Africa’s newest metropolis requires infrastructure. Urban populations will double over the next 25 years, requiring smart investments in housing, power and transportation networks. This presents a unique opportunity for African banks and institutional investors to move away from mega-projects laden with foreign financing and debt and instead fund, manage and resource domestic infrastructure projects.
Africa’s urban population boom – an opportunity to boost economic independence
The number of large cities in Africa continues to grow. Thirty years from now, the continent’s urban population will double from 700 million to 1.4 billion. African banks and institutional investors should capitalize on this trend, play a greater role in infrastructure projects, and ensure that financial rewards remain locally rooted.
Traditionally, local governments have lacked the resources to take on large-scale infrastructure projects, such as cross-border rail projects or giant wind farms. However, smaller urbanization projects such as 5G networks, metro systems and drainage systems present a unique opportunity for African banks to start taking the reins from foreign investors.
This is important because infrastructure projects are costing African countries billions of dollars in high-interest debt. Addis Ababa’s $475 million metro network was promised to carry 60,000 passengers per hour along its tracks, but it currently carries a fraction of that number, as the project lacked long-term consideration for maintenance, spare parts and local technology for sustainable operation.
It was a similar story in Nairobi, where the new highway toll project ended up costing $668 million to build. But countries also pay very high interest rates. 26% of Ghana’s government revenues cover interest payments to foreign creditors, compared to 3% in France, which has relatively high debt levels.
Why should African institutions lead urban infrastructure projects?
African economies are changing rapidly. Rather than focusing on exporting or extracting primary products, countries are adding value by diversifying into manufacturing, consumer, and agricultural sectors. One of the most important changes has been brought about by providing digital banking services to previously unbanked populations. In sub-Saharan Africa, 49% of adults own a bank account, a rate that has doubled since 2011.
Infrastructure financing on the continent has changed little over the past three decades and remains heavily dependent on foreign aid. If it becomes a reality, it could fundamentally change this investment activity and reap the benefits. Just as it diversified its exports and popularized online banking for the masses. The continent remains lagging in building the physical and digital infrastructure needed to sustain long-term economic transformation.
Locally-led projects can help transition away from foreign financing. Bonds, FDI and development finance have brought capital to some of Africa’s biggest infrastructure projects, but citizens have often been excluded from the benefits. The time has come for Africa to reduce its dependence on external debt for infrastructure development.
Countries should use commercial banks, investment banks, and other domestically headquartered companies for loans, bonds, and other financial products. The important thing is to keep financial rewards within your company’s range.
Of course, some African countries first need to strengthen their fiscal structures in order to collect more revenue from private projects. For example, some governments need to improve tax collection, while others need to cut inefficient spending. Ultimately, we need to reach a stage where we can invest in urbanization projects and begin Africa’s transition towards economic independence.
This is not wishful thinking; it has been achieved before. Ethiopia’s new $5 billion hydroelectric dam, financed almost entirely domestically through bonds, payroll contributions and public financing, connects the country to clean energy and creates an export market for neighboring countries. This proves that African countries can provide infrastructure success stories.
I am confident that African businesses can deliver results at the municipal scale as well. South African banking group ABSA Group has partnered with the National Commercial Bank to structure green bonds for sustainable development projects. Nearly two-thirds of the bond investment was domestically funded and contributed to the construction of water and sanitation infrastructure in the city of Tanga, Tanzania.
African banks and institutional investors are not yet able to bear the full brunt of urbanization, but to get there they will need to rapidly develop capabilities in several key areas, such as local government financial structures. This will ensure that urbanization projects have the right mix of debt, taxes and other revenues to support local infrastructure projects over the long term.
Similarly, local financial institutions could follow ABSA’s lead and raise sustainable development finance through municipal bonds to support small-scale projects such as sanitation and waste treatment. We also need to increase participation in public-private partnerships to provide early-stage capital and risk sharing.
These examples are not exhaustive. This type of project management happens every day at the bank’s headquarters. It is time to scale up these skills and apply them to urbanization projects in Africa.
For example, commercial banks are promoting financial inclusion in Africa, but their next big role should be indirectly supporting customers outside their branches and investing in local infrastructure projects. If rural farmers seek a better life in the city, they need safe drinking water, affordable housing, and reliable commuting. These needs must be met before you can step into a branch and open a bank account.
Think big, start small
It is understandable why people argue that banks and institutional investors in Africa should not take the lead in financing housing developments, construction projects and energy projects. Small banks simply don’t have the same size. Africa has relied heavily on FDI and development bank support for decades, perpetuating a system that sidelines urbanization projects.
Africa’s population boom offers an opportunity to start small. The green roots of change are beginning to appear. This continental bank is one of the fastest growing banks in the world. Africa’s most valuable financial institution has seen its assets grow by 3.3% in the past 12 months. Financial services companies need to funnel more profits into local urbanization projects and create new models for domestic growth across the continent.
African cities are on the brink of overpopulation. Governments can stick to the status quo and rely on external funding for urbanization projects. Or empower domestic banks and institutions to provide them, helping to maintain locally-based economic interests. Whatever the outcome, I expect to see twice as many African financial institutions leading urbanization projects over the next decade.
