OPINION: Access to finance key to unlock Africa's potential
The upcoming World Economic Forum on Africa 2015, which will be hosted in Cape Town, provides a platform for global and regional leaders to discuss the opportunities on the African continent and the challenges in harnessing these opportunities. The delegates will share ideas and lessons learnt from existing economic and social development initiatives implemented both globally and regionally, with the aim of developing solutions for the challenges facing the continent.
Research from the World Bank has identified access to financing as one of the most problematic factors for doing business in Africa. This problem is viewed as greater than the perceived threat of corruption and lack of infrastructure on the continent. The availability of financing is constrained by a number of factors, like a lack of historical credit market data, regulatory uncertainties (including the enforcement of collateral), high transaction costs, size of the domestic banking sectors and underdeveloped capital markets.
The lack of access to finance is hampering growth in the continent on two fronts. Firstly, small businesses are finding it difficult to secure finance for start-up capital, or to fund growth. Secondly, large infrastructure projects on the continent are competing for limited funding, which exacerbates the existing infrastructure backlog.
In 2009, the World Bank published a report which estimated annual investments of US$93 billion was required to address Africa's infrastructure needs. Approximately one third of this amount related to the need for maintenance and upgrade of existing infrastructure. The infrastructure spending requirements are concentrated in the power (c.44%), water supply and sanitation (c.23%) and transport (c.20%) sectors, with the balance required in the information and communication technologies and irrigation sectors.
The continent currently has the ability to meet two thirds of this funding requirement from government finances and funding from development finance institutions, private investments and external governments like China and India. Despite these sources of finance, the annual infrastructure financing gap in Africa remains significant at approximately US$30 billion per annum.
Solutions to solving the infrastructure funding gap include increased support from international funders. However, a number of African countries have the potential to increase the amount of local finance for infrastructure projects by providing stable regulatory frameworks and developing their local corporate bond markets. Such developments would be likely to attract increased commitments from institutional investors.
The representatives of the World Economic Forum are aware of the challenges posed to the continent due to financing constraints and the lack of access to capital. In addressing this we see a common theme reaching across a number of sessions planned for the event dealing with issues as diverse as: developing employment and skills, powering innovation on the continent, achieving sustainable development goals, powering Africa, improving infrastructure and expanding access to healthcare.
We hope that under the theme 'Then and Now: Reimagining Africa's Future' we will see some of these issues addressed successfully.
Corneleo Keevy is a credit analyst at Ashburton Investments.