The Role of International Development Finance Institutions in Financing Infrastructure in Africa and its Implications for Korea

Young Ho Park, Youngki Kim, Jong-Moon JANG, and Hyelin Jeon

Africa, once a land of ceaseless civil wars and abject poverty, is now emerging as a continent of new potentials and opportunities, drawing attention from governments and corporations worldwide. The growing interest in Africa is evident in a recent opinion poll involving construction companies in Korea. The respondents’ interest in Africa was much higher than that in either the Middle East or Asia. It is no exaggeration to say that the sound of bulldozers and hammers are fast replacing the sound of guns on the continent, whose demand for construction is growing explosively. In line with this, however, the backward business environment in general, continuing political instability, and breaches of contracts that are still prevalent throughout the region make Korean corporations reluctant to enter into the African market. Furthermore, these risks limit the amount of financial support that Korean export credit agencies (ECAs) provide. It is believed that one way to overcome this is to foster financial cooperation with policy financing bodies overseas. This study surveys the types and amount of financial resources that overseas policy financing bodies, such as development finance institutions (DFIs), provide for Africa, and makes in‐depth analysis of major projects in Africa financed by them. Moreover, this study explores how Korean ECAs and investors can use partnership with financial institutions worldwide to provide greater finance for Africa.

This study finds the following characteristics and attributes in the financial support that DFIs have been providing for Africa. Firstly, DFIs are increasing their support for Africa, particularly prioritizing projects on infrastructure development. The World Bank (i.e., the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA)), for instance, allocated 20% of all loans it provided in 2012 on Africa, which was spent on a wide range of development projects, including plant construction, roads, bridges, water resources, and wireless communication networks. International Financial Corporation (IFC), which has traditionally focused on Central Asia and Latin America, has also been increasing its financial assistance for Africa in the recent years. Whereas IFC’s assistance for Africa stood at USD 278 million in 2002, it multiplied by over 13 times to reach USD 3.7 billion by 2012. Much of IFC’s investments and loans for Africa concerns infrastructure development, amounting to over USD 1 billion in 2012. The Multilateral Investment Guarantee Agency (MIGA) encourages and guarantees private‐sector investments in developing countries. It has played a pivotal role in the development of Africa by providing guarantees for multiple projects. MIGA’s attention these days is on assisting postwar reconstruction in countries coping with the aftereffects of civil wars. In 2012, 34% of the number of projects guaranteed by MIGA was allocated to sub‐Saharan Africa, representing 24% of the total value of investments the agency guaranteed.

The European Investment Bank (EIB) is another major source of finance for Africa’s development projects. The EU‐Africa Infrastructure Trust Fund (ITF) which the bank established in 2007, has been crucial to the expansion of infrastructure in Africa. The African Development Bank (AfDB) shows a similar concern for developing infrastructure, which claimed almost half of all the loans and concessions the bank provided in 2012. The AfDB’s goal is to promote market integration across Africa and it prioritizes trans‐Africa infrastructure projects that involve multiple African countries accordingly.

Secondly, the most active bilateral DFIs in Africa today are CDC of the United Kingdom, Proparco of France, and DEG of Germany. These institutions mainly focus on assisting private‐sector projects that aim to achieve significant development impact and financial returns. Although these bilateral institutions count as organizations of official development assistance (ODA) as they support the eradication of poverty and sustainable development in developing countries, they are also akin to commercial banks in their pursuit of profits. These institutions have been successful with the development projects in Africa they have invested in. These projects have yielded much development impact and financial returns, particularly reflecting these institutions’ extensive experience with, and expertise on, the feasibility and analysis of development projects. Another interesting characteristic of these European DFIs is that they mobilize private‐sector capital through proactive investments for risk management. By providing investments, loans, and guarantees for risky private‐sector projects, these institutions serve to catalyze the participation of other investors and lenders. CDC, for instance, has been participating in a broad array of development projects in Africa, making use of the UK‐Africa relations that go back to the colonial days. Having decided to concentrate investments in Africa in 2011, CDC is rapidly increasing its presence on the continent. Its operating policy today requires that 75% of all new investments be made in low‐income countries (i.e., countries with a GDP per capita of USD 905 or less each), and that 50% of those investments be made in sub‐Saharan Africa. Thanks to this change in policy, Africa claimed the majority of investments that CDC made in 2012. Most of these investments have gone into former British colonies, such as Kenya, Nigeria, South Africa, Ghana, Uganda, and Tanzania.

Proparco is similarly active in Africa, with eight of its fourteen overseas offices located on the continent. Proparco’s area of focus is sub‐Saharan Africa, which has taken almost half of all the investments that the company has made so far. On the contrary, Africa is relatively minor in the investment portfolio of DEG, a company based in Germany that has no comparable historical or colonial relations with Africa. Nevertheless, DEG has been steadily increasing its investments in Africa in the recent years, especially in the form of cofinancing with other DFIs.

Thirdly, financial resources of quite diverse natures come together through cofinancing to form financial packages for Africa. Large‐scale projects involving construction and plant development rely primarily on the financial assistance provided by multilateral development banks (MDBs) and bilateral DFIs, with ECAs and commercial banks tending to participate in these projects as latecomers. African projects tend to involve multiple and diverse financial institutions, not only to find sufficient financial resources, but also to distribute and mitigate the risks inherent to those projects. Africa is still home to a wide range of unpredictable risks. Most African states have relatively low credit ratings, making it impossible for financial institutions to fund projects in the region either by themselves or in small groups.

This study develops suggestions on how Korean ECAs and investors can make use of DFIs overseas based on their analysis of these characteristics. First, Korean ECAs need to attempt to broaden the range and scope of cofinancing. As Korean corporations have begun to pay greater attention to construction and plant development markets in Africa, the Export‐Import Bank of Korea, an ECA, has been trying to enlarge the range of export credits and Development Cooperation Fund (EDCF) it provided for projects in Africa. The high business risks and rampant poverty in African states, however, still make it nearly impossible to draw sufficient investments to satisfy Korean developers’ needs. Constructor‐financed projects in Africa crucially impinge upon the developers’ ability to secure financial resources for their success. Korean developers, however, lag behind their competitors overseas in this regard. One way to overcome this shortcoming is to increase cofinancing with DFIs overseas. Cofinancing may serve to anchor the stability of projects and mitigate risks. DFIs and ECAs of advanced countries possess significant negotiating power when it comes to African governments and may effectively provide a bulwark against breaches of contracts, expropriation and foreign exchange control, restrictions on remissions, and other such political risks. Because construction and plant development projects require massive amounts of investments for setting up the necessary equipment and also for operating the projects for relatively long spans of time, effective risk management strategies are essential. The inherent characteristics of these projects also render them riskier than other types of projects. Should the Export‐Import Bank of Korea and other Korean ECAs decide to cofinance these projects in Africa with financial institutions overseas, they will be able to catalyze and encourage other Korean corporations’ investments in Africa as well. To this end, Korean ECAs first need to build and strengthen the network of financial cooperation with DFIs and ECAs abroad and actively seek out measures of multisource financing by combining resources and services with these institutions. Without sharing risks with other ECAs or MDBs worldwide, Korean ECAs would always remain passive in terms of investing in high‐risk regions like Africa. Moreover, Korean ECAs also need to broaden financial partnerships with other types of financial sources worldwide, including ODA institutions of advanced countries, international commercial banks, local financial institutions, investment funds, among others. However, because these financial institutions carry different aims, policies, and terms and conditions of investment, it is important to choose the right type of financial sources and design the financial package strategically. Cofinancing is a great way to enlarge the pool of available capital, share experience and expertise, and mitigate risks. The Export‐Import Bank has worked on six cofinancing projects in Africa so far, with institutions, such as the World Bank and AfDB.

Second, cooperation with financial institutions abroad also enable Korean ECAs to take part in infrastructure projects with great development impact. DFIs prefer projects with high development impact and cross‐border infrastructure development projects that promote regional economic integration, such as energy and transportation projects. The decisive fact about the Kenya‐Uganda Railway Network Project, for instance, that drew DFIs’ support was that it would equip Uganda, a landlocked country, with a logistics network and routes of exports so that it could grow along with the neighboring country of Kenya. Should Uganda have promoted this project solely for its own benefit, it would have failed to mobilize such a massive amount of financial assistance from DFIs.

Third, cooperation with financial institutions abroad will also allow Korean ECAs to make better investment decisions through securing project viability. Projects with poor project viability face considerable constraints in securing the financial resources they need and thus tend to drag on for extensive periods. Even in projects in which Korean companies’ participation is limited merely to construction, these companies will have difficulty receiving payments on time insofar as those projects lack sufficient project viability. Securing project viability is crucial for projects where Korean companies take a lead or participate in.

Thorough analyses of feasibility are important to foster the private sector’s participation and investment in projects. The case studies included in this research all ensured the viability of their projects based on detailed feasibility studies.

Fourth and finally, cooperation with financial institutions abroad will also enable Korean ECAs to make use of the available financial advisory services. Entering the African market entails a wide range of complex risks and requires thoroughgoing preparations for minimizing them. As Korean financial institutions lack experience and capability to advise on development projects in Africa, Korean investors need to seek out help from foreign financial institutions with expertise on financing projects in the region. It is usually investment banks with well‐established international reputation that provide these advisory services. European banks have vast experience in handling financial advisory services for prospective investors in Africa. They do not only possess extensive knowledge on the states and industries of Africa, but also offer expert advice on how to secure investments and minimize risks. These financial advisory institutions of advanced countries can provide a broad array of helpful services, including consultation on project structures, feasibility reviews, financing plans, finance modeling, and contracts. Moreover, they can serve as mandated lead arrangers for securing loans and finding other financial resources. It is thus crucial to make effective use of the services they provide in order to enter the risky African market.

서언

국문요약

약어표

제1장 머리말
1. 연구의 배경 및 목적
2. 연구의 방법 및 구성‧범위
3. 연구의 의의 및 한계

제2장 아프리카 진출 리스크와 금융조달 여건
1. 아프리카 진출 리스크
가. 국가위험(Country Risk)
나. 사업(기업경영) 리스크(Business Risk)
2. 금융조달 여건
가. 금융 접근성 제한
나. 사업형태별 내재위험에 따른 금융조달 제약
다. 한국의 사업추진 실패 사례

제3장 다자개발금융기관의 아프리카 지원현황 및 사례분석
1. 세계은행그룹
가. 개요 및 특징
나. 아프리카 지원현황 및 정책
다. 아프리카 지원 사례
2. 유럽투자은행(EIB)
가. 개요
나. 아프리카 지원현황
다. 아프리카 지원 사례
3. 아프리카개발은행(AfDB)
가. 개요
나. 아프리카 지원현황
다. 아프리카 지원 사례

제4장 양자개발금융기관의 아프리카 지원현황 및 사례분석
1. 유럽개발금융기관 현황 및 주요 특징
가. 현황
나. 주요 특징
2. 영국: CDC
가. 개요 및 특징
나. 아프리카 투자 현황 및 정책
다. 아프리카 투자 사례
3. 프랑스: Proparco
가. 개요 및 특징
나. 아프리카 지원현황 및 정책
다. 아프리카 지원 사례: 코트디부아르 발전프로젝트
4. 독일: DEG
가. 개요 및 특징
나. 아프리카 지원현황 및 정책
다. 아프리카 지원 사례: 가봉 비료공장 프로젝트
5. 일본: JICA‧JBIC
가. 개요 및 특징
나. 아프리카 투자 메커니즘 및 현황
다. 아프리카 투자 사례: MOZAL 알루미늄 제련소

제5장 아프리카 금융조달 활성화 방안
1. 분석 내용 요약 및 시사점
가. 분석 내용 요약
나. 한국에의 시사점
2. 아프리카 금융조달의 고려사항
가. 위험분석 및 금융조달 계획 수립
나. 금융자문 서비스 활용
3. 협조융자 활성화
가. 복합금융 활용
나. 신디케이션(syndication) 활용
다. 협조융자 사례: 모로코 석탄화력발전사업

제6장 맺음말

참고문헌

Executive Summary