A vision for financing Africa's infrastructure

New type of institution is needed to tackle the continent's most pressing problem

There is do doubt that Africa, home to six of the world's fastest-growing economies, has changed rapidly over the past few years. However, a lack of infrastructure in many parts of the continent has put a brake on the dramatic changes that still need to take place to bring the continent the prosperity most can still only dream of. The main problem is that the current financing model is insufficient for African countries that want to develop roads and ports.

There is unlikely to be any change in that if the people of Africa are expected to continue relying on governments alone to solve these problems. Economic development in Africa is stuck at lower levels, and because of weak financing many governments lack the resources to build and upgrade infrastructure, for which very large sums of money are usually required.

At the same time, the lending models of the World Bank and other international financial institutions do not necessarily apply to African circumstances. The Programme for Infrastructure Development in Africa (2012-20) calls for $7.5 billion to be spent on infrastructure each year on average, far beyond the $1 billion loan the World Bank advanced in 2011.

Apart from that, big World Bank loans are for government projects and small annual loans are usually for nonprofit projects. So African countries cannot rely on aid of this kind to solve their seemingly interminable infrastructure problems. In fact, it is easy for African countries to be trapped in a vicious cycle of debt.

One way of solving this is to set up an infrastructure development corporation. It would be a national infrastructure investment and cooperation company along the lines of the Tanzania Infrastructure Development Corporation. By setting up such a corporation, whose headquarters would be in the capital city of an African country, China and the country would promote collaboration in strategic infrastructure on a market-oriented basis.

For such a corporation to be set up, China would work with African countries at different levels, according to conditions on the ground and local regional development needs. It could be a provincial joint venture authorized by local governments from both sides, taking charge of local infrastructure projects.

Nationally, the central governments of China and an African country could found a joint venture promoting the national infrastructure projects within its territory. For cross-border infrastructure development, China and several African countries would run a regional company to carry out projects across regions.

One of the chief aims of operating such a corporation would be to develop Africa's infrastructure in exploring more mineral resources. The corporation would help Africa convert resources so the most is made of their economic potential.

To this end there would be a share capital and shareholder structure. Registered capital would be equally split between China and its African partner, China in cash and Africa in the equivalent value in mining rights of proven reserves.

Such a model would be in each party's best interests. First, it would help to fulfill China's responsibility as a global economic power to promote national development in Asia, Africa, the Americas and Europe and pull them out of crisis. It would strengthen the friendship of these countries with China and increase China's soft power as well.

Second, it would help to achieve structural adjustment of China's foreign demand, shifting it from Europe, the United States and Japan to other Asian and African countries. It would also promote economic growth and make the most of capital reserves, technology and management, with low-end production giving way to huge construction, infrastructure-related industries and manufacturing production.

It would also help expand foreign reserves and speed up the process of internationalization of the renminbi.

Chinese companies, too, would benefit greatly, gaining access to more resources and being able to make the most of domestic resources.

The influence of high-end customers at home and abroad would increase, as would international business in Africa and Latin America, and it would help financial institutions to develop, and effectively control credit risk.

For African countries, the national development corporation would help improve lagging infrastructure without adding to national debt, paving the way for economic growth.

Because it would be a joint venture, it would allow China's planning capabilities, financial strength, advanced design construction technology and management experience to be put on full display. These would all contribute to African countries improving their know-how. Jobs would also be created and political stability promoted.

But in bringing the corporation to fruition, particular attention would need to be paid to several aspects.

First, it would need strategic decision-making, and it would require many organizations at various levels to work together.

International organizations and governments involved in Africa could set up a special committee to coordinate matters.

Attention would of course need to be paid to how to deal with political instability in certain countries.

On the issue of internal coordination, it would probably take time for an international joint investment and financing platform for the company to be set up. Since it would be involved in large-scale cross-border collaboration between enterprises, the institution would need to function as an impartial agent acting in the interests of all the partners and investors.

The author is deputy director of the Center for Financial Research and development, China Development Bank.

(China Daily Africa Weekly 02/06/2015 page9)