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The COVID-19 pandemic has unveiled huge investment needs in Africa. Yet perceived risk continues to significantly impair private investment, compromising the quality of financial market information and lenders' ability to assess the viability of companies and investment projects. Left unchecked, this can create pervasive risk aversion towards private investment projects and lead to a dearth of bankable projects.
To generate investor interest, not only access to risk reducing measures but also access to funding for project preparation and support are needed. Through its European Investment Advisory Hub, the European Union (EU) has built solid experience in project preparation within its own borders by connecting project promoters and intermediaries with advisory partners who work directly together to help projects reach the financing stage. Building on this approach, we propose the establishment of an Accelerator Hub, which would provide targeted support to identify, prepare, and develop investment projects in Africa.
Infrastructure projects in Africa struggle to get off the ground
The pandemic has had a significant negative impact on foreign direct investment (FDI) in Africa. According to UNCTAD’s 2021 World Investment Report, FDI flows in Africa saw a 16 percent decrease from $47 billion in 2019 to $40 billion in 2020. Moreover, a recent study by McKinsey estimates that 80 percent of infrastructure projects in Africa fail at the feasibility and business-plan stage and an additional 10 percent fail between the planning stage and financial closure. The lack of capacity and resources to perform strong feasibility studies, analyse market prospects, and develop viable business plans severely constrains infrastructure investments, particularly in key sectors like healthcare and education.
As part of its External Investment Plan (EIP), the EU has made technical assistance available to help develop viable investment projects and to attract more investment. Between 2017 and 2019, the EU provided close to €500 million in technical assistance linked to blending projects and guarantees of the European Fund for Sustainable Development (EFSD) in Sub-Saharan Africa and the EU Neighbourhood. However, this technical assistance does not explicitly cover the bulk of upstream costs, financial institutions and investors are left to fill the gap. Moreover, business and regulatory advice is delivered on an ad-hoc basis and depends on the expertise of the partner financial institution involved in the transaction.
An Accelerator Hub would generate a pipeline of financially viable projects
We propose the EU establish an Accelerator Hub to identify, prepare, and develop investment projects. Whereas the current setup only links technical assistance to existing projects financed under the EFSD, the Accelerator Hub would be designed to be a permanent and single access point for technical assistance services. Building on the experience of the European Investment Advisory Hub (EIAH) for EU domestic financing, the Accelerator Hub would have three distinct features:
A one-stop shop fora range of technical assistance programmes and initiatives, based on the specific needs of local markets.
A strong network of partners from the European Commission, European and national development banks, and consultants based both in the EU and in partner countries, working directly with investors and companies, offering tailor-made advice to dramatically accelerate the process of the development of a pipeline of high-quality projects.
Project development support throughout the stages of the project as well as upstream advice on market studies, sector strategies and project screening, and financial advice to enhance companies’ ability to access adequate sources of financing (e.g. grants to subsidize investment costs, advice on Environment, Social and Governance standards etc.).
The lack of bankable projects represents a key obstacle to greater investment in Africa. An Accelerator Hub, managed and funded by the European Commission in partnership with European and national development banks, would enable the development of a pipeline of financially viable projects and help them take off. The Hub would bridge investors and local businesses and help markets develop, with the ultimate aim being to create the conditions to expand the potential number of eligible recipients in nascent markets.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.