September 24, 2017

Role of DFIs versus that of donor funders

There is a need to be more cognisant of the role of DFIs versus that of donor funders, says Deloitte

Development Finance Institutions (DFIs) have overtaken the governments of African states as the largest financier of infrastructure projects on the continent, according to Deloitte’s latest African Construction Trends Report, which reflects extensive research into mega infrastructure projects conducted by the firm.

With participation in 145 of the 301 projects under construction in Africa, with a value of more than $US50 billion, international DFIs represent 48.17% of total projects and 33.84% of continent-wide financing, with a large exposure to energy and power projects and to the transport sector.

Breaking these projects down into regions, the highest concentration of projects are in West Africa with International DFIs participating in 40 projects, followed by 39 projects in East Africa and then in 37 projects in Southern Africa. It is also involved in 17 in Northern Africa and 12 in Central Africa.

Liquidity limitations in a contracting global economy and the commodity crunch saw governments drop to the second largest contributor to infrastructure development in their own back yard. This was followed by the amalgamation of the participation of all singular countries’ financing followed by African DFIs, Private Domestic investments and China on a stand-alone basis.

“There has been a marked shift from Government-led spend to DFIs,” said J-P Labuschagne, Africa Infrastructure & Capital Projects Leader at Deloitte South Africa.
He says that this has led the team to question longevity and sustainability of the investment.

“”The maintenance will one day need to come on the government budget,” he said. “African economies may be getting the boost that they require to build the infrastructure currently but how will this investment be maximise for future benefit?’’.

What has become clear to Deloitte is the need to be more cognisant of the role of DFIs versus that of donor funders. While donor funding is effectively a handout, not for repayment and often serving as a kick start for project planning, DFIs are called on to facilitate sustainable project funding.

“Interestingly, both financier types have, and continue to invest substantially in the continent’s infrastructure development.”

According to a previous study compiled by Deloitte, donor activities across member firm countries was the highest in East Africa and parts of West Africa, with actual disbursements dominated by USAID and the World Bank, and infrastructure development was the top addressable sector by these funders, receiving US$8.9 billion in 2011 when the research was conducted.

The data in this report also indicates that development of social infrastructure lags behind other sectors”, said Labuschagne. “’This begs further questions as to whether the infrastructure development agenda is being driven by getting people from A to B and keeping the lights on, or catering to the basic needs of residents such as the provision of healthcare, water, sanitation and housing.”

“What is critical in the context of the developmental cycle?’’

Labuschagne said that these questions are not easy to answer but taking a 360 degree view of infrastructure development in Africa, as in the African Construction Trends report, they are better equipped to understand the complexities behind building a continent from the ground up.
“’In gaining this grasp on the development landscape, we can better navigate success,”he said.

‘’What we also know, based on the experience of the Deloitte Africa ICP team, is that this project landscape is a litmus test for national and regional leadership. It is the new circle of influence in which heavyweight political and economic support need to come together, not only in talk but in action, as teamwork is put to the test in realising some of the continent’s hopes for the future.’’

Projects are however still mainly owned by governments with 214 projects (71%), followed by private domestic owners with 38 projects (13%) and Africa DFIs with 9 projects (3%), with China the owner of only one project, even though it is the funder of 13 such developments and heavily present in the construction of 42 projects (14%). Contrarily, governments own 71% of projects and are part of the construction process of 27% and are present in the funding of 16% of these developments.

www.deloitte.co.za

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