Fuelling Africa's infrastructure growth: alternative funding

Africa is growing at an unprecedented pace, with an expected average growth trend of 4.0 percent in 2024/25. This growth trend has a forward and backward linkage with the continent's infrastructure growth; as infrastructure fuels growth, growth fuels the demand for more infrastructure. Infrastructure development is pivotal in driving economic growth, creating jobs, and reducing poverty across Africa. The infrastructure demand in Africa ranges between $130 and $170 billion a year, with a financing gap ranging between $67.6–$107.5 billion. The World Bank estimates that closing Africa’s infrastructure gap could increase growth rates by up to 2% per year and reduce poverty by 25% in many regions. Moreover, infrastructure projects have the potential to generate significant employment opportunities, with every $1 billion invested in infrastructure capable of creating between 110,000 and 150,000 jobs. This article aims to highlight sustainable new financing methods to close the financial gap.

Current state of infrastructure in Africa

Most of Africa’s critical infrastructure sectors remain relatively underdeveloped. Approximately 60% of people in sub-Saharan Africa still lack electricity, and the transport sector is no exception, as only 25% of the roads are paved.³ This limits intra-continental trade, accounting for just 17% of Africa’s total trade. In terms of water supply, it is no secret that millions of Africans live without access to clean drinking water, and sanitation infrastructure remains inadequate for many. On the telecommunications front, mobile phone penetration has reached 44% as of 2022, but broadband internet coverage remains limited, with only 29% of sub-Saharan Africa having access to the internet. The lackluster statistics amplify the seriousness of the financial gap between the demand and the current infrastructure situation in Africa.

Traditional financing methods

Traditional financing methods for Africa's infrastructure have relied heavily on government funding, international loans, and foreign aid. Governments across Africa finance many infrastructure projects but face budgetary constraints due to competing priorities like healthcare and education. On average, African governments allocate only 3 - 4% of their GDP to infrastructure, which is insufficient given the continent’s needs.⁴ International loans, often provided by institutions like the World Bank and the International Monetary Fund (IMF), have been a critical funding source; however, these loans often come with stringent conditions and contribute to the rise in national debt. As of 2023, Africa's external debt reached $696 billion, with some countries spending as much as 20% of their revenue on debt servicing, reducing the fiscal space for infrastructure investment. Foreign aid, while helpful, tends to be unpredictable and often directed towards short-term projects rather than long-term sustainable infrastructure. This dependency on external funds limits the autonomy of African nations in project planning and implementation, and the slow disbursement of funds often delays critical infrastructure development. These limitations highlight the need for more innovative and sustainable financing models to bridge Africa's infrastructure gap.

New financing methods

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) has been a critical driver of private capital flows to Africa, accounting for approximately 70% of total private investment. Historically, FDI has been concentrated in Africa’s mineral resources, including oil, gas, and mining, which continue to attract significant investments. In 2020 alone, Africa received $40 billion in FDI inflows, with a substantial portion going to extractive industries.⁵ However, there is growing potential for FDI to be redirected towards infrastructure projects, particularly in sectors like energy, transportation, and telecommunications. Countries such as Kenya and Nigeria have begun attracting infrastructure FDI through innovative public-private partnerships (PPPs) structures.

Public-Private Partnerships (PPPs)

Public-Private Partnerships (PPPs) are increasingly playing a pivotal role in financing Africa’s infrastructure projects, as they offer a solution to the continent’s persistent funding gaps and PPPs provide a mechanism for leveraging private capital and expertise. Between 2016 and 2021, Africa saw a rise in PPP-funded infrastructure projects, particularly in sectors such as energy and transport. In Nigeria, for example, the Lekki-Epe Toll Road is a successful PPP model that improved road infrastructure and reduced congestion.⁶ At the same time, the Azura-Edo Power Plant, a $900 million project, has enhanced energy access for over 14 million people.⁷ Similarly, South Africa’s renewable energy sector has benefited significantly from PPPs through the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), attracting over $14 billion in private investment and adding 6,422 MW of renewable energy to the grid since its inception. These successful models demonstrate the potential of PPPs to unlock much-needed capital, while also addressing infrastructure deficits across the continent.

Blended finance

Blended finance is emerging as a vital mechanism for addressing Africa’s infrastructure financing gap by combining public and private resources to mitigate risks and attract private investors. By leveraging public capital, blended finance helps de-risk projects, making them more attractive to private investors who might otherwise be hesitant due to political or economic uncertainties. According to Convergence, between 2015 and 2020, approximately $140 billion was mobilised globally through blended finance structures, with Africa receiving 27% of these flows.⁸ This approach has particularly benefited sectors like renewable energy, water, and transport infrastructure. In Kenya, the Lake Turkana Wind Power Project, Africa's largest wind farm, was financed using a blended finance model that combined $698 million from public and private entities, providing clean energy to over 1 million households.⁹

Sovereign Wealth Funds (SWFs)

Sovereign Wealth Funds (SWFs) are increasingly being recognised as a potential source of financing for Africa’s infrastructure needs. Globally, SWFs manage over $7.2 trillion, but African SWFs represent a relatively small portion, with around $1.6 billion in assets.¹⁰ Despite their limited size, these funds hold significant promise for infrastructure investments, particularly in countries with substantial commodity revenues. For instance, African countries like Nigeria, Angola, and Botswana have established SWFs that could play a larger role in funding infrastructure projects. Nigeria’s Sovereign Investment Authority (NSIA) has already invested in critical sectors like power and healthcare, including a $5.5 billion allocation toward infrastructure development. As African SWFs grow, there is an opportunity to channel more of these resources into long-term infrastructure projects.

International bond market

The international bond markets, particularly the Eurobond market, have emerged as a valuable financing source for African infrastructure projects. Since Ghana's debut Eurobond issuance in 2007, several African countries have tapped into these markets, attracted by historically low global interest rates. By 2020, over 21 African countries had issued Eurobonds, raising more than $155 billion to fund various development projects. Countries like Nigeria, Zambia, and Rwanda have successfully accessed the market competitively. For instance, Zambia’s 2012 Eurobond issue raised $750 million at a yield of 5.6%, while Rwanda raised $400 million in 2013 at a rate of 6.8%.¹¹ These bonds have been used to finance critical infrastructure projects in energy, transportation, and telecommunications.

Conclusion

In conclusion, the future of Africa's infrastructure development holds great potential, but it requires innovative financial solutions to overcome the significant funding gap. Leveraging diverse financing sources such as Foreign Direct Investment, Sovereign Wealth Funds, and international bond markets will be essential. While FDI continues to focus on extractive industries, it has growing potential to shift towards infrastructure projects supporting sustainable growth. Similarly, Sovereign Wealth Funds, though currently underutilised, can be used as a valuable resource to reduce dependence on foreign debt and aid. The Eurobond market has also proven to be a viable avenue for securing long-term financing for large-scale infrastructure development at competitive rates. However, African nations must address key challenges such as strengthening regulatory frameworks, mitigating political risks, and creating sustainable financing mechanisms to attract more private investment. By fostering public-private partnerships and improving the investment climate, Africa can unlock the capital needed to fuel its infrastructure growth, driving economic prosperity and improving the quality of life across the continent.

^{[1] https://www.worldbank.org/en/region/afr/overview}

^{[2] Africa’s infrastructure: great potential but little impact on inclusive growth}

^{[3] https://www.afdb.org/en/knowledge/publications/tracking-africa%E2%80%99s-progress-in-figures/infrastructure-development}

^{[4] https://futures.issafrica.org/thematic/11-large-infrastructure/}

^{[5] https://www.un.org/africarenewal/web-features/addressing-foreign-direct-investment-paradox-africa}

^{[6] https://mapafrica.afdb.org/en/projects/46002-P-NG-DB0-008}

^{[7] https://www.miga.org/sites/default/files/2024-06/Nigeria.pdf}

^{[8] https://www.convergence.finance/reports/sobf2021/assets/The_State_of_Blended_Finance_2021.pdf}

^{[9] https://www.ifu.dk/en/news/ifu-sells-shares-in-lake-turkana-wind-power/}

^{[10] https://blogs.worldbank.org/en/africacan/impact-sovereign-wealth-funds-can-make-africa}

^{[11] https://www.afdb.org/sites/default/files/documents/publications/wps_no_356_eurobonds_debt_sustainability_and_macroeconomic_performance_in_africa_synthetic_control_experiments_f.pdf}