By Wildu du Plessis and Kieran Whyte*
The 38th Summit of Heads of State and Government of the Southern African Development Community (SADC), currently taking place in Namibia, is expected to address a wide range of issues of importance to the SADC region, most notably the status of implementation of the SADC Industrialisation Strategy and Roadmap, as well as the current political situation and its effect on investment.
The theme of this year’s SADC Summit is “Promoting Infrastructure Development and Youth Empowerment for Sustainable Development”. Developing infrastructure is vital for the improvement of economic growth, employment opportunities and the socio-economic conditions in the region.
An example of a proposed power infrastructure project in Namibia, the SADC Summit hosts, is the mooted Kudu Gas Project. The Namibian Minister of Energy recently referred to this project when he spoke at the African Energy Forum in Mauritius.
This project is offshore, and they have to bring the gas onshore and find power or industrial offtakers not only in Namibia but in neighbouring countries as well. As such, industrialisation will work only if there is an increase in intra-regional trade and dependency.
Raising finance remains a challenge
A key challenge of industrialisation is raising finance on acceptable terms. SADC noted when it launched the Industrialisation Strategy and Roadmap that one of the biggest challenges to the growth of industrialisation in the region was inadequate funding, and that they needed to consider innovative ways of financing industrialisation.
Investments in infrastructure in particular are often big ticket, long term commitments with fixed locations, fixed revenue streams and structures, which will require substantial financial buy-in from all parties and stakeholders.
Because of market volatility, coupled with low credit ratings and a lack of exposure to private investors, emerging markets, and Africa in particular, require innovative financing solutions to bridge the gap between public and private investment. This is where the New Development Bank and other Development Finance Institutions (DFIs) play a pivotal role.
Apart from perceived or actual investment barriers, infrastructure projects have to identify and mitigate multiple risks notably completion risks, regulatory or policy uncertainty, performance risks and revenue risks to ensure that the project not only repays its debts, but also provides an adequate return for investors.
The overall “bankability” and multi-faceted and inter-dependency of the components of the primary and enabling infrastructure of a project must not be underestimated.
The key role that DFIs have to play in making a project bankable include being able to provide a broad range of financing products, the ability to act as a loss absorber on both greenfield as well as brownfield projects, having developmental mandate which goes beyond pure funding, active engagement in creating enabling environments to address regulatory and institutional challenges, and risk mitigation.
SADC members will most likely also use the Summit’s platform to discuss the need for cross border and regional co-operation and collaboration, as well as the need for regulatory certainty and certain, independent, transparent and impartial regulation.
Also under discussion will be the need to pursue a liberalised market to foster intra-Africa trade based on the recently signed African Continental Free Trade Area Agreement, the implementation of liberalised foreign exchange markets and convertibility of currencies, the status of bi-lateral investment treaties and security.
* Wildu du Plessis is Head of Africa, and Kieran Whyte is Head of Energy, Mining and Infrastructure at Baker McKenzie in Johannesburg.