‘Charity should begin at home’

The African Development Bank’s call for a $22bn fund to finance infrastructure via a new type of bond is a sound idea. But is Africa ready to come together?

“Charity should begin at home!” 

That was the rallying cry issued recently by African Development Bank (AfDB) president Donald Kaberuka in a bid to get African countries to band together to help plug a staggering $94 billion-a-year infrastructure gap that is hampering growth across the continent.

The AfDB’s proposal is simple and remarkably sound, at least financially. African countries have some $450 billion of foreign reserves, most of them invested abroad, where, as Kaberuka dismissively pointed out, its “security is relative as we saw in 2008, and at this moment, the return is a meagre one”.

So why not use some of those foreign reserves to help fund African infrastructure? “Suppose we begin with only 5 percent of each country’s reserves; that would be at least $22 billion. That is easily equal to three times what both the World Bank and African Development Bank commit to Sub-Saharan Africa each year,” the AfDB president highlighted.

Having pooled those resources into a $22 billion fund, the money would then be used to fund projects via an “African Infrastructure Bond [being developed] by the African Development Bank [and] reserved solely for Africa’s Infrastructure.” Kaberuka called the new instrument a “safe, secure, high-return” bond.

The true genius of Kaberuka’s proposal, though, is that it places the AfDB as guarantor of the fund, promising Africa’s central banks that their $22 billion of foreign reserves will be put to good – and profitable – use.

If you haven’t done business in Africa – particularly infrastructure-related business – it can be hard to appreciate just how prestigious the AfDB, as an institution, actually is. As one source told Infrastructure Investor when we were preparing our 2011 Africa Intelligence Report:

“The AfDB is a blue-chip African institution in which African governments trust. When AfDB representatives travel across the continent, they get the red carpet treatment, same as foreign dignitaries.” In a fragile and often war-torn continent, not many institutions command that sort of respect. 

But the AfDB’s credentials go beyond that. As Kaberuka stressed, the AfDB “is a AAA rated institution” with “the security, the track record and experience” to pull-off such an undertaking. Put simply, the AfDB is African’s infrastructure bank, with 60 percent of its resources, or about $5 billion a year, going into infrastructure financing.

So if anyone can successfully convince African countries to raise a $22 billion infrastructure fund, it’s the AfDB. Having said that, the bank faces a daunting, if not insurmountable, task – and Kaberuka knows it.

“I am not underestimating the political, operational and especially, the psychological obstacles that we may have to overcome – even those of common perception, to get to this apparently logical outcome,” Kaberuka said. 

To put it mildly, it will not be easy, even with the AfDB brand name behind it, to convince Africa’s countries to pool together resources. The continent is simply not well integrated, with many countries openly hostile toward their neighbours. Therefore it’s hard to be optimistic about the AfDB’s initiative.

That takes nothing away from the bank’s proposal, though. Even if it ends up coming to life in a more modest fashion – with less capital and fewer countries involved – it would still be an important milestone on the road to Africa’s infrastructure development.