“Billions to Trillions” Is Not about Africa

The G20’s Infrastructure Hub estimates that the global infrastructure financing gap through 2040 will be about $15 trillion. The scale of the gap exceeds the capacity of public financing and has prompted a concerted effort to attract private capital. “Billions to Trillions” is a framework introduced by multilateral development banks (MDBs) as a paradigm shift that would be “used strategically to unlock, leverage, and catalyze private flows and domestic resources.” The framework foresees blended finance as the way to achieve this, mainly through infrastructure as an asset class. But blended finance has such limited application in low-income countries (LICs) in Africa that its prominence as means of financing infrastructure functionally excludes Africa from the conversation, even though the infrastructure need is greatest there. It’s time to course-correct.

My first blog post here at CGD tackled the difficulties of infrastructure as an asset class, especially applied in African LICs. My concerns were: 1) the heterogeneity of infrastructure projects made standardization difficult as there are no “plug-and-play” contracts or typical risk allocation procedures; 2) that even in developed economies, infrastructure as an asset class has proved elusive at only one to three percent of portfolios (OECD average) of pension funds dedicated to infrastructure; and 3) infrastructure as an asset class makes no sense for any reasonable planning horizon of most LICs, especially African ones. The Inter-American Development Bank recently published a paper that echoes these concerns and moves beyond identification of challenges and proposes areas requiring further development, which could ultimately lead to infrastructure as an asset class. But as one of the authors tweeted, their proposals were aimed at medium- and high-income emerging markets, not sub-Saharan Africa.

The paper also highlights high endogenous risks that may be inhibiting the development of infrastructure as an asset class. The authors argue that these risks can be “controlled, mitigated, insured, guaranteed or diversified” by deploying “governance and contracting structures, project preparation and monitoring institutions, market-based insurance and hedging instruments.” But I argue that in many developing countries the questionable quality of domestic institutions, over-politicization of project selection, misaligned incentives of governments, and low levels of quality and predictability of the regulatory environment preclude the creation of infrastructure as an asset class in sub-Saharan Africa, at least in any useful timeframe.

Nevertheless, sub-Saharan Africa desperately needs infrastructure investment. With negligible blended financing (LICs account for only about 5 percent of blended financing mobilized in 2018) available, many African countries have turned to financial markets with Eurobond issues while also absorbing large Chinese loans. A reckoning on the debt question is inevitable with many African countries breaching debt sustainability thresholds, and run the risk of debt servicing crowding out investment in social services and other much-needed infrastructure.

With an estimated infrastructure financing gap of between $87 and $112 billion, Africa’s options are limited and shrinking fast. So, let’s recap: Blended financing for infrastructure—the “billions to trillions” concept—is not about Africa. Africa still lags the rest of the world on every measure of infrastructure coverage. By 2040, almost ALL IDA countries will be concentrated in Africa (poverty is reducing worldwide and becoming concentrated in Africa, and most African countries are approaching, have reached, or have passed the hard fiscal debt sustainability thresholds). It’s time for the World Bank and other MDBs to launch a realistic program for financing African infrastructure—a program that is appropriate for the realities of the region and the urgency of its infrastructure needs.