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African Development Bank Raises Funding as China Boosts Role

Chinese Premier Li Keqiang & Kenyan President Uhuru Kenyatta
Chinese Premier Li Keqiang, left, shakes hands with Kenyan President Uhuru Kenyatta in Nairobi, on May 10, 2014. Photographer: Tony Karumba/AFP via Getty Images

The African Development Bank is stepping up plans to finance power and rail projects as China boosts lending on the continent by half.

The Tunis-based lender is set to endorse this week the Africa50 Fund, which is targeting $10 billion of equity from an initial capital of $3 billion, to finance infrastructure projects. Central bank governors and finance ministers across the continent will meet from today at the bank’s annual conference in Rwanda’s capital, Kigali, to back the plan.

African nations have a funding shortfall of $50 billion a year to ease energy shortages and transport bottlenecks, according to the World Bank. The AfDB’s spending on the continent is dwarfed by China, which invested more than $13 billion in infrastructure in 2012, as the world’s second-largest economy boosts its reliance on Africa’s oil, coal and other commodities.

“The AfDB is investing significantly into African infrastructure,” Joe Cosma, head of government and infrastructure at Ernst & Young in Johannesburg, said by phone. “They are investing a lot of time in working out how they can work with African governments to define infrastructure requirements and investment options. In a sense, they are competing with the Chinese.”

The AfDB approved funding of $9 billion in 2011, with infrastructure projects accounting for $3.4 billion of that, according to the lender.

Chinese Pledges

Chinese Premier Li Keqiang said on a visit to Africa this month that the government will boost its line of credit to African nations by $10 billion to $30 billion. He also pledged to almost double capital in the China-Africa Development Fund, which gives financing to Chinese companies for private equity deals, to $5 billion.

Sub-Saharan Africa, a region of 48 countries with a combined population of 800 million, generates the same amount of electricity as Spain, which has a population of 45 million, according to the World Bank. Only a third of Africans living in rural areas are within 2 kilometers (1.2 miles) of an all-season road, compared with two-thirds of the population in other developing regions.

“Chinese investors provide both funding and technical expertise, a full implementation package, which African governments find attractive,” Cosma said. “The AfDB is much more connected to the African governments and they can use this relationship to their advantage.”

Infrastructure Shortfall

The AfDB’s fund will help complement China’s investment in Africa given the scale of the infrastructure shortfall in the region, said Alastair Herbertson, an investment specialist at Investec Asset Management.

“The actual quantum of the infrastructure investment deficit is so great that all of this goes together,” Herbertson said by phone from Cape Town on May 15. “It’s never going to displace the Chinese investment.”

Faster economic growth is putting pressure on ailing infrastructure. Africa’s economy will probably expand 4.8 percent this year, with West Africa growing the fastest at 7.2 percent, the AfDB said in its African Economic Outlook report, which is co-written by the Organization for Economic Co-operation and Development and the United Nations.

The AfDB, which is marking its 50th anniversary this year, will focus its funding on large-scale projects, mainly in energy and transport, in all 54 countries across the continent, Neside Tas Anvaripour, who heads Africa50 fund, said in an e-mailed response to questions on May 15.

Low Savings

“There is a huge infrastructure gap and we need capital from elsewhere to address it” Admassu Tadesse, president and chief executive officer of PTA Bank, based in Burundi’s capital, Bujumbura, said in an interview in Kigali today. “The savings in the region are too low compared to capital investment needs.”

Given the scale of Africa’s financing needs, the Africa50 fund is too small to bridge the funding gap and more businesses need to be encouraged to invest in infrastructure, said Aurelien Mali, vice president and senior analyst at Moody’s Investors Service. This will require reforms in industries such as electricity because the regulated price for energy in many countries doesn’t cover the cost of producing it, he said.

“Until it’s done, the investment is not going to happen,” Mali said. “It’s one of the first rules: you don’t invest in something if you are not going to have a return, or if it’s a loss-making situation.”

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