Policy ReseaRch WoRking PaPeR
4878
Local Sources of Financing
for Infrastructure in Africa
A Cross-Country Analysis
Jacqueline Irving
Astrid Manroth
The World Bank
Africa Region
African Sustainable Development Front Office
March 2009
WPS4878
Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized
Produced by the Research Support Team
Abstract
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development
issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the
names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those
of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and
its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
Policy ReseaRch WoRking PaPeR 4878
With the exception of South Africa, local financial
markets in sub-Saharan Africa remain underdeveloped
and small, with a particular dearth of financing with
maturity terms commensurate with the medium- to long-
term horizons of infrastructure projects. But as financial
market reforms gather momentum, there is growing
awareness of the need to tap local and regional sources.
Drawing on a comprehensive new database constructed
for the purpose of this research, the paper assesses the
actual and potential role of local financial systems for
24 African countries in financing infrastructure. The
paper concludes that further development and more
appropriate regulation of local institutional investors
would help them realize their potential as financing
sources, for which they are better suited than local banks
because their liabilities would better match the longer
terms of infrastructure projects. There are clear signs of
This paper—a product of the African Sustainable Development Front Office, Africa Region—is part of a larger effort in
the region to gauge the status of public expenditure, investment needs, financing sources, and sector performance in the
main infrastructure sectors for 24 African focus countries, including energy, information and communication technologies,
irrigation, transport, and water and sanitation. Policy Research Working Papers are also posted on the Web at http://econ.
worldbank.org. The author may be contacted at jirving@worldbank.org.
positive change: private pension providers are emerging
in Africa, there is a shift from defined benefit toward
defined contribution plans, and African institutional
investors have begun taking a more diversified portfolio
approach in asset allocation. Although capital markets
remain underdeveloped, new issuers in infrastructure
sectors—particularly of corporate bonds—are coming to
market in several countries, in some cases constituting
the debut issue. More than half of the corporate bonds
listed at end-2006 on these countries’ markets were by
companies in infrastructure sectors. More cross-border
listings and investment within the region—in both
corporate bonds and equity issues—including by local
institutional investors, could help overcome local capital
markets’ impediments and may hold significant promise
for financing cross-country infrastructure projects.
i
Local Sources of Financing for
Infrastructure in Africa:
A Cross-Country Analysis
Jacqueline Irving
Astrid Manroth
This report was produced by the World Bank with funding and other support from (in
alphabetical order): the African Union, the Agence Française de Développement, the European
Union, the New Economic Partnership for Africa’s Development, the Public-Private
Infrastructure Advisory Facility, and the
U.K. Department for International Development.
About the authors
Jacqueline Irving is a consultant economist with the World Bank’s Development Prospects
Group (previously a consultant economist with the African Sustainable Development Network at
the time of writing this paper). Astrid Manroth is an energy specialist with the African
Sustainable Development Network. The authors would like to particularly acknowledge the data
and other information contributed by officials and staff of the securities exchanges, central
banks, finance ministries, and other financial markets authorities in the 24 countries that are the
focus of this paper, and in Chile and Malaysia. The authors also would like to thank Vivien
Foster, lead economist, Sustainable Development Department, for useful comments and
suggestions on the paper and her overall lead role in the Africa Infrastructure Country
Diagnostic. Connor Spreng contributed to some of the preliminary data gathering in an early
phase of this project.
ii
Contents
Introduction 1
1 Macroeconomic fundamentals 2
Size of the economy and volume of savings 2
Domestic and external debt 6
2 Financial intermediation and bank lending 7
Assets of financial intermediaries 8
Ratio of private bank credit to GDP as an indicator of financial depth 14
3 Syndicated bank lending for infrastructure development 21
4 Institutional investors as a potential source of infrastructure financing 27
5 Domestic capital markets 41
Government bonds 41
Corporate bond markets 47
Equity markets 53
6 Conclusions and policy recommendations 61
Macroeconomic stability, financial depth, and infrastructure financing 61
Growing potential role of institutional investors 63
Local capital markets: bonds and equities 64
The importance of corporate bonds issued to finance infrastructure 65
References 69
Appendix 1 Sovereign credit ratings 72
Appendix 2 Basic macroeconomic data 77
Appendix 3 Official development assistance as a source of infrastructure financing 82
1
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.
1
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.
2
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.
