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Africa will have to factor in new bank curbs as $93bn/y is sought for infrastructure

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Africa will have to factor in new bank curbs as $93bn/y is sought for infrastructure

27th August 2010

By: Terence Creamer
Creamer Media Editor

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The regulatory response to the recent global financial crisis may create new constraints for the involvement of commercial banks in African and other emerging market infrastructure projects, notwithstanding the opportunities and the continent’s large infrastructure backlogs that will require a yearly investment of $93-billion to close.

In fact, the International Project Finance Association’s Anthony Sykes told participants at the Project Finance Conference 2010 in Johannesburg earlier this month that the regulatory tightening would definitely have consequences for the future availability of private finance for African infrastructure projects.

He warned that those believing that private finance would simply be released to close Africa’s estimated yearly infrastructure financing gap of some $31-billion were “living on cloud-cuckoo- land”.

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African policymakers would, therefore, be advised to take account of these new regulatory restrictions when seeking to prepare and market projects that required private finance.

Sykes, who also works for the Sumitomo Mitsui Banking Corporation, warned that Africa would “simply not achieve the inflows” being sought unless project promoters “got realistic” about how projects were packaged and marketed.

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Future projects would need to be prepared in line with “best practice principles”, be made relatively more attractive when compared with infrastructure programmes elsewhere in the world and should be negotiated by public-sector officials who have been capacitated to negotiate complex public–private partnership (PPP) ventures. In many instances, this capacity building would have to take place “on the job”, with the support of experienced advisers.

However, projects with any chance of success would also have to take account of the new regulatory constraints facing commercial banks, many of which focus on reducing liquidity risks.

Sykes warned that the net stable funding ratio, which is likely to be included in Basel III, could emerge as a material impediment, owing to the fact that it would seek to balance the liquidity profiles of the assets funded and the potential for contingent calls on funding liquidity arising from off-balance sheet commitments and obligations.

PPP infrastructure projects would probably also only be considered if strong capital management programmes were in place and if projects had been ‘derisked’ through the support of country or development finance institutions guarantees.

Sykes also argued that refinancing solutions would need to be sought that would enable commercial lenders to limit their exposure to tenures of less than eight years, or to finance during construction. He proposed the creation of State-owned infrastructure banks, the sole purpose of which would be to “recycle” commercial bank debt arising from infrastructure projects and repackage the debt as an alternative vehicle for domestic savings.

Governments Have Key Role
Speaking at the same event, Development Bank of Southern Africa (DBSA) executive Admassu Tadesse agreed that the shortage of capital had deepened in the wake of the recent financial crisis and that project sponsors had to contend with higher prices for capital and shorter tenures.

However, he argued that there had been a “sea change” in Africa, owing to the fact that countries were in a better position than they had been previously to make equity contributions into projects that would otherwise be left stranded.

Tadesse pointed to a recent example in Lesotho, where a R1,2-billion private healthcare project had been unlocked through the combination of a R400-million equity contribution from the Lesotho government and the DBSA funding of R800-million. This enabled Netcare and its partners to proceed with the construction, upgrading and operation of a hospital at Bots’abelo, in Maseru.

“Governments in the region are not as cash strapped as they were in the past,” he argued, noting that the “role of the sovereign” had emerged as an important “new dimension” in the Southern African infrastructure sector.

This new capacity meant that, while there were new obstacles dealing with the $93- billion yearly infrastructure backlog, there were also new instruments available for tackling the problem.

“It’s a huge number, but if you look at the landscape, I believe, there is also significant new opportunity,” Tadesse concluded.

Those believing that private finance would simply be released to close Africa’s estimated yearly infrastructure financing gap of some $31-billion were ‘living on cloud-cuckoo-land’

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