In what follows, I discuss some of these roles.
First, their supranational nature makes MDBs uniquely positioned to play an honest broker role and facilitate convergence of views across borders on, for instance, cost-sharing, procurement modalities, and security of access or service agreements. We saw this role played out by the AfDB and the World Bank Group on two multinational operations – Kazungula Bridge and Chirundu Border Post respectively – both located on the North-South corridor and requiring harmonization of policies and procedures. Chirundu, for example, was the first one-stop border post to be established on the African continent; and entailed harmonization of highly politically sensitive protocols on immigration procedures and border tariffs, as well as sharing of border information systems. These reforms often require a neutral and “patient” broker to establish a common vision.
Second, although mostly known for their lending operations, development banks are also often called on to play the role of advisor. This role is fundamental in multinational operations because of the complexity and multiplicity of sovereign decisions that must be taken. In infrastructure sectors historically dominated by the public sector, MDBs have played an advocacy role and, through policy dialogue, championed the implementation of key reforms necessary to engage the private sector. When Kenya made the decision to concession its rail network jointly with Uganda about a decade ago, it sought the advisory services of the IFC, trusting not only its expertise, but also its convening power with respect to private finance and its capacity to provide complementary services such as facilitating negotiations with Uganda. The AfDB’s African Legal Support Facility provides similar support to governments and private firms with a particular focus on structuring complex regional projects, defining the legal environment and contractual terms for private sector involvement, and brokering negotiations of multifaceted commercial contracts.
Third, while advocacy, advisory and facilitation can enable countries to move from an idea to a plan for a regional project, in the case of concessions and public-private partnerships (PPPs), there is sometime a need for further risk mitigation measures to support private sector participation. MDBs are uniquely able to provide guarantee instruments which transfer liability for political risk to governments (and sometimes on concessional terms), as a way of mobilizing private investments for projects involving countries where political risk is (or is perceived to be) high. Aside from making high-risk projects bankable, risk management instruments involving governments, such the partial risk guarantee (PRG) offered by the International Development Agency (IDA) and the African Development Fund (ADF), have also succeeded at incentivizing government to implement key reforms that address performance risk. The above-mentioned Kenya-Uganda railway joint concession benefits from these instruments. Active roles of this nature complement political risk mitigation brought by MDBs implicitly, when they simply “lend their name” by participating in, or championing, specific operations.
Fourth, because MDBs benefit from certain privileges and immunities in the countries they operate, such as preferred creditor status (PCS), they are better able to weather country risk. Although not legally binding, historical practice and moral obligation gives these privileges and immunities significant weight. PCS, for instance, protects loans extended by MDBs from risks such as currency inconvertibility or moratoriums on debt service. This privilege can be extended directly to commercial creditors through the use of an A-B loan structure whereby the MDB takes on a “lender of record” role for debt mobilized from commercial sources. Fundamentally, PCS and other similar measures enable MDBs to operate in riskier environments, while still maintaining high credit worthiness. For instance, the AfDB currently operates in 18 fragile states having local presence in half of them.
The list is long, but let me close with a few observations on the development mandate of MDBs. In general, this mandate directs MDB funds to highly developmental projects, or project phases, with low profitability. This includes supporting the development of non-income generating regional infrastructure or of multinational operations of a public good nature. In financially under-served markets, MDBs often seek to provide the type of financing that complements private capital and, to the extent possible, contributes to developing local capital markets. This often entails providing long-term financing required for commercial viability when projects have high up-front costs and a long lead-time to revenue generation. We see long tenor being an almost standard feature in AfDB financing for infrastructure PPPs. In the context of missing or nascent markets, MDBs have the capacity to provide resources with a large grant element, thus support both the project and the industry’s development. We see this form of financing in projects that use innovative technologies, such as in grid-connected solar power projects. I should emphasize the crucial role MDBs can play to support preparation of strategic regional operations, especially in the absence of robust public systems or innovative public-private partnerships to perform this role. This form of engagement is evident in the ongoing project preparation work for the Grand Inga project.
In conclusion, we are interested in the “additional” roles of MDBs not for their own sakes, but because they enable development partners to pay the more useful role of catalyzing private finance. The AU, NEPAD and AfDB place the cost of implementing the continental regional infrastructure Program for Infrastructure Development in Africa (PIDA) at USD 360 billon cumulative through to 2040. Clearly, the most critical role of MDBs will not be in the form of the funds they can put on the table, but in how much they are able to facilitate the participation of private sector players.
Emelly Mutambatsere is a Principal Regional Economist at the AfDB’s Southern Africa Resource Center. Prior to joining the African Development Bank, she worked as a Post-Doctoral Associate with the Emerging Markets Program at Cornell University in Ithaca, New York. She holds a PhD in Applied Economics and Management from Cornell University.
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