- Reference: P-ZA-HA0-002
- Approval date: 11/09/2008
- Start date: 06/01/2009
- Appraisal Date: 27/06/2008
- Status: OngoingOnGo
- Implementing Agency: NEDBANK LIMITED
- Location: Multinational
The project is a Line of Credit (LoC) of USD 100 million to Nedbank Limited, Nedbank Group's principal subsidiary. The proposed LoC will be used exclusively to finance USD-denominated project finance transactions in Africa but outside of South Africa with a particular focus on infrastructure and industrial projects. In order to meet Nedbank's need for longer term funds, the LoC will feature a grace period of up to three-year and a 10-year amortization profile. Nedbank has a strong pipeline of projects with high visibility for rapid disbursement of funds. These are important continental projects that will make a strong contribution to growth and development. Through the LoC, the Bank will be leveraging a strong middle-income country (MIC) financial institution that is capable of assessing and taking risks in lower-income countries (LICs) and fragile states.
Nedbank plans to finance a group of projects with short-term disbursement probability in the infrastructure, industrial and mining sectors. These projects amount to USD 3.3 billion in total investment of which Nedbank would provide USD 645 million. Of this, roughly USD 1.4 billion (USD 265 million for Nedbank) is expected to close in 2008. The largest sector concentration is infrastructure, particularly power, followed by industry and mining. Nedbank's project pipeline is geographically diversified with a focus on the SADC region. There are projects located in nine different countries, and several of the projects are regional in nature and will promote regional integration.
The primary rationale for the project is to increase the availability of commercial finance for infrastructure and other productive sectors to promote growth and productivity.
There is a growing body of evidence that weak infrastructure is a major impediment to higher productivity and growth in Africa. This has prompted governments and donors to step up investment in infrastructure in recent years. Using various methodologies, a number of studies have estimated Africa demand for investment in infrastructure at roughly USD 25-30 billion per year. The emerging African Infrastructure Country Diagnostic (AICD) study is providing a clearer understanding of Africa's infrastructure needs. In total, the AICD estimates demand for infrastructure investment at USD 75 billion per year, or 12% of continental GDP, over the next decade. This suggests a significantly larger total investment demand than earlier studies. Even using the smaller, earlier estimates, it is clear that there is a very large need for investment in infrastructure. In addition to infrastructure, there is also considerable demand for investment in other productive sectors such as industry/manufacturing, agri-business and natural resources. While sector data is difficult to obtain, studies have recently suggested that the appetite for investments in natural resources in Africa is increasing.
The supply of public finance for infrastructure in Africa comes primarily from donor support and government budget allocations. In 2006, DAC donor support for infrastructure was approximately USD 4 billion. Based on data from the ICA, donor commitments to infrastructure increased further in 2007. There have also been large new flows from non-traditional donors such in Asia and the Middle East. China has substantially increased aid and investment in Africa. It is estimated that total Chinese commitments to infrastructure in Africa totaled roughly USD 4.5 billion in 2007. Flows from India have been much smaller but are growing. In total, the AICD study estimates that public expenditure on infrastructure has averaged about 8% of GDP in sub-Saharan Africa. This captures both government spending and donor contributions. Much of this is expenditure on operating expenses and does not build incremental capacity. In volume, most sub-Saharan African public spending is less than USD 600 million per year on infrastructure. This demonstrates that despite increased flows, public financing has been unable to keep pace with Africa's needs.
Domestic and foreign private investors constitute a growing source of finance for infrastructure. In 2006, more than 30 infrastructure projects were financed with private participation compared to just two in 1990. Over the same period, the amount of finance mobilized increased to roughly USD 11.8 billion compared to USD 40 million. Private infrastructure investment in sub-Saharan Africa has been highly concentrated both by country and by sector. Since 1990, 60% of private infrastructure investment has gone to two countries (South Africa and Nigeria), while the telecommunications sector has attracted 65% of total investment. In the 1990s, private investment in infrastructure came primarily from large companies from developed countries. More recently, developing country investors have emerged as major players and now account for half of private infrastructure investment in sub-Saharan Africa.
Africa's financing needs for infrastructure and other productive investments far outstrip the available supply. Despite promises of more donor support, there is a growing need for more commercial partners to finance infrastructure and ultimately growth in Africa. There is a relatively restrained group of financiers for infrastructure project finance in Africa. This group includes development finance institutions (DFIs) such as the Bank, IFC, EIB, DBSA and BOAD. Through its operations, primarily in South Africa, Nedbank has developed the requisite skills and experience to be a significant provider of finance in other African countries. Nedbank can leverage its reputation as a "local" bank, with presence on the ground, to position itself as a privileged partner with investors. Expansion in Africa is a key strategic priority for Nedbank, and it has built a strong pipeline of project finance transactions across the Continent. Working with Nedbank to develop this business will increase the number of players in this field and ultimately increase the availability of commercial finance.
The LoC is expected to create development outputs and outcomes resulting directly from LoC itself. In turn, these outputs are expected to create a strong development impact through the projects financed by the LoC. Based on Nedbank's planned financing share, the Bank's LoC can be expected to catalyze total financing of roughly USD 1 billion. The primary development output of the LoC will be an increase in the availability of commercial finance for infrastructure and industry in A frica. The outcome of better availability of finance should be a greater number of commercially viable projects developed on better terms ultimately leading to stronger growth, which is the key longer term targeted impact. The amount of incremental finance mobilized by the LoC will be tracked.
A second development output will be the LoC's contribution to the mitigation of environmental and social risks related to project finance transactions in Africa. Nedbank is currently the only African bank compliant with the EPs. All sub-projects financed by the LoC must comply with these principles ensuring that will be implemented in line with international standards on environmental and social management. Furthermore, the eligibility requirements of the LoC will ensure that the Bank's support for projects in the extractive industries goes only to EITI countries where revenue transparency should be higher. These requirements should generally lead to stronger mitigation of environmental and social risks and ultimately better development outcomes from these projects. Compliance with these requirements will also be tracked.
As detailed below, the LoC should also have a number of positive outcomes and impacts through the projects that are ultimately financed.
Economic performance:All of the projects will create incremental economic output through positive returns to invested capital. The amount of economic output generated by the sub-projects will be tracked. In addition, the sub-projects will generate employment in the form of temporary jobs during the construction phase and long-term jobs during the operational phase. This will lower unemployment and improve livelihoods. Long-term employment created by the sub-projects will be tracked.
Environmental effects:In some cases, infrastructure and extractive projects have negative environmental effects that need to be mitigated. As mentioned above, enforcing compliance with the EPs should ensure that good international standards are followed. Several of the energy-related projects in the pipeline may have positive environmental effects by producing biofuels and converting waste to power.
Gender and social effects:The planned infrastructure and industrial projects will provide services and goods that are enjoyed by the entire population. The projects are also expected to generate employment for women, which will be tracked.
Private sector development and demonstration effects:The LoC should have a demonstration effect by providing additional examples of commercially and economically viable private investment in LICs in Africa. As described above, private infrastructure investment is still highly concentrated. By contributing to greater flows, the LoC should increase investor familiarity with this asset class. Longer term, this should draw more African commercial banks and other private investors into the business and further improve the terms and availability of finance. There may also be a positive impact on local financial markets as Nedbank develops its presence through transfer of knowledge and skills. The LoC will also contribute indirectly to better governance and transparency by supporting extractive projects in EITI countries.
Infrastructure:The LoC will finance several power sector projects. These projects will improve the access to electricity in Western and Southern Africa. The need for additional power capacity in Southern Africa is particularly urgent. The economic benefits of improved access to electricity are huge: it renders firms more competitive and directly enhances the livelihoods of individuals, opening new economic, educational and leisure opportunities. The LoC will also finance several important telecommunications projects that also increase economic efficiency and competitiveness by improve information flows.
Government:All of the sub-projects are expected to generate incremental government revenues in the form of taxes, duties or royalties. This should improve the fiscal balance and generate resources that can be invested in poverty reduction and development programs. The amount of incremental government revenues will be tracked.
Regional integration:Several of the planned sub-projects will contribute to greater regional integration. Several of the power projects in the pipeline will increase electricity production capacity in the Southern Africa Power Pool. This will create opportunities for power trading to the benefit of participant countries. In addition the pipeline includes a satellite telecommunications project with a regional footprint that would benefit multiple countries and improve opportunities for information exchange between them. Finally there is multinational pipeline project that will leverage existing port infrastructure in Mozambique to efficiently supply markets in South Africa. This will increase intra-African trade and economic ties and benefit both countries.
ANSAH Dennis - PIFD