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Earlier this year, Allianz Global Investors (AGI) committed nearly $120 million, structured as a 12-year loan to the Emerging Africa Infrastructure Fund (EAIF). In doing so, it became the first insurance investor in the EAIF. To what extent does this also mark a turning point for infrastructure investment across the African continent?
Africa’s wealth of natural resources has seldom translated into wealth for its citizens. While the reasons for this are myriad, a lack of viable infrastructure has been a clear barrier to the long-term development of African economies. Africa’s annual infrastructure gap – the difference between what it has and what it needs – is now estimated at around $170 billion.
Research by the World Bank states that per capital GDP growth could increase by 1.7 percentage points per year if Africa could find ways to brings its infrastructure in line with the median of the developing world.
To date, the way African infrastructure investment has been funded has often been unsatisfactory. On the one hand, few African governments have sufficient cash resources to fund infrastructure investment themselves. This leaves them reliant on either loans from large wealthy countries – such as China – or on private companies willing to take the development risk.
Both options have clear side-effects. China is estimated to have lent around $95.5 billion between 2000 and 2015. There are real concerns over whether impoverished African countries can pay this back. China has also been accused of “predatory loan practices,” of not using local labor or developing local skills, and even focusing on infrastructure to suit its own ends rather than those of the domestic population.
Private capital has been seen as a route to infrastructure development, but this too comes with its problems. The region is considered high risk, with political and economic instability rife. The risk premium demanded by investors may be considered too high by cash-strapped governments. There are other, practical, considerations. Infrastructure investors risk taking a significant currency risk. African countries often have no developed yield curve and currency hedging is impossible. This is a vital consideration where investors are trying to build long-term, reliable income streams.