# Presentation: 285248

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## BANKING ON DEVELOPMENTMarch 30, 2006

**African Development Bank &**
**Multilateral Development Bank Infrastructure Funding**
- Christel Fredrikson
- Advocacy Center/MBD
- U.S. Commercial Liaison Office, AfDB

## African Development Bank

- Temporarily based in Tunis
- Unique among MDBs
- $2-3 billion annually in approved loans
- AfDB and World Bank mobilize $8 billion per year
- Enhanced Procurement Outreach Program
- U.S. procurement very low

**Notes:**
History: The Bank was created in 1966 (the agreement to establish it was in 1964).  Over the past few years it has undergone a major reorganization leading to streamlined operations, institutional change, and much more transparency.  On its feet again, the AfDB is taking it slow but improving its results dramatically. Largest investor in infrastructure and social development in Africa. U.S. joined in 1983. 77 member countries – 53 are african and 24 are non-african. U.S. is third largest shareholder and largest non-african shareholder with 6.6% of shares.

AfDB group consists of three institutions: African Development Bank, African Development Fund, Nigeria Trust Fund.

AfDB functions: Make loans and equity investments for the economic and social advance of borrowing countries in Africa, provide technical assistance in preparation and execution of development projects and programs, promote investment of public and private capital for development purposes, respond to requests for assistance in coordinating development policies and plans in borrowing countries, and support national and multinational projects and programs which promote regional integration.

The AfDB provides loans, guarantees, technical assistance/cooperation, grants, capital investment, and other types of financing to their developing member countries. The difference between AfDB and a commercial bank is that the bank is mandated to go where the commercial financier may be hesitant, and the projects it finances must “augment the economic and social development of borrowing member countries.”

Loans: Under most public sector projects, developing member “borrowers” secure AfDB funds with a sovereign guarantee and are expected to repay the debt. Funds are loaned on both commercial and concessional terms. Private sector loans are provided for private projects in developing countries. These might be for independent power production, BOT water plants, or other private undertakings that the Bank is supporting.

Guarantees: Guarantees can benefit borrowers/host governments in many ways. Often a guarantee will be just what is needed to ensure that a project materializes. By covering risks that the market would not bear, or would be prohibitively high, the guarantee lowers the cost of financing. Guarantees can also extend the term of lending beyond the period for which the market would normally lend – and essential consideration for infrastructure projects that require long-term debt in order to match debt service with revenues.

African Development Bank staff members track, alert, encourage, assist, advocate, report on project opportunities.

## AfDB Sector Focus

- Agriculture
- Public Utilities
- Energy
- Manufacturing
- Transportation
- Infrastructure
- Industry & Extractive Industries

- Banking & Finance
- Health & Education
- Tourism & Other Service Industries
- Social Reform
- Good Governance

**Notes:**
The Bank does not participate in: (speaker should profile the sectors without getting into a public or private lending discussion at this point)
  real estate development projects
  providing direct trade
  housing finance to enterprises

The Bank provides many of the same services already mentioned by my colleagues: counseling, advocacy on procurement and contracting issues, project identification

## Loan & Grant Approvals by Sector, 2004

- African Development Bank

**Notes:**
Social Sector:  sanitation and water supply.

## Infrastructure

- Human and physical infrastructure are critical elements for economic growth and poverty reduction.
- Significant links between lack of infrastructure and poverty, environmental degradation, health, education, capacity for effective governance.
- Historically, much physical infrastructure has been viewed as public goods have been entrusted to ‘natural monopolies.’

**Notes:**
Countries have determined for themselves that for their economies to grow, they need to develop their infrastructures. All five development banks have a focus on infrastructure development as a key to growth, poverty reduction.

Human infrastructure = education and health
Economic infrastructure = services necessary for daily life and to engage in productive activities (power, transportation, telecommunications, water, sanitation, safe water disposal)
Physical infrastructure = complements of economic infrastructure (telecommunications, power, transport (roads, railways, ports, ariports), water supply and sewage systems.

Performance of these natural monopolies varies, but has often been characterized by operational inefficiency, lack of technical dynamism, and poor service to consumers.

## MDB Infrastructure Funding

- Early MDB emphasis on “bricks and mortar”: roads, dams, bridges, hospitals, power plants.
- Investments shifted from infrastructure to social investments: modernization of the state, economic and social reforms, good governance, environment, etc.
- Result: more “sector” and “conditionality” lending and less project lending. With emphasis on economic and social reforms – more funding for consultancies.

**Notes:**
Early on = 1950s. Idea was that bricks and mortar investment would “trickle down” to the poorest of the poor. This did not happen.

Social investments = good governance and reform projects.

Some (Gene) peg the infrastructure gap at $200 billion.

Decline in investment seen most sharply by private sector. Due to inability to close financing for BOT/BOOT projects. 

## Private Involvement in Infrastructure Investment

- Fiscal constraints slowed public infrastructure spending
- 1990s: economic reforms lead to private infrastructure investment explosion
- Withdrawal of private capital in late 1990s has led to huge infrastructure gap.
- Commercial banks decreased investments in developing countries for $26 billion in 1998 to $5.7 billion in 2002.
- Between 1997 and 2003, investment in developing countries’ infrastructure declined by over 60%.

**Notes:**
Fiscal constraints affected India, Latin America and Africa. The combination of inadequate fiscal resources and low user fees stalled system expansion and undermined quality of service.

During the 1990s, many countries tried to attract private investors. With the adoption of economic reforms, investment in infrastructure projects with private participation expanded rapidly from less than $20 billion in 1990 to $130 billion in 1997, mostly in Latin America and East Asia. However, a combination of the Asian and Argentine Financial Crises, the inability of developing governments to put in place sustainable policies that assured adequate and predictable returns (particularly in water and power sectors), and some governments’ defaults on contractual obligations led to withdrawal of private capital. Uncertain political, legal, and economic environments add to this risk. Today, investment in infrastructure projects private participation is at a little more than $40 billion. Attempts to create Public Private Partnerships instead of BOTs/BOOTs have encountered difficulties. In addition, IMF policies commencing in the 1990s, discouraged or limited sovereign guarantees.

In the last decade, infrastructure investment in developing countries has fallen significantly, driven by declining public as well as private investment. Most developing countries now face the challenge of correcting huge infrastructure gaps that threaten growth and achievement of social and other broader development goals.

Current estimates point to financing needs of about 7% of GDP for all developing countries and as much as 9% for low-income countries. Past actual investment rates average about 3.5%. Need to double actual financing for infrastructure.

## Current Status of Infrastructure Development

- MDBs are assessing how to increase infrastructure funding – key to overall economic development.
- Active discussions are underway at the MDBs about how to reach sub-sovereign borrowers for infrastructure needs.
- MDBs are expected to dramatically increase lending for infrastructure over the next several years.

**Notes:**
Need to connect infrastructure development with private financial markets as a way to leverage and mobilize more capital. New and improved risk mitigation products and applications, including in the area of currency and regulatory risk, will make this connection more effective.

Helping sub-sovereign entities with the transition from relying on central government funding towards more market-based funding – by further strengthening institutional capital as well as providing risk mitigation – is a critical tool to mobilize additional capital for the provision of infrastructure services.

## Specific Infrastructure Initiatives

- AfDB: NEPAD (New Partnership for African Development)
- World Bank: Infrastructure Action Plan
- ADB: Connecting East Asia – A New Framework for Infrastructure
- IDB: Focus on private investment in infrastructure
- EBRD: Numerous infrastructure-related projects

## Current MDB Infrastructure Lending

- Overall MDB lending has been fairly constant at $40 billion annually since 1996.
- Total MDB infrastructure lending has been fairly constant at about $12.5 billion annually (~25-30% of total MDB lending).
- Infrastructure lending varies by bank:
- IDB is decreasing
- AfDB is increasing

## New Partnership for Africa’s Development (NEPAD)

**Infrastructure Development Priorities**

- ENERGY

- INFORMATION AND COMMUNICATIONS TECHNOLOGY

- PUBLIC/PRIVATE PARTNERSHIPS

- WATER AND SANITATION

- TRANSPORT

- ICT Infrastructure Development, Capacity Building, Strengthening Regional Telecommunications

- Rail Services, Roads, Sea Ports, Airports

- Assisting African Governments to establish legal and regulatory frameworks in infrastructure with NGO’s and private companies

- WRM, Africa Water Facility Initiative

- Power Systems, Oil/Gas Projects, Renewable Energy Projects

**Notes:**
In response to the specific mandate given by the Heads of States to the ADB, the Bank has incorporated all infrastructure development under the NEPAD unit.  The bank has adopted a two-pronged approach consisting of a  Short Term action plan to kick start the NEPAD process and a medium to long term strategic framework  to be developed over a period of time and to run in parallel with the implementation of the Short-Term plan.  The Focus of these priority physical investments in Energy, Transport, Water and Sanitation and Information and Communications Technology (ICTs).  

This is the point where this speaker starts to focus on her stand alone discussion.

Focus is infrastructure – should state that all banks are refocusing here and expected to dedicate substantially more resources to infrastructure in the coming years.  Her example is to talk about African development Bank.

## Future of Infrastructure

- Developing public/private balance for infrastructure funding and service provision.
- Public Private partnerships are flourishing in telecommunications, ports, airports, freight railways, natural gas pipelines.
- Public sector likely to remain dominant in sectors such as roads, water supply, and sanitation.
- Significant opportunities for U.S. businesses as MDBs and governments try to bridge the infrastructure gap.

**Notes:**
In 1990s:
70% of all infrastructure investments publicly financed
8% by official development aid
22% was private. Substantial opportunities for private participation in infrastructure

## Total Infrastructure Lending by MBD (in millions USD)

**Notes:**
Loans for infrastructure vary widely by bank, with 46% of 2004 AfDB lending going to transport loans and only 10% of 2004 IDB lending going to transport.

## Advocacy CenterU.S. Commercial Service Liaison to the  African Development Bank

**AC-AfDB**
**Office of the U.S. Executive Director**
**ATR BAD**
**16, Rue de Syrie**
**Bloc C, 3rd Floor**
**1002 Tunis Belvedere, Tunisia**
**Tel:   (216) 71-831-117**
**Fax:  (216) 71-830-244****	**

- Advocacy CenterU.S. Commercial Service Liaison to the  African Development Bank

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## AfDB Infrastructure Projects

## AfDB Infrastructure Projects: Energy

- Capacity Building Project: Strengthen and make operational the African Energy Commission
- Africa Energy Information System
- Training of Energy Experts
- Facilitation Project: Promote reforms and cooperation among all stakeholders for energy infrastructure development
- Mephanda Uncua Hydropower
- Mozambique-Malawi Interconnection
- Algeria-Morocco-Spain Interconnection

## AfDB Infrastructure Projects: Water

- Goal: to contribute to the efforts to reduce poverty by expanding the capacity of African populations to access existing and future financing sources for water and improving the efficiency of such resources
- Target: to raise $615 million USD by 2009, to be disbursed in the form of grants
- These resources would catalyze an increase in public and private resources in support of water resources development

**Notes:**
The Bank may assist in promoting these projects by providing:
  Financial support through direct equity investment & the provision of loans
  Advice to enterprises on the structuring of such projects to minimize financial risk
  Advice & assist government to introduce a conducive legal & regulatory framework

In selecting infrastructure projects, the Bank pays particular attention to:
the process of selecting BOO/BOOT developers & suppliers
  the BOO/BOOT terms
  the environmental aspects

## AfDB Infrastructure Projects: Transport

- Reduce costs and improve the quality of services
- Better and safer roads
- Rail services
- Efficient ports and safe and secure skies and airports
- Projects:
- Feasibility studies for rail/road in Angola, Congo and the Maghreb
- Mombasa port expansion
- Nacala port rehabilitation
- Djibouti port container construction

## AfDB Infrastructure Projects: ICT

- Infrastructure development in Telecommunications, Broadcasting, and Internet Technologies
- Regional Connectivity
- Regulatory Framework Harmonization
- Projects:
- ECOWAS Regional Interconnection Project
- SADC Regional Infrastructure Initiative
- ICT Human Resource Capacity Development

## AfDB Public/Private Partnerships (PPP’s)

- NEPAD will encourage and assist African Governments to create the necessary legal and regulatory framework for PPP’s.
- Current PPP technical units