Development finance institutions (DFIs) are turning to blended finance, which has been identified as key to bridging Sub-Saharan Africa’s infrastructure gap.
Sub-Saharan Africa has a widening $100bn annual infrastructure funding gap, particularly for ventures of 10 years or more, with local commercial banks often lacking capacity for long tenures. Ninety percent of projects on the continent are failing due to inadequate risk allocation and feasibility studies.
This has seen more blended finance transactions under way. There are 216 transactions targeting one or more countries in Sub-Saharan Africa and representing an aggregate volume of up to $45bn invested in full or in part in the region.
Blended finance is an instrument aimed at supporting high-income projects that would otherwise not attract funding on strictly commercial grounds. It is the strategic use of development finance and other funds to mobilise capital flows to emerging markets, combining official development assistance with other private and public resources.
But analysts say the blended finance model, which allows for institutional investors and the private sector to back projects in the early stage development, will be tested in the global economic slowdown and that African governments need to create systems that allow capital to flow efficiently.
Speaking at the Africa Finance Industry Summit (AFIS) in Lomé, Togo, last week, International Finance Corporation (IFC) director for economic policy Denis Medvedev said the main challenges for infrastructure funding across the continent include finance gap risk due to high country, sector or project risk.
“Returns are initially too low mainly because of untested business models, limited scale and the misalignment in incentives from stakeholders regarding maximising development impact,” Medvedev said. “Blended finance products provide a critical value-add via targeted financing solutions that help overcome each barrier and move deals over the finish line.”
High impact
He said the IFC has focused on the careful use of concessional funds for high development impact projects.
“It funds 369 high-impact development projects in 55 countries. Sectors they have invested in include health, agriculture, gender, SME financing and climate,” Medvedev said.
He said blended finance has to be used strategically and that it is not just an instrument to reduce cost.
Medvedev said instruments used by the IFC include risk mitigation and guarantees, concessional debt and equity via direct investments as well as private equity.
The continent’s development challenges are well known and are especially acute considering the region’s infrastructure needs.
The region’s ability to attract global commercial financing to tackle these challenges has been hampered by the high perceived risks of investing, and a shortage of investable opportunities of scale.
Tshepidi Moremong, COO of Africa50, said blended finance can make unattractive projects investable, and can guide commercial capital towards sectors like transport, water and sanitation, information and communication technology, as well as clean energy.
Africa50 is an organisation established by African governments and the African Development Bank (AfDB) to help bridge Africa’s infrastructure funding gap by facilitating project development and mobilising public and private sector finance.
“Even though we talk about risk and perceived risk, we have done incredible projects on this continent. The reason they worked is because we have been able to allocate the risk to the people best placed to do it,” Moremong said.
Moremong said what sets Africa50 apart is a focus on equity. “A lot of people talk about debt financing. What we do is we bring projects to bankability. So from a concept to bankability. In addition we provide growth capital.
“So we do end-to-end financing. And the beauty about this is financing comes from 29 African governments, two central banks and the AfDB.”
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