To Attract Private Sector Investments, African Governments Must Stop Doing This

It is no longer news that infrastructure development is essential for Africa’s long-term economic growth and global competitiveness. The gains from adequate, functioning infrastructure will serve Africa and its subregions in so many ways. Increased productivity, accelerated innovation and easy intra-continental trade are just a few benefits.

Across Africa, however, sustainable economic growth, as well as our broader development goals, face their biggest bottlenecks due to inadequate road networks, disproportionate telecommunication network, water and sanitation, power supply and several other basic pieces of infrastructure.

The African Development Bank estimates that Africa currently needs between $130 and $170 billion annually to meet its infrastructure needs. Over half of that amount must be sourced from private quarters.

Fund shortages have been the most obvious obstacle to infrastructure development in many emerging economies. Year in year out, African governments have recorded huge deficits in their infrastructure budgets. More than ever, emerging economies are realising the need for partnerships with the private sector.

But like in most developed economies, wooing the private sector into your cause is a simple yet tricky game. For one, most governments make the mistake of treating private investors as one monolithic whole. They have this socialist viewpoint with which they see private investors. Little wonder they find it hard to win private-sector buy-in.

If African governments must ensure the sustainable inflow of private capital — from insurance companies, banks, private equity firms and pension funds — to their development needs, they must understand the nuanced nature of investors’ taste.

Whether it is private equity, individual businesses or pension funds, investors have varying risk appetites, investment volumes and timelines. For instance, the risk appetite of a multinational pension fund unfamiliar with the African space will vary from that of a dedicated development fund such as the African Development Bank.

A typical pension fund would want predictably steady returns to cover its humongous liabilities. Whereas a local private sector player — who is familiar with the African market — will probably tolerate more uncertainty. Hence taking higher risks for higher returns. According to a recent study by Canada-based development platform, Convergence, most insurance companies opt for investments in the range of $100 million to $200 million while wealth managers and banks prefer investments above $400 million.

The point is, investors are not uniform. Governments must now learn to market appropriate development schemes to private investors. One that fits their interests, risk appetite, investment volume and timeline. This way, governments can find long-term partners to help meet their infrastructure needs.