# Introduction

The future of infrastructure development in Africa depends on local finance. Traditionally, infrastructure projects in Africa have been financed by the public sector or international private investors. Fiscal space for domestic public sector sources of infrastructure financing is limited, however, while private financing sourced from abroad tends to attract high country-risk premiums and often carries the risk of currency mismatch as infrastructure project revenues are typically earned in local currency. Most of the focus countries’ local financial markets remain underdeveloped, shallow, and small in scale, with a particular dearth of long-term financing with maturity terms commensurate with the long-term horizon of infrastructure projects. Nevertheless, there is growing recognition of the need to explore the potential for accessing local and regional sources of private financing in building Africa’s infrastructure, particularly as national and intraregional financial market reforms gather increasing momentum across the countries.

The first objective of this paper is to take a comprehensive inventory of local sources of infrastructure financing in the 24 countries of Sub-Saharan Africa included in the first phase of the Africa Infrastructure Country Diagnostic.<sup>1</sup> This inventory will provide a baseline against which further developments may be gauged.

A second aim of this study is to identify and analyze, insofar as possible, factors contributing to the variance in the ability of national financial sectors to generate local financing for infrastructure projects. The study attempts to analyze the potential for generating infrastructure financing by specific infrastructure sectors (electricity generation, transport, water and sanitation, and telecommunications), where it has been possible to compile these specific data. A concluding section proposes general policy recommendations for strengthening local capacity to mobilize financing for infrastructure.

We assess the ability of local financial markets in the 24 countries to provide long-term finance by examining macroeconomic fundamentals (chapter 1), financial intermediation (chapter 2), and depth of domestic capital markets (chapter 3). Our indicators are drawn from a comprehensive data-gathering exercise conducted at the national and subregional levels. The selected indicators, primarily quantitative, cover local and subregional banking systems, corporate and government bond markets, equity markets, and institutional investors, as well as overall macroeconomic conditions. We identify which countries’ local and regional financing sources are best able to fund infrastructure and which are the most severely constrained. Where useful, we make comparisons with Chile and Malaysia, the designated comparator countries for the AICD study.<sup>2</sup>

> 1 Information on the Africa Infrastructure Country Diagnostic, a multidonor initiative, is available at www.infrastructureafrica.org. AICD’s 24 focus countries are Benin, Burkina Faso, Cameroon, Cape Verde, Chad, Democratic Republic of the Congo, Côte d’Ivoire, Ethiopia, Ghana, Kenya, Lesotho, Madagascar, Malawi, Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, South Africa, Sudan, Tanzania, Uganda, and Zambia.

> 2 Chile and Malaysia are upper-middle-income economies that have grown considerably and reduced poverty in recent years by pursuing sound macroeconomic policies, structural reforms, and have deepened their financial markets.

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