FOR the past few months, the president of the African Development Bank (AfDB) has been barnstorming the continent, lobbying its political and economic leaders on the virtues of an instrument he sees as key to unlocking the cash needed to fund cross-border and regional infrastructure projects.
Donald Kaberuka has talked to central bankers, finance ministers, regional economic blocs such as the Southern African Development Community and the Common Market for Eastern and Southern Africa, as well as the African Union (AU), about the Africa infrastructure bond, which his bank would issue to fund the continent’s developmental agenda.
The bank correctly ranks infrastructure alongside quality education, improved efficiency and productivity, regional integration, embracing new technologies and dedicated and visionary leadership, as critical ingredients to Africa’s economic success.
From a financial perspective, the logic and starting point are simple enough. African central banks have accumulated more than $500bn in reserves, most of which is in safe assets such as US treasuries, which at the moment offer an annual return of only about 1%.
By AU estimates, Africa requires investments totalling $360bn to bring its basic communications and other infrastructure up to speed, money that has up to now been difficult to raise.
But there is a new appetite for African debt. Last year, Zambia issued a euro-bond that raised $750m and was oversubscribed to the tune of $12bn. Paper issued by Kenya, Ethiopia and Uganda in the past year has met similar success, showing there is no shortage of private-sector players keen to invest in a continent seen as the last frontier of rapid growth on the globe.
Making financing decisions for individual countries such as Zambia or Kenya is easy. It is a question dictated by national priorities as outlined in their national development plans.
To agree to investment in cross-border or regional projects can be more cumbersome, as individual countries need to balance their individual and regional needs.
That is why the AfDB wants African central banks to invest 5% of their accumulated reserves, a total of $22bn, in the Africa infrastructure bond. Zambia offered a yield of more than 5% on its eurobond, and the pan-African lender would probably offer about the same, meaning the return on African central banks’ investment would be considerably higher than that gleaned from their current "safe havens". And, it also would contribute directly to regional growth.
That amount is a small percentage of the total financing Africa requires, but it is necessary for the AfDB to prove first to its African constituency that it is worth investing in, and that the dividend in terms of Africa’s growth is significant and efficiently delivered, before going back to ask for more.
The bank’s role on the continent is growing in importance. For instance, the completion this year of a $400m super-highway in Kenya’s capital Nairobi was both on schedule and within budget, partly because it ensured accountability and corruption-free procurement. It was also well marketed and received buy-in from Kenyan citizens.
Accountability is key to the success of developmental states, as many in Africa fashion themselves. So, a lender with a mandate to grow Africa’s infrastructure and a deep knowledge of how the continent operates can be a great help in ensuring that governments set aside resources to achieve national goals and have coherent policies to avoid spooking investors.
A common refrain in Africa is that Africans must be allowed to fix African problems. The Africa infrastructure bond presents an excellent opportunity for the pan-African leadership to put our money where their mouths are.