Policies in promoting private finance For Local Government Infrastructure Washington, 01 October 2004 Policies in promoting private finance For Local Government Infrastructure Washington, 01 October 2004 African Development Bank Group

AFRICAN DEVELOPMENT BANK 40 th Anniversary Edition 2 Private financing in local government infrastructure? n For –Aid financing is insufficient and diminishing –Public sector finance is insufficient –FDI only around 2.3% of global share –Estimated annual infrastructure needs about US$20 billion in next 10 years in Africa –Improvement of the quality of service –Permit price discovery –Allow re-allocation of public fund to social sectors –…. n Against –Increase in service price (this is debatable) n There are many compelling reasons for MDBs to actively promote private financing of local government infrastructure. n The Bank acknowledges that private investment is critical, provided there is an enabling environment n Sector policies n Financial policies n Operational policies and operations in the field

AFRICAN DEVELOPMENT BANK 40 th Anniversary Edition 3 Sector policies n Infrastructure sectors include transport; energy and power; WSS; Irrigation; educational and health facilities; ICT n The Bank has initiated sector reforms policies (water, energy, telecommunication, urban development, private sector operations,…) –To improve the regulatory framework –To promote a separation of the regulatory function and the delivery of services –To introduce competition –To encourage and support entry into areas that are un-served or poorly served –To prepare the sectors for privatization

AFRICAN DEVELOPMENT BANK 40 th Anniversary Edition 4 Sector policies (more…) n The Bank is working very closely with its members to promote good governance (good governance policy) –To reduce corruption –To bring more transparency in management of contracts n The Bank encourages and supports decentralization of infrastructures –Where it makes economical sense n The coming new private sector operations policy –supports private investment through PPP –improves regulations –modernizes laws –Encourages reform of property rights and enforcement of contracts n Promotion of regional cooperation and integration in infrastructure development

AFRICAN DEVELOPMENT BANK 40 th Anniversary Edition 5 Once the policy framework has been setup, the Bank has several financial instruments to encourage private finance n Indirect instruments (broad creation of leverage) –Co-financing n Sovereign lending, n Commercial lending, and n public non-sovereign guaranteed to finance viable investment activities in a distinct group of public enterprises in African middle-income countries that are commercially run. –Line of credit. –Agency line of credit. –Participation in infrastructure funds or promotion of dedicated funds. –Development of local capital markets. n Issuance of bonds, n Syndication of local banks.

AFRICAN DEVELOPMENT BANK 40 th Anniversary Edition 6 The Bank has several financial instruments to encourage private finance (more…) n Direct instruments –Guarantee n Partial credit guarantee, n Partial risk guarantee). –Syndication (B-loan). –Risk sharing facility.

AFRICAN DEVELOPMENT BANK 40 th Anniversary Edition 7 On the ground,… n Investment in entities that finance local governments such DBSA, IDC or INCA. n Equity participation in infrastructure funds such as the African Infrastructure Funds (AIF). n Risk sharing facility with commercial banks to invest in infrastructure projects. n Guarantee of a local banks syndicate to provide CFA resources (MTN-Cameroon). n The Bank promotes infrastructure projects and gives special attention to public-Private Partnership investments (Azito, Ivory Coast). –The key objective is to provide confidence and comfort to other lenders who may hesitate to participate otherwise due to perceived risks or lack of familiarity with conditions in the host countries.

AFRICAN DEVELOPMENT BANK 40 th Anniversary Edition 8 On the ground, (more…) n African Water Facility (USD 615 million). –An Initiative of AMCOW being hosted and implemented by the Bank, aims at strengthening and enabling environment to attract investments in the water sector in Africa. n Technical Support to the NEPAD initiative on Infrastructure. –To bridge the infrastructure gap in the region as an important element in the promotion of growth, trade and regional integration. –ADB as lead agency, has developed and is already implementing a STAP for facilitation, capacity building, physical capital investments and studies.

AFRICAN DEVELOPMENT BANK 40 th Anniversary Edition 9 The road ahead,… n The Bank will seek to increase its leverage: –by strengthening its technical capacities in project syndication, –by the promotion of public-private partnership (PPP), and –by encouraging joint ventures involving African public and private enterprises and foreign direct investor. n The Bank is now increasing its emphasis on infrastructure through a variety of instruments designed: –to increase public sector effectiveness, –to strengthen the enabling environment, –to support private sector investment particularly local investors. n Greater Collaboration with development partners –Sharing of experiences between MDBs, –Discussion on possible collaboration with USAID on supporting local bank credit for infrastructure.

AFRICAN DEVELOPMENT BANK 40 th Anniversary Edition 10 The road ahead, (more…) n Collaborate with central governments in RMCs to promote more decentralization. –Financially support decentralization policies. n Increase our commitments at the local level through direct or indirect financial instruments. –Show that we understand and believe that this approach can work. n Continue research of the best and sustainable structure to mitigate foreign exchange risk.

Policies in promoting private finance For Local Government Infrastructure Washington, 01 October 2004 Policies in promoting private finance For Local Government Infrastructure Washington, 01 October 2004 African Development Bank Group