## pfdwttobea ## Source details **Canonical URL:** [pfdwttobea](https://www.imf.org/-/media/files/publications/dp/2021/english/pfdwttobea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2021/english/pfdwttobea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2021/english/pfdwttobea.pdf.json) --- ### Need for More Private Finance: context and urgency - COVID-19 aggravated tension between large infrastructure needs and scarce public resources. - To promote a strong, job-rich recovery, Africa needs more financing from and to the private sector. - Recent constraints: - Public investment-driven growth is reaching limits given high debt levels and limited domestic revenue mobilization. - The pandemic has eroded prior supportive external conditions: strong global growth, easy access to external financing, supportive commodity prices. - Informal economy relevance: - Informal economy ranges 20–65 percent of GDP across Africa and typically cushions downturns; the pandemic has incapacitated it. ### Why now? — a pivotal moment - Past external and fiscal environment that supported progress has changed, requiring rethinking of development strategies. ### Potential scale and explicit quantitative targets - Main quantitative objective: raise the contribution of private finance in SSA countries by 3 percent of GDP by the end of the decade. - Paper estimate: international private finance could increase by, at least, 1½ percent of GDP by the end of the decade (assuming equal split domestic/foreign). - Implied ambition: - 1½ percent of GDP corresponds to almost 30 percent of today’s international financing of private investment in SSA (private investment estimated at 13 percent of GDP in 2017; 40 percent of that financed externally: 0.4*13 = 5.2). - International financing of private or semi-private projects would need to increase by almost a third relative to the current situation. ### Starting point: current contribution and gaps - Private sector financing of social and physical infrastructure in Africa is very limited compared to needs and other regions. - 95 percent of infrastructure project investments in SSA were sponsored by government entities and SOEs in 2017; private projects represented only 5 percent. - World Bank PPI database (2011–20, SSA projects): - External debt averaged 40 percent of PPI investment. - Equity accounted for 30 percent of investment; about 70 percent of projects’ equity owned by international entities — implying about 60 percent of PPI project financing came from foreign investors. - Historical private investment-to-GDP ratios: - SSA average private investment-to-GDP ratio: 10.4 percent in 1990 to 13.5 percent in 2017. - Median SSA private investment ratio in 2017: 13.0 percent of GDP. - Asia private investment ratio in 2017: 16.7 percent of GDP (median). - AEs median private investment ratio in 2017: 18.9 percent of GDP. - Median ratios by income group in 2017: LIDCs = 12.7; EMEs = 14.2. ### Why private finance has been low in Africa — risk-return and structural factors - Two primary deterrents for financial investors: 1. Market failures and Africa-specific factors that limit private returns in development sectors (natural monopolies, long-lived capital, positive externalities). 2. Elevated investment risks that crystallize around poor project preparation, high exchange-rate risk, and difficulties in divesting. - Returns evidence: - Africa Private Equity and Venture Capital Index horizon pooled returns (Net to LPs as of December 31, 2019): - 1-Year: 4.7; 3-Year: 5.8; 5-Year: 2.7; 10-Year: 4.9; 15-Year: 6.0; 20-Year: 6.6. - US Private Equity Index horizon pooled returns: - 1-Year: 18.6; 3-Year: 16.8; 5-Year: 14.2; 10-Year: 15.9; 15-Year: 13.3; 20-Year: 11.4. - Comparative benchmarks: MSCI Emerging Markets Index 20-Year: 7.0; MSCI Emerging Markets Index 15-Year: 7.9. - Firm-level ROE: SSA ROEs 2000–07 exceeded on average 20 percent; 2008–17 dropped to below 15 percent on average. - Investor-identified key risks: - Project risk: projects not “investment-ready” or “bankable”. - Macroeconomic risk: economic or political uncertainty, currency depreciation, growth volatility. - Exit risk: limited exit routes, illiquid domestic markets, capital account restrictions. ### Government role: three-pronged approach (risk mitigation, promotion, compensation) - Risk mitigation: - Strengthen business climate to lower project, macroeconomic, and exit risks. - Use tools like Public Investment Management Assessment (PIMA) and PPP Fiscal Risk Assessment Model (PFRAM). - Policy areas: monetary policy (clear inflation objective, interest-rate operating procedure), exchange rate and reserve management, fiscal discipline and debt management. - Promotion: - Address market failures directly; targeted incentives (subsidies and guarantees) may be necessary. - Empirical pattern: about half of infrastructure projects with private participation in SSA receive public support. - Principle: public incentives should address clear market failures, be temporary where appropriate, display additionality, allocate risk to parties best able to bear it, and minimize contingent liabilities. - Compensation: - Compensate economic actors negatively impacted by reforms, especially poor households facing higher tariffs (targeted cash transfers recommended alongside price deregulation). ### Fiscal and political costs; multiplier logic - Infrastructure services must be paid for whether provision is public or private; significant costs remain for government even with private participation. - Well-designed public incentives can have a multiplier effect on quantity and quality of infrastructure services but are unlikely to transform “billions into trillions.” - Public incentive empirical patterns: - Public money financed on average nearly 40 percent of PPP projects’ investment costs in SSA during 2011–20. - Two-thirds of PPI deals in low- and middle-income countries had some form of government support during 2011–20. - About half of SSA projects received direct or indirect government support; indirect support (payment guarantees) prevalent (~40 percent). ### Reducing costs: blending, DFIs, philanthropy, and partnerships - Blending paradigm: use donors’ concessional resources to catalyze private finance (direct grants, guarantees, credit tranching, first-loss, risk capital, FX hedging, technical assistance). - Empirical scale and limits: - In 2019, private investment mobilized through blending in low- and middle-income countries estimated in range $3–27 billion versus about $150 billion of ODA from OECD DAC members. - Less than $2 billion annually of private finance mobilized through blending goes to low-income countries. - Leverage ratios generally below 1 in poorest countries (one dollar of public funds catalyzes less than one dollar of private funds). - Blending appears complex, fragmented, and sometimes nontransparent; scaling faces governance and capacity constraints. - Philanthropy and HNWI: - OECD (2018) estimates private philanthropic flows averaged $8 billion a year between 2013 and 2015 (survey of 143 foundations). - Foundation Center/Council on Foundations evaluate international giving for US foundations at $9 billion in 2015. - Africa received about 30 percent of global philanthropic finance in 2013–15; preliminary 2017–18 data estimate one-quarter. - Philanthropy concentrated: about 80 percent of giving provided by 20 foundations; Bill & Melinda Gates Foundation provided half of total giving among surveyed foundations during 2013–15. ### Country context matters for applicability and sequencing - Countries with relatively strong state capacity, institutions, near middle-income level, and market access are more attractive to international investors; they could benefit significantly from mobilization programs. - Smaller low-income countries with weaker capacity and higher relative needs should prioritize enhancing public investment efficiency and attracting more official aid. ### Feasibility, historical precedents, and risks from the 1990s experience - Historical episode: 1990s private participation surge - Nominal PPI projects increased seven-fold between 1990 and 1997–98; about 1,850 projects and $325 billion cumulative investment. - As a share of GDP, annual private participation rose by about 1.5 to 2 percent of GDP between 1990 and the 1997–98 peak. - Backlash sources: poorly designed contracts, fiscal costs from guarantees, political economy of tariff reforms, employment reductions without compensation, frequent renegotiations. - Literature finds substantial welfare gains over the 1990s (efficiency, access, service quality) despite mixed outcomes. - Annex historical evidence: - A quarter of developing countries (29 out of 125) raised their private investment ratio by at least 3 percentage points over the past decade. - Best performers (one decade): simple average increase 10.6; median increase 9.6 (countries raising private investment ratio by at least 6 percentage points). - Robustness checks show similar magnitudes using averages. ### Model-based cost-benefit scenarios (electricity sector illustrative) - Three 1 percent of GDP fiscal use scenarios (government cost financed through higher consumption taxes): - Scenario 1 (Traditional): government spends 1 percent of GDP to increase energy via imports (import price assumed 10 percent above domestic baseline). - Scenario 2 (Investment subsidy): government provides investment subsidy equal to 1 percent of GDP to reduce marginal cost of capital and incentivize private production. - Scenario 3 (Price deregulation + transfers): allow energy prices to increase; provide targeted cash transfers equal to 1 percent of GDP to fully compensate poor households; calibrated to produce a 10 percent domestic price increase relative to baseline. - Main quantitative simulation findings: - Energy use: - Scenario 2 yields an increase in energy used of close to 20 percent in real terms relative to baseline—about twice the increase in Scenarios 1 and 3. - GDP impact: - Scenario 2 is the only scenario with a positive impact on GDP under unchanged productivity assumptions. - Scenario 1 reduces GDP by 0.5 percent relative to baseline. - Scenario 3 shows the strongest reduction in GDP (higher energy prices raise production costs). - Productivity sensitivity: - If Scenario 2 features a 10 percent decline in energy-sector TFP, much of Scenario 2 benefits evaporate. - Scenario 3 would need an energy-sector TFP increase of at least 12 percent to match Scenario 2’s impact on energy use. - Distribution: - Scenario 3 lowers Gini; Scenarios 1 and 2 increase Gini (consumption taxes are regressive). - Stylized conclusion: - No single policy dominates across service production, growth, and distribution. - Public funds used to incentivize private investment can improve provision and access when public production costs are high and public-sector productivity is low—but success depends on precise subsidy design, project preparation, and safeguarding against poor targeting. ### Project preparation, bankability, and PPFs - Bankability constraints: - Capacity constraints; project preparation costs can be as high as 4–10 percent of total investment for infrastructure projects in Africa. - Size mismatch: international private equity typically targets projects >$100 million; >70 percent of companies in sample have revenue ≤$25 million. - Information gaps and high due diligence costs; limited public project track records. - Project Preparation Facilities (PPFs): - About 20 PPFs have operated in Africa in recent years. - NEPAD-IPPF (AfDB grant-based) volume about $110 million in 2020; since inception approved ~100 projects, resulting in crowding in of private investment of more than $24 billion (AfDB claim). - PPFs remain small relative to SDG investment needs; DFIs have scaled up engagement in project preparation. ### Macroeconomic policy priorities to foster private finance - Monetary policy: coherent, transparent, forward-looking framework; primacy assigned to price stability; explicit inflation objective; short-term interest-rate operating procedure. - Exchange rate and reserve management: maintain adequate buffers, manage liquidity and risks prudently, comply with transparency standards; assess adequacy via metrics and cost-benefit models. - Fiscal policy: diversify revenue away from commodities, build fiscal buffers, adopt prudent debt management, enhance expenditure efficiency, strengthen public financial management and SOE oversight. ### Institutional investors: potential, bottlenecks, and policy recommendations - Potential scale example: - If Africa’s weight in global GDP rose by 0.5 percent (to about 2 percent), African assets under management would increase by $1,500 billion, equivalent to an annual flow of about $50 billion a year (over 30-year asset life). - Bottlenecks: - Risk-return and liquidity mismatches: institutional investors prefer brownfield assets; Africa needs greenfield projects. - Underdeveloped financial products and markets; narrow corporate equity and bond markets. - Prudential, accounting, and rating constraints: regulatory investment limits, risk-based capital charges, mark-to-market accounting, and rating agencies capping project ratings at sovereign levels. - Recommendations to unlock institutional capital: - Regulatory dialogue and harmonization (relax overly restrictive investment limits where appropriate). - Standardization of contracts and building transparent infrastructure project databases. - Develop financial products: project bonds, infrastructure funds specialized by project stage, securitization/tranching. - Expand bankable pipeline and steady national strategies; public support may be needed to attract institutional investors (two-thirds of projects with institutional contributions required government or DFI incentives). ### Impact investing, fintech, remittances, crowdfunding, and ESG instruments - Impact investing: - SSA received 11 percent of total impact investors AUM in 2019 (sample: $221 billion globally). - Global asset allocation of impact investing (percent): US and Canada: 30; Western Europe: 15; Latin America and Caribbean: 12; Sub-Saharan Africa: 11. - Remittances: - Remittance flows to low- and middle-income countries in 2019: $548 billion; remittances to SSA ~ $50 billion (almost 3 percent of regional GDP). - High transfer costs: Q3 2020 average 8.5 percent to SSA (global low- and middle-income average 6.8 percent; SDG target 3 percent). - Crowdfunding: - Africa alternative financing (crowdfunding and online lending) amounted to $209 million in 2018 (<0.1 percent of global volumes). - Donation-based crowdfunding largest model in SSA (~one-third of transactions). - Fintech: - SSA leads in mobile-money adoption; only 20 percent of SSA population has a bank account. - Fintech opportunities in payments, credit assessment, P2P lending, cross-border transfers; constraints include broadband and electricity gaps, regulatory adaptation needs. - ESG/sustainable finance: - Domestic ESG market in Africa small; assets under management about $430 billion in 2017 concentrated in Southern Africa (GSIA 2019, GSB 2020). - Instruments: green/social/sustainability bonds, SDG-linked bonds, use-of-proceed bonds; need coordinated data standards and monitoring. ### Practical policy package and sequencing (high-level) - Core priorities: - Strengthen domestic revenue mobilization (target: increase tax-to-GDP ratio by 5 percentage points over next decade described as ambitious but realistic for many low-income countries; Benedek and others set target 3–7 percent of GDP). - Improve government spending efficiency (conservative estimate potential savings 2–3 percent of GDP in SSA). - Cautious debt management given debt vulnerabilities (nearly half of LICs in SSA were in or at high risk of debt distress at end-2020). - Build bankable project pipeline via PPFs, standardization, and public investment management reforms (PIMA, PFRAM). - Targeted public incentives with strict design principles (additionality, temporary where possible, minimize contingent liabilities). - Complement reforms with compensation measures for losers (targeted cash transfers, social safety nets). - Leverage DFIs, donors, philanthropy for blending and project preparation while addressing governance, transparency, and coordination constraints. *Italic source: IMF staff paper — Executive Summary, Introduction and General Framework, Boxes, Chapters, and Annexes (pfdwttobea).* ### Executive Summary ������������������������������������������������������������������������������������������������������ ### Executive Summary ### Need for More Private Finance: context and urgency - The COVID-19 pandemic has aggravated the tension between large development needs in infrastructure and scarce public resources. - To alleviate this tension and promote a strong and job-rich recovery, Africa needs to mobilize more financing from and to the private sector. - Recent development strategy constraints: - Many African countries have relied on public investment-driven growth, which is reaching its limits given high debt levels and limited domestic revenue mobilization. - The pandemic has eroded the foundations of past progress: strong global growth, easy access to external financing, and supportive commodity prices. ### Why now? — a pivotal moment - Development strategies need a rethink because the external and fiscal environment that supported past progress has changed. - The pandemic has incapacitated the informal economy, which ranges 20–65 percent of GDP across Africa and typically helps cushion downturns. ### Is this time different? — lessons from past privatization waves - Developing countries experienced a wave of private sector participation in infrastructure in the 1990s; results were disappointing and the experiment was later reversed. - Lessons have been learned to make private sector delivery of infrastructure services more sustainable economically and socially. ### Potential scale of private finance contribution - Historical evidence shows private sector responsibility in infrastructure increases as countries move up the income ladder. - The paper estimates: - Private finance could bring an additional 3 percent of GDP in African countries over the next decade, equally split between domestic and international investors. - Going beyond this figure would require active policies to attract new types of private finance flows (foreign institutional investors and philanthropy), above and beyond historical patterns. ### Starting point: current contribution and gaps - The current contribution of the private sector to financing social and physical infrastructure is very limited in Africa compared to needs and other regions. - Nearly all infrastructure projects are carried out by the public sector. - Sectors with private participation tend to rely heavily on financial support (cofinancing and guarantees) from governments and international development institutions. ### Why private finance has been low in Africa - Two primary factors reduce attractiveness for financial investors: 1. Market failures and Africa-specific factors that limit private returns in development sectors. 2. Elevated investment risks that crystallize around poor project preparation, high exchange-rate risk, and difficulties in divesting. - Risk-adjusted returns of private projects in Africa are perceived as less attractive than elsewhere, especially in the past decade. ### Government role: a three-pronged approach (risk mitigation, promotion, compensation) - Risk mitigation: - With international assistance, governments need to strengthen the business climate to lower project, macroeconomic, and exit risks—three key investor concerns. - Promotion: - Market failures in development sectors call for actions beyond business climate improvements. - Experience shows about half of the infrastructure projects with private participation in Africa get some form of public support. - Targeted government incentives (subsidies and guarantees) may be necessary to attract financial investors and ensure project delivery; incentives must be carefully designed for effectiveness and efficiency. - Compensation: - Measures are needed to accompany economic actors negatively impacted by pro-business reforms, particularly poor households that may see utility and service costs rise. - Lack of social consensus and inability to share reform gains broadly have derailed past private participation reforms. ### Fiscal and political costs of mobilizing private finance - Infrastructure services must be paid for whether provision is public or private; significant costs remain for government even with private participation. - When public incentives are well-designed, public funds can have a multiplier effect on the quantity and quality of infrastructure services. - This multiplier is unlikely to be high enough to turn “billions into trillions of dollars” but moderate multipliers could justify reallocating public funds toward incentives for private investment. - This reallocation could be particularly useful in sectors with poor public provision and loss-making, inefficient state-owned enterprises. ### Reducing costs: blending and partnerships - There is scope to shift part of mitigation/promotion/compensation costs from the government to other entities. - The blending paradigm proposes using donors’ money to catalyze private finance, though implementation and extension raise practical issues. - A similar framework could involve philanthropic resources (foundations and high-wealth individuals) to develop partnerships among businesses, philanthropic actors, and governments. ### Country context matters for applicability - Countries with relatively strong state capacity and institutions, already at or close to middle-income level, and with market access are more attractive to international investors and could benefit significantly from programs to mobilize and incentivize private finance. - Smaller low-income countries, with weaker capacity and possibly higher needs (as a share of their economy), should prioritize enhancing the efficiency of public investment and attracting more official aid. ### Key development indicators and fiscal pressures cited - Progress over the past two decades in SSA: - Real per capita income rose by about 40–50 percent on average in the region between the late 1990s and 2019. - Poverty headcount rates fell from about 60 percent to about 40 percent. - School enrollment rates increased to 70 percent. - Infant mortality rates fell from about 100 to about 50 per 1,000 live births. - SDG performance: - Median composite SDG index score is about 50 percent in SSA; EMEs are at 66 percent and AEs at 78 percent. - Pre-COVID fiscal trends and constraints: - Average public debt increased by almost 25 percentage points during 2010–19. - Interest payments-to-revenue (including grants) ratio doubled from 5 percent in 2010 to 11 percent in 2019. - 16 out of 35 SSA LICs were at high risk of or in debt distress in 2019. - Net official development assistance (ODA) received by SSA countries has dropped by more than 3 percentage points of GDP since its peak in the mid-1990s. - COVID-19 impact: - Aggregate debt ratio increased from 50.4 percent of GDP in 2019 to 56.6 percent of GDP in 2020. - SSA projected to see its worst growth outcome since 1970 in 2020, with a sizeable decline in per capita incomes and likely the first increase in poverty rates in nearly two decades. _Italic source: IMF staff paper — Executive Summary (pfdwttobea - Executive Summary)_. ### Introduction and General Framework ### Introduction and General Framework ### Role and Definition of Private Finance - Private finance is defined as the financing flows going to private service producers; financial investors either lend to or take equity stakes in development projects that are not controlled by the government. - Under private finance: - Service producers (for example, a hospital or a power plant) are private market producers; their liabilities are not recorded as liabilities of the general government. - Private finance flows do not increase government debt, but create, in general, private sector liabilities. - Philanthropic flows going to the private sector are an exception, since they do not generate private sector liabilities for the recipient. - Development Finance Institutions (both bilateral and multilateral) investing in private projects are considered a form of “private finance,” since such operations do not impact directly national governments’ balance sheets. - Public finance refers to arrangements where development projects are financed directly or indirectly by the government, thereby impacting the public balance sheet. When the government borrows to conduct such activities, government debt increases. - Many financing schemes lie between pure private finance and pure public finance. Public-private partnerships and other collaborative arrangements may impact the liabilities of both sectors; the degree of private sector participation can vary significantly across projects and legal arrangements. ### Statistical and Institutional Perimeters - The paper emphasizes that the term “private finance” is defined by the sectorization of the entity receiving the financing, not the provider. Example: a private household buying a government bond is classified as “public finance.” - State-owned enterprises (SOEs) often fulfill a public function but are, statistically speaking, outside the general government sector: - From a statistical point of view, SOE debt is not government debt but is not private debt either; it should be recorded as “public sector” liability. - The paper treats financing of SOEs operating in development sectors as a form of public finance, since the objective of involving the private sector is to generate new financial resources, not to shift investments from the government balance sheet to the broader public sector. ### Determinants of the Choice Between Private and Public Finance - The choice between private and public finance depends on: - Efficiency considerations (including efficient allocation of risks to the party best able to manage them). - Equity and inclusiveness considerations (which can favor public finance when private providers cannot ensure universal access to basic services). - Feasibility and financial sustainability (if either sector is overleveraged and at high risk of debt distress, borrowing capacity and investment ability are constrained). - The relative size of private versus social returns (projects with high private returns are more likely to attract private finance). - Misallocation of risk or transferring risks in excess of optimal can lead to inefficient capital use and higher project costs. ### Scope, Focus, and Geographic Coverage - The paper examines whether it is desirable and possible to mobilize more finance for private or semi-private projects in development sectors in Africa, focusing on five sectors: - Road, power, water, education, and health. - Emphasis is on the financing side of development projects while recognizing that project selection and execution quality are essential; closing both financing and efficiency gaps is necessary. - The paper places greater emphasis on international private finance, while noting that many recommendations also apply to domestic investors. - The time horizon for achieving the SDGs is described as “about a decade,” which is shorter than the time needed to significantly improve the depth, access, and efficiency of local financial markets in Africa. - Geographical coverage: sub-Saharan Africa (SSA), comprising 45 countries. - SSA lags behind other regions on development outcomes and infrastructure gaps, is home to at least half of the world’s poor, has the largest share of fragile countries, and the most acute fiscal and debt sustainability constraints. - SSA could account for about one-third of the global labor force by 2050, and with significant investment the region could become a future engine of global growth. ### COVID-19 Impacts and Uncertainties - The COVID-19 pandemic has: - Reduced governments’ available resources. - Scarred countries’ growth potential and shifted economic structures. - Dampened investors’ confidence and hit the private sector hard. - Sectoral and investor implications: - Contact-intensive service sectors such as transportation and low-skill manufacturing industries may take a long time to fully recover. - Global risk aversion could remain heightened, restricting the ability to attract foreign funding. - The pandemic may reshape international investment flows in terms of risk preferences and sectoral allocation (for instance, toward digitalized and greener investments). - These factors increase uncertainty about the potential for mobilizing private finance, even as the need for private finance becomes more critical. *Source: IMF staff, “Introduction and General Framework,” pfdwttobea - Introduction and General Framework* ### Introduction and General Framework ### Introduction and General Framework ### Context and purpose - The paper examines the role and potential for private finance in sub-Saharan Africa (SSA) to help meet development objectives and promote recovery from the COVID-19 crisis. - The paper is organized into seven chapters covering: need for more private finance; trends and obstacles; business environment reforms; public interventions to catalyze private finance; potential new investors; and conclusions. - Main quantitative objective identified: raise the contribution of private finance in SSA countries by 3 percent of GDP by the end of the decade. ### Scale of development needs - Additional annual spending required for meaningful progress on SDGs in five sectors (education, health, roads, electricity, water and sanitation) in 2030: - $0.5 trillion for low-income developing countries. - $2.1 trillion for emerging market economies. - In SSA, additional expenditure needs on average account for about 20 percent of GDP. - Complementary development costs outside the five sectors: - Climate adaptation for SSA: $30–50 billion (2–3 percent of regional GDP) each year over the next decade. - Broadband connectivity in SSA: $9 billion annually. - SDG costing caveats: - Additional spending needs are computed for the year 2030 but are recurrent beyond 2030. - The costing exercise is agnostic about public vs private provision of services. ### Mobilizing resources: responsibilities and realistic targets - Domestic policy priorities for African countries: - Raise tax revenues: increasing the tax-to-GDP ratio by 5 percentage points of GDP over the next decade is described as an ambitious but realistic target for many low-income countries. - Benedek and others (2021) set a target range of 3–7 percent of GDP for comprehensive tax strategies in developing countries, taking into account COVID-19 developments. - Raise government spending efficiency: conservative estimate suggests SSA countries could generate about 2–3 percent of GDP of savings through efficiency improvements. - Limited scope for further government borrowing: nearly half of low-income countries in SSA were in or at high risk of debt distress at the end of 2020, implying thin room for additional net borrowing in the medium term. - International community: - In 2019 ODA provided by OECD DAC members amounted to 0.3 percent of their gross national income, with about one-quarter of the funds going to SSA countries. - Delivering on ODA targets (0.7 percent of gross national income commitments annually) or better targeting existing aid could generate an estimated 4–5 percent of GDP for a median SSA country. - Role of private finance: - Even with scaled-up public resources, large unfunded development needs would remain at the 2030 horizon; private sector contribution is essential. - Target for private investment: raising private investment in SSA countries by 3 percent of GDP within the next decade is presented as a realistic, though ambitious, goal. ### Private investment trends and composition - Data and measurement: - Analysis relies predominantly on national accounts “private investment” series as a proxy for total financing for private projects (records both domestically and externally financed expenditure). - Limitations noted: may include fixed asset formation in sectors with low development spillovers (e.g., mining) and SOE investment may be recorded as private investment. - Historical private investment-to-GDP ratios: - SSA average private investment-to-GDP ratio increased from 10.4 percent in 1990 to 13.5 percent in 2017. - Median SSA private investment ratio in 2017: 13.0 percent of GDP. - Asia private investment ratio in 2017: 16.7 percent of GDP (median). - Advanced economies (AEs) median private investment ratio in 2017: 18.9 percent of GDP. - Median ratios by income group in 2017: LIDCs = 12.7; EMEs = 14.2. - Infrastructure investment composition (2017 World Bank survey): - 95 percent of infrastructure project investments in SSA were sponsored by government entities and SOEs in 2017. - Private projects represented only 5 percent of total infrastructure investment in the region. - Comparators: private share averaged 17 percent in low- and middle-income countries and 40 percent in Latin America. - Ghana was an outlier in SSA with higher private than public investment commitments in 2017. - Public vs private investment patterns: - Public investment ratio tends to be lower in richer countries; in 2017 the public investment ratio was almost twice as high in SSA as in AEs. - Private investment tends to increase as countries converge toward higher income levels. ### Feasibility and policy implications - Feasibility assessment: - Annex analysis of historical country experiences shows a quarter of developing countries (LIDCs and EMEs) have raised their private investment ratio by more than 3 percent of GDP over a decade. - For SSA, raising private investment by 3 percent of GDP by 2030 would broadly correspond to reaching the 75th percentile median of LIDCs. - Achieving more than a 3 percent increase within the SDG horizon would require either a longer time horizon or mobilizing additional private finance sources. - Policy directions (high level, as presented): - Strengthen domestic revenue mobilization and improve spending efficiency to create fiscal space. - Pursue a cautious debt management strategy given elevated debt vulnerabilities. - Implement reforms to create an investment-friendly business environment and policies that catalyze private finance (detailed reforms and public interventions are discussed in later chapters). - Enhance partnerships among private investors, governments, and the international community to mobilize private finance for development sectors. *Source: Introduction and General Framework (pfdwttobea - Introduction and General Framework).* ### Chapter 6. The next section focuses on how the 3 percent of GDP target ### Chapter 6. The next section focuses on how the 3 percent of GDP target could be split between domestic and foreign investors ### The contribution of domestic versus foreign investors - In the past decade, about 40 percent of private investment has been financed externally in SSA countries. - Method used to estimate the split: - Step 1: Amount of external finance going to the private sector = net incurrence of financial liabilities reported in Balance of Payments statistics (which records inflows going to both private and public entities) minus the net incurrence of financial liabilities reported in the IMF Government Finance statistics. - Step 2: Divide the previous series by private investment from the IMF investment database. - Excluding outliers, the median split for financing of private investment in SSA countries was 40 percent external–60 percent domestic during 2010–17 (2017 being the last year with cross-country data available on private investment). - For major infrastructure projects (World Bank PPI database, 2011–20): - External debt represented, on average, 40 percent of PPI investment in SSA countries. - Equity accounted for 30 percent of the investment. - Available information on nationality and stakes of individual shareholders suggests about 70 percent of the projects’ equity was owned by international entities over the period. - Combining debt and equity implies about 60 percent of the financing of PPI projects came from foreign investors in SSA. - Conclusion from both macroeconomic and PPI data sets: - It is reasonable to expect private financing mobilized for achieving the SDGs to be split evenly between domestic and foreign investors. ### Target for international private finance and implications - Paper estimate: international private finance could increase by, at least, 1½ percent of GDP by the end of the decade. - Prior section target: 3 percent of GDP for the contribution of private finance toward achieving the SDGs by 2030. - Assuming equal sharing between domestic and foreign investors: - International investors would need to raise their contribution by 1½ percent of GDP by 2030 and maintain it afterward on a sustainable basis. - Ambition and scale: - This target is ambitious, since 1½ percent of GDP corresponds to almost 30 percent of today’s international financing of private investment in SSA. - Private investment was estimated at 13 percent of GDP in 2017 (latest year available), out of which 40 percent is estimated to be financed externally. Thus, 1½ percent of GDP is almost 30 percent of international financing (0.4*13 = 5.2). - In other words, international financing of private or semi-private projects in SSA would need to increase by almost a third relative to the current situation. ### Progress requires more than just financing - Historical lessons: the mixed track record of the 1990s’ private infrastructure boom shows that raising private investment is a matter of quality, not just quantity. - Between 1990 and 1998, private sector participation in infrastructure increased very significantly in developing economies. - The episode had mixed results, partly because the right institutions were not in place to ensure sustained private sector involvement, economic and budgetary gains, and clear improvements in standards of living. - Institutional progress since the 1990s: - Many institutional weaknesses have been partly addressed or are being addressed, including in Africa. - In many areas of infrastructure governance, SSA countries have made significant progress in the past two decades. - Most countries now have formal laws or procedures covering the main elements of the public investment management cycle. - Public Investment Management Units have been established across the region to strengthen appraisal, selection, and implementation of infrastructure projects. - Tools developed to improve infrastructure governance and PPP design/implementation: - Public Investment Management Assessment (PIMA) framework launched in 2015 to evaluate institutional design and effectiveness across planning, allocation, and implementation stages. - PIMA recommends good practices to ensure efficiency, alignment with development needs, and management of risks associated with projects. - As of the end of 2020, 25 SSA countries had undergone a PIMA assessment since 2015. - PPP Fiscal Risk Assessment Model (PFRAM) created to assess potential fiscal costs and risks arising from individual PPP projects or PPP portfolios. - PIMA recommendations for governments (highlighted guidance): - Publish a PPP strategy. - Adopt a legal framework for the preparation, selection, and management of PPPs. - Report the contingent liabilities arising from PPP projects. ### Lessons from the 1990s private infrastructure scaling up - Drivers of the 1990s shift toward private participation: - Disappointment with poorly run and inefficient public utilities, governments’ budgetary pressures, limited technical and managerial resources in the public sector, successes with pioneer privatization experiences, technological changes (for instance, mobile phone and smaller minimum size for power plants), and regulatory reforms. - Magnitude and timing: - According to the World Bank PPI database, nominal value of PPI infrastructure projects increased seven-fold between 1990 and 1997–98, with about 1,850 projects and $325 billion of cumulative investment during this period. - As a share of GDP, annual investment in infrastructure projects with private participation increased by about 1.5 to 2 percent of GDP between 1990 and the peak of 1997–98, depending on countries’ income group. - Investment flows peaked in 1997 and then dropped sharply at the end of the decade amid crises in Asia (1997–98) and Argentina (2001–02). - Sources of failure and backlash: - Many contracts were not well designed (for example, lacking regular tariff review, creating need for renegotiation). - Unexpected fiscal costs emerged because of ill-conceived guarantees and generous risk assignments. - Political economy of infrastructure pricing: legacy of keeping prices below costs and heavy subsidies made tariff reforms difficult—more acute for water and electricity than for sectors like telecommunication and transportation. - Frequent contract renegotiations often produced outcomes unfavorable to users (delays, tariff increases). - Private participation often led to reductions in the number of employees in overstaffed public utilities, causing public discontent when not accompanied by compensation and state support. - Broad evidence on benefits: - Literature finds private sector participation generated substantial welfare gains over the 1990s decade, including greater efficiency, better access and coverage, and improved service quality (reliability, better customer service, more accurate billing, lower waiting time, etc.). *Source: IMF staff calculations based on IMF Investment and Capital Stock Dataset, 2019; World Bank Private Participation in Infrastructure Database; and IMF staff analysis included in the chapter.* ### Box 1. The 1990s Private Infrastructure Scaling Up (continued) ### Box 1. The 1990s Private Infrastructure Scaling Up (continued) ### Financing Flows to Development Sectors in Africa - Capital inflows to SSA are relatively small and have declined since the mid-2010s. - Less than 5 percent of total capital inflows to developing economies—both EMEs and LIDCs—were to SSA in 2019. - Peak and decline in inflows: - Peak in 2014 of $120 billion (partly fueled by commodity prices). - Declined to $77 billion by 2019. - Inflows are concentrated: a large proportion of all capital flows to SSA go toward large frontier markets, dominated by South Africa. - Measurement note: “capital inflows” measured as “net incurrent of liabilities” and include foreign direct investment (FDI), portfolio, and other investment flows (the latter comprise international banks’ loans to African projects) taken from the IMF Balance of Payments statistics. - FDI inflows as a share of global GDP, 2018: - Sub-Saharan Africa, 0.7 - Asia, 8.5 - Latin America and Caribbean, 1.0 - Middle East and North Africa, 0.3 - Europe, 19.7 - North and Central America, 5.7 - FDI to SSA has remained relatively stable as a percent of aggregate SSA GDP over the last decade despite commodity-price vulnerabilities. - Sectoral allocation (cross-border private investment, 2010–18): - Investment into all SDG sectors accounts for about a quarter of cross-border investment in SSA during the period, with a broadly similar share of investment in extractives. - SDG sector investment composition: - Energy: 82 percent - Roads: 13 percent - Health: 3 percent - Education: 1 percent - Water and sanitation: 1 percent - Infrastructure with private participation (World Bank PPI database): volatility and decline - Spike in 2012: SSA $15 billion; across developing economies $164 billion. - Since 2012 both number of projects and values invested have fallen. ### Who Invests in Africa in Development Sectors and How? - Bilateral and multilateral development institutions are generally the main international investors in infrastructure PPPs in Africa. - During 2011–20, about 30 percent of total PPI investment in SSA countries was financed through international debt provided by bilateral and multilateral development finance institutions (DFIs). - On average, the contribution of international banks was relatively small over the period; in Figure 19 financing provided by international banks (international debt excluding DFIs and governments) represents about 6 percent of total investment over the period. - Typical investment structure for non-listed domestic companies and projects: - Two-tier fund structure: Limited partnerships (LPs) provide capital; general partnerships (GPs) manage funds; funds invest in multiple companies/projects via special purpose vehicles. - Fund asset classes include private equity, private debt, infrastructure, or natural resources. - Fund flows, 2010–2017 (survey of Africa-focused funds): - Private equity funds invested $9.3 billion in managed assets. - Infrastructure funds invested $6.1 billion. - Private debt/credit funds invested close to $1 billion. - Main investors in private equity asset class in Africa (shares of assets under management): - DFIs: 30 percent - Pension funds: 25 percent - Third-party fund managers: 15 percent - Remainder: direct investors, foundations, and asset managers. - Impact investment: - Definition: investments that do not solely target financial returns but intend to generate positive, measurable social and environmental impact (Global Impact Investment Network’s definition). - SSA received 11 percent of total impact investors assets under management (AUM) in 2019 (based on a sample: $221 billion globally; 289 impact-investing organizations). ### What Factors Explain the Lack of Attractiveness of Development Sectors for Foreign Investors in Africa? - Low private investment contribution to development sectors indicates perceived risk-return profile is often unattractive. - Empirical and anecdotal evidence: - Returns in Africa were high in the 2000s compared to other developing regions but have declined significantly in the past decade. - Risks that deter financial investors—such as institutional settings, size and liquidity of markets, and macroeconomic volatility—are higher in SSA and have not declined markedly over the same period. - Juvonen and others (2019) find that average return on investment over a 10-year period was not higher in Africa than in developed markets, while risks were perceived to be more elevated. ### Returns - Two return types analyzed for development sectors in SSA: - Financial returns (fund-level returns): returns recorded at the fund level and captured by financial investors. - Project returns (firm-level returns): returns generated by a company/project measured as profit divided by assets or equity (return on assets ROA or return on equity ROE). - Analysis scope and data constraints: - Focus on private returns (relevant for investors); social returns are excluded though likely to be higher in Africa. - Data limitations necessitate use of multiple return metrics: financial returns available only for a subset of funds and are rarely disclosed; project returns available at sectoral level. - Empirical finding: financial returns in Africa (private equity and venture capital funds) tend to underperform comparable benchmarks over the past two decades. - Cambridge Associates (2020b, c, d) shows average returns (internal rate of returns) generated by Africa-focused private equity and venture capital funds tend to lag behind US private equity performance indicators as well as MSCI indexes. *Source: Box 1. The 1990s Private Infrastructure Scaling Up (continued), pfdwttobea - Box 1. The 1990s Private Infrastructure Scaling Up (continued).* ### 6.0 percent a year, compared to 13.3 percent for the US private equity index ### pfdwttobea - 6.0 percent a year, compared to 13.3 percent for the US private equity index ### Returns and historical patterns - Africa Private Equity and Venture Capital Index horizon pooled returns (Net to Limited Partners as of December 31, 2019): - 1-Year: 4.7 - 3-Year: 5.8 - 5-Year: 2.7 - 10-Year: 4.9 - 15-Year: 6.0 - 20-Year: 6.6 - US Private Equity Index horizon pooled returns: - 1-Year: 18.6 - 3-Year: 16.8 - 5-Year: 14.2 - 10-Year: 15.9 - 15-Year: 13.3 - 20-Year: 11.4 - Comparative benchmarks: - Cambridge Associates LLC US Venture Capital Index 20-Year: 6.6 - MSCI Emerging Markets Index 20-Year: 7.0 - MSCI Emerging Markets Index 15-Year: 7.9 - Key interpretation: - Africa’s financial returns were higher in the 2000s and early 2010s, but have fallen since the commodity price collapse of 2014 and related currency depreciations, lowering realized and expected returns in US dollars for active funds. ### Liquidated funds versus active funds - Observed pattern: - African “liquidated funds” (at time of exit) had higher returns than other regions. - “Active funds” (still open) have much lower expected returns, indicating lower expected cashflows throughout the investment. - Possible explanations noted: - Commodity price collapse of 2014 and related currency depreciations reduced expected USD returns of active funds. - Liquidated funds correspond to a boom period in Africa (mid-2000s to early 2010s). - Underperforming projects may be retained in open funds, prolonging closure and exit. ### Firm-level project returns and spreads - Firm-level ROE and ROA: - SSA ROEs in 2000–07 exceeded on average 20 percent. - For 2008–17, SSA returns dropped to below 15 percent on average, reaching levels comparable to other developing regions. - Project return spreads (risk-adjusted returns, median across firms): - Annual medians 2000–2007 (selected entries): - Developing Asia and Pacific: 5.9, 8.2, 6.5, 9.7 (for 2000, 2003, 2006, 2007 respectively) - Sub-Saharan Africa: 9.2, 9.2, 18.8, 14.0 (for 2000, 2003, 2006, 2007 respectively) - Annual medians 2008–2017 (selected entries): - Developing Asia and Pacific: 10.9, 9.5, 7.8, 8.5 (for 2008, 2011, 2014, 2017 respectively) - Sub-Saharan Africa: 11.5, 11.4, 8.8, 4.8 (for 2008, 2011, 2014, 2017 respectively) - Note: “Risk-adjusted returns” defined as returns removing the risk-free rates (government 1-year T-bill or bond rates, subject to data availability by country). ### Sectoral differences in returns - Median Return on Equity by sector, 2000–2017 (selected values): - Non-SDG Sectors, Sub-Saharan Africa: 17.7 - SDG Sectors, Sub-Saharan Africa: 20.7 - SDG-Infrastructure, Sub-Saharan Africa: 37.0 - SDG-Electricity, Sub-Saharan Africa: 27.0 - Mining, Sub-Saharan Africa: 21.6 - Caution: small sample size of projects in SSA for some sectors; some sectors have missing observations (e.g., SDG-Health for SSA). ### Risks identified by investors - Three key risks highlighted by impact investors: - Project risk: projects not “investment-ready” or “bankable”. - Macroeconomic risk: economic or political uncertainty limits ability to generate returns. - Exit risk: ability to monetize the investment at the desired time and repatriate funds. - Survey evidence: - GIIN survey (2018) showed 24 percent of investors in SSA experienced a “significant risk” event in 2017 (second only to Latin America with 31 percent). - GIIN (2020) survey: 81 percent of impact investors globally perceived overall investment risk as likely or very likely to have changed due to the COVID-19 pandemic; 15 percent of investors are likely to commit more capital in development sectors of low-income countries and emerging market economies in response to the pandemic. ### Project risk: pipeline and execution - Constraints to bankable projects in SSA: - Lack of well-advanced proposals to attract international investors. - Capacity constraints and preparation costs limit investment-ready project pipeline. - Information gaps and misperceptions of risk. - Infrastructure project outcomes: - SSA has a high rate of project failure in infrastructure compared to most developing regions except Latin America (share of cancelled or distressed PPP investments, 1983–2020). - According to Moody’s project finance database (1983–2018), simple average default rate in Africa: 4.7 percent; global average: 6.8 percent. - Moody’s rated infrastructure debt sample shows five-year cumulative default rate relatively high (10 percent) for these securities in developing countries, but sample size is very small and no separate information is available for Africa. ### Macroeconomic risk: currency, growth volatility, sovereign ratings - Currency risk: - Average holding time of a private financing project in SSA: about 5–8 years. - Investors can potentially lose a third of returns due to depreciation or face large hedging costs. - Exchange rate movements against USD, 2010–19: standard deviation and index comparisons indicate SSA compares poorly relative to other regions. - GDP growth volatility: - SSA GDP growth is particularly volatile compared to other developing countries due to reliance on commodities, small automatic stabilizers, political instability, agriculture dependence, and inadequate health infrastructure. - Sovereign risk ratings: - SSA sovereign ratings are generally poor, either non-investment grade or speculative, or absent (no rating available), complicating investor calibration of risk premiums. ### Exit risk and financial market frictions - Private equity exit activity in Africa, 2007–18: - Number of exits is small and average holding period has been increasing. - AVCA survey (March 2020): 76 percent of LPs identified limited exit opportunities as a key challenge for GPs over the next three years (65 percent in 2018; 58 percent in 2017). - 42 percent of LPs view relatively long holding periods for portfolio companies as the biggest challenge for investing in African private equity. - Bottlenecks to exit: - Underdeveloped and illiquid domestic financial markets (South Africa JSE accounts for more than 90 percent of total market capitalization). - Failure to enforce legal and regulatory rights of shareholders; SSA records relatively low scores for shareholder governance and conflict of interest regulation. - Capital account restrictions on financial outflows; Jahan and Wang (2016) indices (2013) show openness on outflows remains very limited for SSA with many countries maintaining full control on outflows (indices equal to zero in some cases). ### Exit routes and market structure - Common exit routes in Africa (2007–17, percent): - Management buy-outs (MBOs) or private sales and trade buyers are more common exits than IPOs or sales to financial buyers. - Domestic market limitations: - Low liquidity and small trading sizes are common and can be smaller than many funds’ minimum trading size. ### Impact investing allocation to SSA - Impact investment characteristics: - Sits between philanthropy and traditional investment, targeting social or environmental outcomes alongside financial returns. - Survey finding: more than 80 percent of respondents indicated progress toward the SDG agenda as a “very” or “somewhat” important motivation. - Asset allocation (GIIN 2020, total fund assets US$ 221 billion; percent of assets under management excluding outliers): - US and Canada: 30 - Western Europe: 15 - Latin America and Caribbean: 12 - Sub-Saharan Africa: 11 - South Asia: 6 - EECA: 6 - Oceania: 5 - East Asia: 5 - South East Asia: 3 - MENA: 2 - Other: 5 - Sectoral allocation globally (selected figures): - Education: 3 percent of impact-investing assets - Infrastructure: 4 percent - Healthcare: 7 percent - Water, sanitation and hygiene: 6 percent - Energy: 16 percent - Most funds also directed to financial services and microfinance, food and agriculture, and forestry. *Source: IMF staff synthesis of data and analysis in the provided content unit.* ### Box 2. Impact Investors in SSA ### Box 2. Impact Investors in SSA ### Overview - Focus: policies to improve the business environment and remove government-induced barriers that discourage private ventures in Africa, prioritizing mitigation of three economywide risks perceived by international investors: project risk, macroeconomic risk, and exit risk. - Recommendation: targeted strategy focused on the three main risks is likely superior to a diluted, piecemeal approach; complement with sector-specific reforms. ### Addressing Project Risk - Definition: A project is “bankable” or “investment-ready” when it is financially viable, sufficiently developed and mature, and has a relatively large size. - Bankability factors include proof of project feasibility, sufficient development, financial viability, demand planning, sound funding of operations, community acceptance, regulatory approvals, and legal compliance. - Projects without adequate cash flows can still be bankable if risk mitigations or credit enhancements are available. - Constraints to bankability in SSA: - Capacity constraints to generate deals: governments, local institutions, and project managers lack technical capability to prepare projects to standards required by private sponsors and financial investors. - Cost of project preparation: can be as high as 4–10 percent of the total investment for infrastructure projects in Africa. - Size requirements: - International private equity investors typically invest in projects larger than $100 million. - More than 70 percent of companies are situated in the range of $25 million and below in SSA countries. - Only 10 percent of international private equity funds target companies below $100 million. - Figure 35 (Private Companies by Revenue in Selected SSA Countries, 2014–17): US$100m = 15 (percent of companies in sample). - Figure 36 (Africa-Focused Private Equity Fund Size, 2014–17): US$500m = 43 (percent of capital raised). - Lack of information available to financial investors: limited reliable data, information asymmetries, high due diligence and monitoring costs, absence of publicly available project track records. - Instruments to enhance project preparation and expand pipeline: - Project preparation facilities (PPFs). - Project development funds (PDFs) that provide financing at initial development stage with objective of recovering costs later on. - Project information platforms (examples: NEPAD/AUDA PIDA in collaboration with AfDB). - Standardizing procedures (standard contracts) and developing international best practice norms (infrastructure governance standards). - Public infrastructure governance priorities to reduce project risk: - Standardized methodology and central support for project appraisal and risk analysis. - Reinforce central government implementation mechanisms for timely and efficient delivery: openness and transparency of procurement, improved cash management efficiency, strengthened capacity for monitoring consolidated portfolio of projects, development of infrastructure asset registries. ### Addressing Macroeconomic Risk - Macroeconomic instability (economic and financial crises, large swings in activity, fiscal imbalances, FX volatility, high inflation) increases uncertainty and discourages investors. - Policies that improve macroeconomic stability can foster private investment and FDI; private sector confidence is affected by track record of sound macroeconomic policy. ### Addressing Exit Risk - Exit options are crucial: IPOs, direct listings, private placements, sales to strategic buyers, management buyouts. - Constraints in Africa that complicate exit: - Illiquid and shallow financial markets. - Weak regulatory and legal systems. - Capital account restrictions. - Financial development measures to facilitate exit: - Promote development of a diverse investor base (local and international institutional investors) and enhance retail participation. - Increase pool of securities and financial products (local/foreign listings, derivatives, ETFs, market linkages). - Create enabling market environment: improve trading technology, market and reference data, market-maker schemes, securities lending and borrowing schemes. - Early-stage priorities: develop simple-but-efficient electronic markets, automate processes, provide basic market data. - Later-stage priorities: provide indices, launch market-making incentive schemes. - Legal and regulatory reforms to strengthen exit environment: reinforce investor rights, ensure enforcement of property rights and contracts, timely legal procedures, predictable taxation for investment exits. - Capital account liberalization: careful, gradual, sequenced liberalization can bring benefits (technology transfer, competitiveness, lower borrowing costs) but also risks (macroeconomic volatility); appropriate pace depends on country circumstances. ### Market Solutions to Insure Against the Three Risks - Available instruments: investment guarantees, risk insurances, hedging mechanisms provided by private, government, or multilateral entities; can cover commercial and noncommercial (political) risks. - Examples: - TCX (founded in 2007) offers currency hedging solutions covering more than 70 currencies via swaps and forward contracts. - World Bank MIGA provides political risk insurance to private equity funds investing in Africa. - Limitations of private insurance markets in low-income countries: - Some risks are idiosyncratic and not easily pooled; contracts become complex and expensive. - Risks may be highly correlated across countries leading to simultaneous claims. - Triggering events may be partially under the control of the insured, complicating coverage (moral hazard). - Result: insurance and hedging markets can be underdeveloped, costly, or non-existent for some risks. - Role of DFIs and governments: often act as insurers of last resort; many investors favor public over private schemes expecting greater enforceability. - Conclusion: market insurance/hedging tools are complements, not substitutes, for strengthening fundamental policy and institutional frameworks. ### Sectoral Policies: Creating a Business-Friendly Environment - Range of private participation models (public-private continuum): management contract, lease, concession, privatization; degree of delegation of responsibility and risk varies. - Three illustrative contract types: - Management contract: private operator runs operation and maintenance; ownership and capital expenditure remain public. - Lease: private operator runs project, retains revenues, pays lease fee; ownership remains public. - Concession: private sector responsible for full development (design, build, finance, operate, maintain) for payment from government or users. - Five key considerations to identify “natural habitat” for private engagement: - Ability to generate private returns. - Externality gap (social return vs private return). - Risk transfer willingness and capacity of private partner. - Efficiency gains from private sector expertise versus transaction costs. - Equity: access and coverage to meet social objectives. - Sectors with higher natural scope for private participation: power generation and highways; sectors less suited: basic healthcare and primary/secondary education (universal access concerns). - Common sectoral policy principles: - Price-setting mechanisms that enable cost recovery; phase out subsidies where needed and accompany with transparent, targeted social transfers if required. - Regulations that provide conducive frameworks and remove barriers to entry; consult private sector; adapt legislation where necessary. - Transparent public sector governance: independent regulators, efficient management of state-owned enterprises, avoidance of negative spillovers. - Provision of complementary inputs: skills, PPP capacity, coordination to meet private provider needs. - Technological change: mini-grids, mobile money, remote diagnosis and learning can lower costs and increase access; sectoral policies should adapt to capture benefits and manage risks. ### Project Preparation Facilities (PPFs) - Role: support governments, investors, and developers to expedite technical, financial, legal, and regulatory processes from conceptualization to deal structuring and transaction. - Types: grant-based facilities financed by donors and commercially oriented facilities that recover part of their costs. - Activities supported: feasibility studies, value-for-money analysis, procurement documents, concession agreements, social and environmental studies, stakeholder awareness, technical/legal/financial advisory services. - Impact and limitations: - PPFs can crowd in project finance and help generate projects that would not have come to fruition otherwise. - PPFs remain small in scale relative to SDG investment needs. - About 20 PPFs have been operating in Africa in recent years. - NEPAD-IPPF (AfDB grant-based) had a volume of funds about $110 million in 2020; since inception it has approved about 100 projects for regional infrastructure projects, resulting in a crowding in of private investment of more than $24 billion according to the AfDB. - Existing PPFs often fall short in committing resources because of lack of suitable projects that meet eligibility criteria. - Recent DFI engagement: DFIs have significantly scaled up engagement in project preparation. The newly established US International Development Corporation (DFC)—which merged the US governmental DFI, the Overseas Private Investment Corporation, with parts of the US Agency for International Development credit facilities in 2019—will significantly extend the US private sector support capacity to up to *Source: https://www.imf.org/-/media/files/publications/dp/2021/english/pfdwttobea.pdf* ### Box 3. Project Preparation Facilities ### Box 3. Project Preparation Facilities ### Scope and examples - Project preparation facilities provide support for feasibility studies and other preparatory work; the text notes "$60 billion worldwide, including a grant window for feasibility studies." - Other initiatives from DFIs cited as providing project preparation support include Choose Africa (French Development Agency), AfricaGrow/AfricaConnect, and Business Network Africa (German Investment and Development Corporation). ### Macroeconomic policies to foster private finance - Well-designed, prudent, and sustainable government and central bank policies can foster macroeconomic stability. Key policy areas and guidance include: - Monetary policy - African countries should strive to develop a coherent, transparent, and forward-looking monetary policy framework. - IMF (2015b) identifies best principles in this area. - The central bank should have a clear mandate that assigns primacy to the goal of price stability, and it should follow a forward-looking strategy that promotes that goal while fostering macroeconomic and financial stability. - An explicit inflation objective should serve as the cornerstone for monetary policy actions and communications. - The central bank’s procedures for implementing monetary policy should be framed in terms of a specific short-term interest rate. - Such objectives and operating procedures can lower inflation, reduce interest rate volatility, and promote financial market development. - Exchange rate policy - Sound foreign exchange reserve management can substantially contain risks for investors by reducing exchange rate volatility. - Reserve management strategies should comply with best international principles, including maintaining adequate buffers, ensuring the liquidity of reserves, managing risks prudently when placing reserves, and complying with transparency standards (IMF 2016b). - The level of “adequate” reserves can be assessed through various tools, including simple metrics and more complex cost-benefit models (IMF 2016c). - Fiscal policy - Well-managed public finances can improve sovereign risk ratings and build investor’s confidence in the ability of government to deliver on core state functions. - Fiscal discipline is essential to containing debt vulnerabilities while protecting outlays that are key to growth prospects (IMF 2018b, 2019b). - In African countries, priorities to enhance fiscal resilience include: - diversifying the revenue sources by gradually increasing taxes from bases other than commodities; - building fiscal buffers, where possible, to provide space for countercyclical fiscal policies when the economy is hit by shocks; - adopting prudent debt management practices; - enhancing expenditure efficiency; and - strengthening public financial management, including the oversight of state-owned enterprises, to mitigate the occurrence of contingent liabilities. *Source: pfdwttobea - Box 3. Project Preparation Facilities* ### Box 6. Successful Sectoral Policies and Projects in Africa (continued) ### Box 6. Successful Sectoral Policies and Projects in Africa (continued) ### Market failures in development sectors and rationale for public incentives - Market failures: allocation inefficient; private provision structurally insufficient. - Infrastructure more prone to market failures for three reasons: (1) many projects entail large, capital-intensive investments and tend to be “natural monopolies”; (2) projects have significant upfront costs and returns accrue over long periods (often several decades); (3) infrastructure investments generate positive externalities so social returns can exceed private returns. - Consequence: risk-adjusted returns of development projects may be structurally too low to attract private finance even in a “perfect” business environment. - Market failures are often sector- or project-specific (examples: water and sanitation—natural monopoly of pipes, universal access requirement, heavy regulation of tariffs, local provision limiting economies of scale). - Market-failure justification: public incentives can lift risk-adjusted returns to unlock private finance, potentially achieving similar or better development outcomes than traditional public procurement at lower budgetary cost. ### Cost-benefit analysis: model setup and three stylized scenarios - Model: multisector general equilibrium model tailored to developing economies; principal features include (1) significant role for commodities; (2) relatively small manufacturing sector; (3) relatively large public sector; (4) a basic financial sector with limited opportunities for risk sharing; (5) households subject to shocks. - Sectoral focus: electricity used as illustrative development sector (consumption good and intermediate input; prices often regulated below cost-recovery). - Baseline: rationing; all electricity produced by public sector (general government or SOE); regulated low prices; government constrained by high public debt and limited tax capacity; rationing affects upper-income households and industrial sector more; private sector has little incentive to supply. - Government can spend a fixed marginal amount in three alternative ways (cost financed through higher consumption taxes): - Scenario 1 (Traditional): government spends 1 percent of GDP to increase energy provision by importing additional energy (import price assumed to exceed domestic baseline price by 10 percent). Domestic consumer price remains low; public sector productivity unchanged. - Scenario 2 (Investment subsidy): government provides an investment subsidy equivalent to 1 percent of GDP reducing marginal cost of capital to incentivize private production. Subsidy modeled as “cost-based incentive” (efficient-type investment subsidy, distinct from distortionary fuel-type subsidies). - Scenario 3 (Price deregulation + transfers): energy prices allowed to increase; government provides targeted cash transfers equivalent to 1 percent of GDP to exactly compensate poor households for loss in purchasing power. In calibrated model, domestic price increases by 10 percent relative to baseline. Price deregulation is partial (price cannot fully reach cost-recovery given the 1 percent of GDP budgetary envelope). - Calibration and financing: - In all scenarios, public cost = 1 percent of GDP and is financed through higher consumption taxes. - Scenario 1: government imports additional energy at international price (10 percent above domestic baseline). - Scenario 2: investment subsidy reduces marginal cost of capital (interest rate minus subsidy rate). - Scenario 3: price increases until (1) purchasing power of the poor unchanged relative to baseline and (2) government budgetary cost = 1 percent of GDP. ### Main quantitative findings from simulations - Energy use: - Scenario 2 (investment subsidy of 1 percent of GDP) yields an increase in energy used of close to 20 percent in real terms relative to baseline. - This is about twice the increase achieved in Scenarios 1 and 3. - Sensitivity to productivity (TFP) assumptions: - Alternative Scenario 2 assumes a 10 percent decline in TFP in the energy sector (relative to baseline) to represent poor targeting and productivity loss; under this assumption, a large part of Scenario 2 benefits evaporates. - Alternative Scenario 3 assumes productivity gains from deregulation; the TFP of the energy sector would have to increase by at least 12 percent (relative to baseline) for modified Scenario 3 to match Scenario 2’s positive impact on energy use. If TFP increased by more than 12 percent, modified Scenario 3 would dominate Scenario 2. - The model notes an empirical plausible overall productivity range of about 20 percentage points, equally distributed around the baseline. - GDP and sectoral growth: - Scenario 2 is the only scenario with a positive impact on GDP under the assumption of unchanged productivity (higher private investment and reduced rationing outweigh tax distortions). - Scenario 1 reduces GDP by 0.5 percent relative to baseline (tax-financed imports insufficient to offset distortions). - Scenario 3 displays the strongest reduction in GDP (higher energy prices raise production costs, reduce profitability, especially in energy-intensive sectors). - If TFP of energy increased by at least 12 percent, modified Scenario 3 could match Scenario 2 in GDP impact. - Welfare and distribution: - Households’ welfare increases in all scenarios relative to baseline; entrepreneurs incur modest welfare losses in all scenarios (higher labor costs reduce profits). - High-skill individuals benefit most in Scenario 2 due to greater relief from rationing; unskilled households also benefit from trickle-down effects in Scenario 2 (but this quasi-disappears if Scenario 2 features lower productivity). - Scenario 1 yields little household gain because taxes rise and rationing remains significant. - Scenario 3: targeted cash transfers produce substantial gains for lower-income unskilled households; higher-income individuals gain less because of higher energy costs and capital-income effects. - Inequality (net income Gini, after transfers and taxes): - Scenarios 1 and 2 increase overall Gini and household Gini (higher consumption taxes are regressive). - Scenario 3 lowers Gini because of targeted cash transfers. - Modified Scenario 3 with higher productivity can increase inequality since productivity gains concentrate in energy-intensive sectors. - Stylized conclusions from model: - No single scenario dominates across all performance indicators (service production, growth, distribution). - Public funds used to incentivize private investment can improve provision and access when public production costs are relatively high and/or public-sector productivity is lower than private-sector productivity. Under the model calibration, use of funds for private provision (Scenario 2) doubles the impact on energy supply relative to public spending. - Scenario 2’s superiority depends critically on a “perfect” subsidy design (precisely targeting market failure and rationing). Poorly targeted subsidies that reduce productivity can make Scenario 2 far less favorable. - Deregulation (Scenario 3) can have adverse general equilibrium effects unless accompanied by (1) substantial efficiency gains linked to private participation and (2) targeted social transfers to protect the poor. - Price deregulation can be beneficial if it yields roughly a 20 percent productivity increase relative to a situation with inefficient subsidies—an order of magnitude that empirical literature suggests is within reach. ### Practical considerations: when and how to design public incentives - Two complementary motivations for government measures: - Remove government-induced distortions (red tape, licensing, imperfect contract enforcement). - Directly address private-sector entry constraints from market failures via explicit incentives (targeted tax breaks, provision of public infrastructure to crowd-in private activities, R&D patents, tariffs to protect nascent industries, PPPs, blending). - Types of government incentives: broadly either government guarantees (reduce perceived risks) or subsidies (improve returns). “Subsidy” used loosely to include transfers to projects or financiers, tax breaks, in-kind grants, capital contributions. - PPPs: - PPPs = long-term arrangements where the private sector supplies infrastructure assets and services traditionally provided by government (concessions, design-build-finance-operate-transfer, etc.). Private partner often finances debt and recovers via user fees or government payments (availability payments). - On average, less than 10 percent of infrastructure projects in SSA are conducted under PPPs, with annual investment flows representing about 0.5 percent of GDP (World Bank 2017b). - PPPs in SSA concentrated in a few sectors (mostly energy, some transportation) and a few countries (Kenya, Nigeria, South Africa, Uganda). - PPPs in Africa have often resembled cofinancing schemes rather than “pure” privately financed projects. - Principles for efficient design of public incentives: - Address a clear market failure; avoid superfluous or distortionary subsidies. - Preferably temporary, unless market failures persist permanently; incentives can be justified for first movers or nascent markets (example: renewable energy). - Display additionality (leverage): public support should catalyze private investment that would not have otherwise occurred at similar size/quality. Value-for-money comparisons between PPP and traditional procurement can assess additionality. - Leave sufficient risk and control with the private sector: allocate risks to the party best able to influence, anticipate, or absorb them; avoid excessive transfer of risk that could reclassify private debt as government debt. - Minimize contingent liabilities for the state: well-designed contracts, laws, and tools like PPP Fiscal Risk Assessment Model (PFRAM) help assess fiscal risks. - Subsidies versus guarantees: - In principle, subsidy or guarantee can be calibrated to equivalent investor returns; in practice differences matter. - Subsidies are generally more transparent and budgeted; guarantees are more contingent, harder to monitor, and can hide fiscal costs. - Guarantees introduce fiscal uncertainty and greater contingent fiscal risk; they can create moral hazard unless restricted to risks outside private-sector control and designed with deductibles, collateral, or risk-based fees. - Subsidies can entail high transaction costs when multiple beneficiaries exist. - Calibration and cost risk: - Properly calibrating value and number of incentives is complex and technical; risk of overcompensation exists, particularly in low-income countries with limited contract-negotiation and monitoring capacity. - Experience shows government “skin in the game” is often needed for PPPs: public money (national governments and DFIs) financed on average nearly 40 percent of PPP projects’ investment costs in SSA during 2011–20. - Attracting private sector often requires government support; many low-income country sectors (electricity distribution/transmission, transport, water and sanitation) tend to require government support to sustain cash flows and achieve adequate returns. - World Bank PPI database: two-thirds of PPI deals in low- and middle-income countries had received some form of direct or indirect government support during 2011–20. - Empirical patterns of government support in SSA (2011–20, PPI database): - About half of SSA projects had received some form of direct or indirect government support. - Less than 10 percent of PPP infrastructure projects in SSA rely significantly on annuity/availability payments or other forms of direct subsidies in their revenue structure. - Indirect support is more prevalent in SSA: 40 percent of SSA projects during 2011–20 had received indirect support, mostly payment guarantees (typical of energy projects). - Common problem: project preparation often underestimates government support needed and overestimates private profitability; contracts are frequently renegotiated with high ex post costs for governments. - Distributional and indirect costs: - Private participation can generate efficiency gains but uneven stakeholder distribution (employment often declines; tariffs may increase harming poor households). - Governments may need to compensate losers (example: targeted cash transfers alongside tariff reforms). ### Innovative approaches: blending and constraints - Blending model: concessional financing from donors used alongside public commercial finance (DFI operations) to catalyze private commercial finance. Strict definitions involve the three components (concessional, public commercial, private commercial), though definitions vary. - Rationale: shift part of incentive costs to donors/philanthropy where government budgets are constrained. - Donor/DFI role: beyond risk-sharing, their participation reduces perceived political/counterparty risk and may signal stability to private investors. - Empirical scale and limits of blending: - In 2019, private investment mobilized through blending in low- and middle-income countries estimated in range $3–27 billion, compared to about $150 billion of ODA from OECD DAC members. - Less than $2 billion annually of private finance mobilized through blending goes to low-income countries. - Blending appears complex, fragmented, and sometimes nontransparent; African authorities and investors often unaware of instruments. - Leverage ratios for blending (defined here as private commercial finance divided by public finance—both commercial and concessional) are generally below 1, especially in poorest countries (one dollar of public funds catalyzes less than one dollar of private funds). - Consequently, blending has limited potential to mobilize the trillions needed for Africa’s infrastructure gap—more plausibly “billions-to-billions” than “billions-to-trillions.” - Challenges to scaling blending: - Transparency risk due to multiple blending facilities and complex procedures. - Governance and capacity: blending facilities often lack private-sector specialists; subsidies may be granted without proven market-failure basis and can be distortionary, crowding out non-subsidized projects. - Scaling blending would require governance rethink: better coordination, consolidation, greater transparency. DFIs could coordinate, receive donor funds through subsidy windows, or donors could finance upstream project development (technical assistance). *Source: IMF staff.* ### Box 7. What Makes PPP Ventures Attractive to the Private Sector? ### Box 7. What Makes PPP Ventures Attractive to the Private Sector? ### Government Incentives: Blending to Enhance Returns and Reduce Risks - Blending uses international grants or other concessional resources to enhance the returns and/or reduce the risks of private projects. - Forms of blending instruments described: - Direct grants. - Grants are provided by the donor either directly to the project or to the lender to allow for better financing conditions.1 - Grants can be conditional and performance-based; for instance, the donor agrees to pay off the debt of the project upon successful achievement of predetermined performance indicators. - Guarantees. - Guarantees cover a portion of private loan or bond repayments. - They are provided by donors to lenders to cover commercial or noncommercial risks (for example, expropriation, currency transfer restriction and inconvertibility, war, and civil disturbance . . . ). - Some guarantee products enhance the terms of commercial debt by covering the payment of principal and/or interest up to a predetermined amount, improving conditions of and access to financing for the project. - Credit tranching and bundling. - Project financing instruments may be sliced into tranches to match different appetite for risk of different financial investors. - Donors can invest in the highest risk tranche of the project shielding other investors from a predefined amount of financial losses (“first-loss provisions”). - Multiple projects can be re-bundled into a portfolio that aims at mitigating risk for financial investors with a lower risk appetite, such as pension funds. - Risk capital. - Donors can make equity investments in high-risk projects. - This creates incentives for other investors, because equity is the riskiest part of the balance sheet. - FX hedging mechanisms. - These schemes provide cost-effective solutions in countries that have no widespread hedging mechanisms. - For instance, when local investors borrow in foreign currency and use the cash generated by the project (in local currency) to repay the foreign exchange loan, the currency risk can be reduced or even eliminated through hedging instruments that swap the foreign exchange debt obligations into local currency obligations. - Technical assistance. - Donor-financed capacity development can strengthen project preparation and implementation, reducing future risks. ### Implementation Characteristics and Practical Uses - Grants can be targeted in different ways: - Grants can pay for specific goods linked to the project so individuals or firms use the grant to replace or upgrade some fixed assets, reducing the need to borrow and lowering financing cost. - Grants can be provided directly to the bank to lower the interest rate on the loan (“interest-rate subsidy”), allowing the project to receive a subsidized loan at below-market interest rate. *Source: pfdwttobea - Box 7. What Makes PPP Ventures Attractive to the Private Sector?* ### 0.5 percent to the weight of Africa in global GDP (about 2 percent), African ### pfdwttobea - 0.5 percent to the weight of Africa in global GDP (about 2 percent), African ### Attractiveness of Africa for Institutional Investors - If Africa’s weight in global GDP rose by 0.5 percent (to about 2 percent), African assets under management would increase by $1,500 billion, equivalent to an annual flow of about $50 billion a year (over the lifetime of the infrastructure asset, assumed to be 30 years). - In a sustained low interest rate global environment, infrastructure investments in Africa could offer relatively high, inflation-protected, and stable returns: - A 2017 survey showed a 6–7 percent premium was required for the return on equity of infrastructure investment in emerging markets relative to OECD countries (EDHEC 2017). - In Africa, the targeted dollar return on infrastructure assets can be on the order of 20 percent (Mercer LLC 2018). - Returns often hedged against inflation because user tariffs for infrastructure services are generally indexed (Deutsche Asset Management 2017). - Infrastructure demand tends to be relatively inelastic to the business cycle, leading to relatively stable returns during operation. - Infrastructure investments generate long-duration cash flows matching many institutional investors’ liability horizons (example concession lengths: 25 years; leases up to 99 years). - Infrastructure can yield portfolio diversification benefits; evidence is mixed: - Some studies find unlisted infrastructure provides significant diversification (Newel, Peng, and De Francesco 2011). - Other studies find listed infrastructure has low correlation with major assets (Blanc-Brude, Whittaker, and Wilde 2017). - ESG/impact appeal: - United Nations Principles for Responsible Investment launched in 2006. - Number of investor signatories increased from 100 to 3,000, representing in 2020 more than $100 trillion of assets under management (PRI 2020b). ### Bottlenecks to Institutional Investor Involvement - Risk-return and liquidity mismatches: - High risks–low returns during origination and construction; illiquidity of infrastructure assets complicates divestiture. - Institutional investors prefer brownfield projects; Africa needs mostly greenfield projects with large upfront investments and long gestation periods (Juvonen and others 2019). - Underdeveloped financial products and markets in SSA: - Corporate equity and bond markets are narrow; debt instruments focus on short-term maturities. - Africa-focused investment funds remain a relatively small market segment; fees can be relatively high for smaller institutional investors (Preqin 2016; OECD 2015). - Mismatch between asset life (20–30 years) and collective investment vehicles’ horizons (for instance, five years for private equity funds and 10–15 years for infrastructure funds in Africa). - Project-level challenges: - Direct investment is difficult due to lack of technical and sector expertise, unfamiliar legal/financial arrangements, idiosyncratic risks (construction, operational, environmental, regulatory), and lack of high-quality data on unlisted infrastructure performance. - Small and heterogeneous market; lack of standardized legal and financial products increases transaction costs and impedes comparability and scaling. - Prudential, accounting, and rating constraints: - Regulatory investment limits in investors’ home countries restrict asset types and regional allocations (OECD 2020c: most pension funds subject to limits at end-2019). - Risk-based capital charges penalize insurance companies for equity and low investment-grade debt, especially BBB-rated debt; Solvency II may encourage insurers toward shorter-term debt. - Mark-to-market accounting can reduce incentives for pension funds to hold illiquid infrastructure assets. - Rating agencies’ rule that a project cannot be rated higher than the sovereign in many African countries. ### Unlocking Resources from Institutional Investors (Policy Recommendations) - Regulatory dialogue and harmonization: - Regulatory requirements hindering SDG-aligned asset purchases could be harmonized and rethought without jeopardizing financial stability. - Example measures: harmonize investment limits across countries; relax overly restrictive rules to diversify pension portfolios away from government securities and allow more systematic foreign investment. - Rating agencies could reconsider practice of rating private projects in Africa below sovereigns. - Standardization and data: - Greater standardization of contracts, documentation, and templates across project lifecycle (bidding, procurement) to reduce cost/complexity and facilitate comparability (G20 2018). - Build a transparent, comprehensive database on infrastructure projects and performance (successful precedent: Africa Infrastructure Country Diagnostic covering 24 African countries during 2001–06). - Develop new financial products and unbundle financing: - Create financial products matching institutional investors’ preferences (project bonds, infrastructure investment funds specialized by project stage, securitization/tranching of bank loans). - Project bonds offer tradability and liquidity; African project bond market early-stage (first listing and investment-grade infrastructure bond entirely held by institutional investors issued in 2013 in South Africa). - Unbundling financing across design, construction, and operation stages to attract different investor types. - Expand pipeline and public support: - Develop national, long-term strategies for the infrastructure sector that last beyond political cycles to ensure a steady flow of bankable projects (with international institution and donor support). - Public support (multilateral, bilateral, or government incentives) can be needed to attract institutional investors; World Bank (2018a) found two-thirds of projects with institutional investor contributions required some government or DFI incentives. - Example: South Africa Renewable Energy Independent Power Producers Procurement Program launched 2011, using payment guarantees to attract institutional investors. ### Foundations and High-Wealth Philanthropic Individuals — Size, Scope, and Characteristics - Definitions and scale: - Global HNWI defined as persons/families with investable financial assets of more than $1 million (Capgemini 2019). - OECD (2018) estimates private philanthropic flows to promote economic development in developing countries averaged $8 billion a year between 2013 and 2015 (survey of 143 foundations). - Foundation Center and Council on Foundations (2018) evaluate international giving for US foundations at $9 billion in 2015. - Bill & Melinda Gates Foundation provided half of total giving among surveyed foundations during 2013–15. - About 80 percent of total philanthropic giving provided by only 20 foundations (OECD 2018). - Concentration and sectors: - Africa received about 30 percent of global philanthropic finance in 2013–15; preliminary data for 2017–18 estimate one-quarter. - Giving concentrated toward middle-income countries, such as Nigeria and South Africa. - Sector focus: health received $12.6 billion during 2013–15 (majority to infectious diseases); education received $2.1 billion. - Motives and flexibility: - Philanthropy motivated by social impact rather than financial return; philanthropies can take higher risks and be more agile than institutional investors. - Venture philanthropy blends venture-capital techniques with philanthropic goals, providing funding plus technical assistance and capacity building. ### Bottlenecks to Philanthropic Involvement - Regulatory, legal, and political constraints: - National legislation can restrict CSOs’ access to international funding; unfavorable tax policies and onerous reporting can discourage philanthropic activity. - Few African countries have specific strategies to engage with philanthropy (exceptions: Kenya, Rwanda, South Africa); Mauritius has a law on philanthropy. - Coordination and transparency issues: - Lack of coordination among foundations, ODA providers, governments, NGOs/CSOs can cause overlap or neglect of recipients. - Data reporting by foundations is not systematic; disclosure is mostly voluntary and reporting burdens can deter smaller foundations. - Short-termism and concentration: - Philanthropic giving concentrated in stable, middle-income countries; only a third goes to fragile and low-income countries. - Majority of foundation engagement is for five years or less; short tenure raises concerns about sustainability for long-term social goals. - Average engagement periods (Survey on Private Philanthropy for Development, OECD 2018): - Less than 1 year: 1% - 1–2 years: 23% - 3–5 years: 62% - 6–9 years: 6% - 10 years or more: 5% ### Unlocking Resources from Philanthropies (Policy Recommendations) - Legal status and enabling environment: - Grant philanthropic foundations a legal status that protects autonomy and facilitates foreign funding while ensuring oversight. - Coordination and partnership: - Foster systematic collaboration between governments, donors, and foundations to match philanthropies to national priorities and reduce transaction costs (example: Kenya Philanthropy Platform). - Enhance multilateral organizations’ role as counterparts in poorest countries or encourage governments to more actively engage foundations. - Data transparency: - Centralize and standardize data sharing on philanthropic activity to improve planning, allocation, and accountability (organizations collecting data: OECD netFWD, Candid, Worldwide Initiatives for Grantmaker Support; International Aid Transparency Initiative underused by foundations). - Leverage fintech and diaspora: - Fintech innovations and crowdfunding (donation model ≈ one-third of crowdfunding in SSA) can catalyze diaspora philanthropy given Africa’s mobile money leadership. - Global funds and catalytic models: - Replicate the global fund model used in health (e.g., Global Fund to Fight AIDS, Tuberculosis and Malaria) for other sectors (education, sanitation, rural electrification) to pool donor funds, provide performance-based financing, and guarantee program performance. - Lessons from Bill & Melinda Gates Foundation: - Gates Foundation spent $53.8 billion since launch; $39.8 billion to global development and global health programs; success linked to catalytic role and partnerships. ### Other Sources and Mechanisms of Private Finance - Remittances: - In 2019, remittance flows to low- and middle-income countries reached $548 billion, slightly larger than FDIs ($534 billion) and ODA ($166 billion) (World Bank 2020b). - Remittances to SSA were estimated at about $50 billion in 2019 (equivalent to almost 3 percent of the region GDP), more than 70 percent higher than the 2009 level. - High cost of sending remittances to SSA: in Q3 2020 senders paid an average of 8.5 percent to transfer money to SSA (global low- and middle-income average 6.8 percent; SDG indicative target 3 percent). - COVID-19 impact: remittances to low- and middle-income countries declined by about 7 percent in 2020 and could decline by another 7 percent globally in 2021; remittances to SSA estimated to have fallen about 9 percent in 2020 and expected to decrease by another 6 percent in 2021. - Developmental leverage limited by low financial inclusion and underinvestment in areas with positive externalities. - Fintech innovations: - SSA leads globally in mobile-money innovation, adoption, and usage; only 20 percent of SSA population has a bank account (versus above 90 percent in advanced economies and about 40 percent in nonadvanced economies). - Fintech opportunities: - Broad mobile banking services (payments, money storage, growing credit provision, cross-border payments, investment products, insurance). - Credit risk assessment improvements via big data and machine learning. - Peer-to-peer lending and crowdfunding (still lagging but high potential). - Cross-border transfer innovations to bypass correspondent banking and reduce costs. - Constraints: gaps in broadband internet and electricity; regulatory adaptation needed to manage financial stability, AML/CFT, and other risks. - Sustainable finance instruments and ESG: - ESG market size estimates vary from $3 trillion to $31 trillion globally (IMF 2019e). - Domestic ESG market in Africa small and concentrated in Southern Africa with estimated assets under management of about $430 billion in 2017 (GSIA 2019, GSB 2020). - ESG approaches: - Use-of-proceed bonds (green, social, sustainability bonds). - General-purpose SDG bonds targeting firms with ESG standards. - Negative targeting (exclusion). - SDG-linked bonds that tie coupon payments to measurable SDG outcomes (example: 2019 Enel SDG-linked bond where coupon increased if renewable capacity targets not met). - Need for coordinated data standards and monitoring: - Consistent corporate reporting with quantified SDG indicators. - Standardized investment terminology and product definitions. - Clear development standards for corporate sector and financial products to foster transparent SDG finance. *Source: https://www.imf.org/-/media/files/publications/dp/2021/english/pfdwttobea.pdf* ### Box 9. Types of Institutional Investors ### Box 9. Types of Institutional Investors ### Crowdfunding in Africa: scale and regional comparison - Alternative financing sources (crowd-funding as well as other forms of online lending) amounted to $209 million in Africa in 2018, representing less than 0.1 percent of total global volumes (Ziegler and Shneor 2020). - Regional shares of global alternative financing volumes in 2018: - China: 71 percent - United States: 20 percent - Europe: 6 percent (half of which is in the United Kingdom) - Asia-Pacific excluding China: 2 percent - Latin America: 1 percent - Middle East: about half a percent - Africa: less than 0.1 percent - The majority of crowdfunding coming to Africa is from international sources (close to 80 percent of total), primarily from the United States and the United Kingdom. ### Models of crowdfunding and their role in SSA - Crowdfunding enables many contributors to donate or invest small amounts for projects, investments or causes through an internet platform. - Donation-based crowdfunding: - Identified as the largest crowdfunding model in SSA, accounting for about one-third of all transactions (Chao and others 2020). - Contrasts with other regions where investment models dominate. - Often precedes investment-funding platforms in initial development stages as perceptions of risk and needs evolve. - Positive experiences with donation platforms can provide confidence, reduce risk perception, and encourage transition to peer-to-peer lending and other investment models. - Donation-based crowdfunding constitutes a vehicle for philanthropic giving and a mechanism to centralize calls for donations for social, developmental, humanitarian, or crisis response projects. ### Diaspora philanthropy and targeting - Crowdfunding platforms can provide a low-cost and efficient platform to facilitate diaspora philanthropy (Flanigan 2017). - “Diaspora philanthropy” denotes donations of money, goods, or services by diaspora members to their networks back home. - Intermediaries—community groups, churches, NGOs, or online platforms—facilitate transfers and build on existing social networks. - Benefits: - Often targets projects or areas in underserved communities where traditional donors do not intervene. - Community and familial links facilitate targeting and delivery of philanthropic funds. ### Potential to expand and barriers in SSA - Potential enablers: - Large digital and mobile money user base in SSA can be leveraged to expand crowdfunding, especially where financing from traditional financial institutions is low. - Crowdfunding provides an avenue for informal funding for many micro and small enterprises that may lack access to credit through formal institutions and microfinance (Chao and others 2020). - Main barriers to fully realizing potential: - Need for more-tailored regulation of crowdfunding platforms to provide certainty for lenders and recipients. - Internet infrastructure remains an impediment to uptake of crowdfunding models for both philanthropic and investment purposes, despite high use of mobile and digital services in SSA. - Institutional development: - The African Crowdfunding Association was established in 2015 to facilitate legislation and public awareness of crowdfunding. *Source: Box 9. Types of Institutional Investors, pfdwttobea* ### Annex Table 2.1. Increase in Private Investment Ratios Over One Decade ### Annex Table 2.1. Increase in Private Investment Ratios Over One Decade (2007–17) and Two Decades (1997–2017) ### Full Country Sample — One decade and Two decades - No. of countries: 162 (Global sample); 125 (Developing countries only) - Simple average increase: - One decade: 2.0 (Global sample); 2.0 (Developing countries only) - Two decades: 1.6 (Global sample); 2.2 (Developing countries only) - Median increase: - One decade: 2.0 (Global sample); 2.0 (Developing countries only) - Two decades: 2.0 (Global sample); 2.4 (Developing countries only) ### Subsample of Best Performers — One decade and Two decades - No. of countries: 15 (Global sample); 15 (Developing countries only) for one decade; 33 (Global sample); 33 (Developing countries only) for two decades - Simple average increase: - One decade: 10.6 (Global sample); 10.6 (Developing countries only) - Two decades: 11.2 (Global sample); 11.2 (Developing countries only) - Median increase: - One decade: 9.6 (Global sample); 9.6 (Developing countries only) - Two decades: 10.0 (Global sample); 10.0 (Developing countries only) ### Note on definition and interpretation - Best performers are the countries that succeeded in raising their private investment ratio by at least 6 percentage points of GDP. - One decade refers to the period 2007–17 while two decades refers to the period 1997–17. - Source: IMF staff calculations based on IMF Investment and Capital Stock Dataset, 2017. ### Robustness check (Annex Table 2.2) — Using averages - No. of countries: 177 (Global sample); 140 (Developing countries only) for one decade; 176 (Global sample); 139 (Developing countries only) for two decades - Simple average increase: - One decade: 1.2 (Global sample); 1.9 (Developing countries only) - Two decades: 1.2 (Global sample); 3.2 (Developing countries only) - Median increase: - One decade: 1.1 (Global sample); 1.7 (Developing countries only) - Two decades: 2.0 (Global sample); 3.0 (Developing countries only) - Subsample of Best Performers (Annex Table 2.2): - No. of countries: 18 (Global sample); 18 (Developing countries only) for one decade; 41 (Global sample); 39 (Developing countries only) for two decades - Simple average increase: 8.7 (Global sample); 8.7 (Developing countries only) for one decade; 10.4 (Global sample); 10.5 (Developing countries only) for two decades - Median increase: 8.1 (Global sample); 8.1 (Developing countries only) for one decade; 9.0 (Global sample); 9.2 (Developing countries only) for two decades - Note: Best performers defined as countries that succeeded in raising their private investment ratio by at least 6 percentage points of GDP. One decade refers to the period between 1998/07–2008/17 while two decades refers to the period 1988/97–2008/17. - Source: IMF staff calculations based on IMF Investment and Capital Stock Dataset, 2017. ### Interpretation and policy-relevant finding for Sub-Saharan Africa (SSA) - A realistic but still-ambitious target for SSA countries suggested by the text: - Raise their private investment ratio by 3 percentage points over the next decade. - Historical prevalence: - A quarter of developing countries (29 out of 125) have lifted their private investment ratio by at least 3 percentage points over the past decade. - About 10 percent (15 countries) achieved a 6-percentage-point increase over the past decade. - The text indicates that robustness analyses (including shorter averages) confirm these two orders of magnitude. *Source: IMF staff calculations based on IMF Investment and Capital Stock Dataset, 2017.* ### Annex 4. Sectoral Policies ### Annex 4. Sectoral Policies ### Description of the Model - Model type: dynamic general equilibrium with a continuum of households facing idiosyncratic risk and multiple sectors with frictions preventing movement of factors across sectors. - Economy: small open economy with five consumption goods: domestic food, imported food, manufacturing, services, and energy. - Household types (predetermined and fixed): - rural and urban - private sector and government employees - entrepreneurs (capital holders) - low-skilled and high-skilled workers - Households: continuum, equal ex ante, face uninsurable idiosyncratic risk; solve dynamic optimization taking prices and government policies as given. - Sectors and principal features: - Agriculture: domestic and exported agricultural products; rural households; uses land and low-skilled labor. - Manufacturing: technology uses low-skilled labor, energy and capital; capital owned by entrepreneurs. - Services: produced by urban households in family businesses (low-skilled labor) or by entrepreneurs in industrial sector (high-skilled labor and energy). - Energy: capital intensive technology. - Financial assets: one-period bonds traded among households to allow risk sharing; the interest rate on these bonds, the wage for public and private employees, the price of domestic food, and the price of services are determined by domestic supply and demand in equilibrium. - Energy price: exogenously given (treated as a policy variable); a wedge is introduced between the price perceived by energy users and the income per unit obtained by producers to implement rationing. The wedge is determined in equilibrium so that, given the price, quantity demanded equals quantity produced. - Scenarios: analysis compares baseline versus steady state under scenario parameters holding other parameters fixed; reported numbers are medium-term effects (model reaches values close to steady state in about seven years in simulations not reported here). ### Functional Specification for Preferences and Production - Household expected utility: - U = E Σ_{t=0}^{+∞} β^{t} u(c_{t}) - u(c_{t}^{f}, c_{t}^{e}, c_{t}^{o}) = ( (c_{t}^{f} − a⃛)^{1−σ} / (1 − σ) ) + γ ( (c_{t}^{e})^{1−σ} / (1 − σ) ) + ω ( (c_{t}^{o})^{1−σ} / (1 − σ) ) - Notation: (f) stands for food, (e) for energy, (o) for other goods. - Food composite: - c_{t}^{f} = [ ε (c_{t}^{a})^{ρ} + (1 − ε) (c_{t}^{*})^{ρ} ]^{1/ρ} - Production technologies: Cobb-Douglas in inputs. - Example entrepreneur technology for non-tradeable goods (super index n), requiring electricity (e), capital (k), and labor (h) with total factor productivity (z): - y_{n,ent} = z_{n,ent} ( ( (k_{t}^{n})^{α} (e_{t}^{n})^{1−α} )^{α_{n}} (h_{t}^{n})^{1−α_{n}} ) ### Calibration of the Model — Illustrative Economy and Steady-State Targets - Illustrative economy: similar to a representative African economy (non-agricultural commodity exporters). Alternative illustrative groups considered with similar results. - Labor and commodity shares: - 50 percent of labor force in rural areas. - Non-agricultural commodities constitute 15 percent of GDP. - Steady-state targets (set by parameters): - Consumption to GDP: 68 percent. - Consumption composition: services 62 percent of consumption; energy 4 percent of consumption; remainder to traded goods. - Investment: 8 percent of GDP. - Gini (overall): 52 in equilibrium. - Gini (urban): 54. - Shares of gross output: agriculture 41 percent; manufacturing 12 percent; services 40 percent; electricity production 7 percent. - Total government revenues: about 25 percent of GDP. - Of which 11 percentage points are obtained from value-added tax. - Effective income tax rates: 12 percent on average. ### Calibration Parameters (Annex Table 5.2) - Preferences: - Discount Rate b: 0.96 - Risk-Aversion σ: 1 - Elasticity of Substitution Between Domestic and Imported Food ρ_{f}: 0.01 - Elasticity of Substitution Between Tradables and Non-Tradables ρ_{o}: 0.01 - Technology: - Land Share in Agriculture Production a_{la}: 0.49 - Intermediary Share in Agriculture Production a_{ma}: 0.4 - Land Relative Size l¹/l²: 5 - Intermediary Share in Commodity Exporter Sector a_{r}: 0.75 - Capital Share in Tradables Production a_{x}: 0.44 - Physical Capital Share a_{e}: 0.36 - Capital Share in Non-tradables Production a_{n}: 0.33 - Capital Share in Energy Production a_{y}: 0.33 - Depreciation Rate d: 0.06 - Population shares: - Skilled Urban Population Share m_{urb,s}: 0.31 - Unskilled Urban Population Share m_{urb,u}: 0.19 - Rural Population Share m_{rur}: 0.37 - Government Workers Share m_{gov}: 0.06 - Entrepreneur Share m_{ent}: 0.05 *Source: IMF staff.* ### 8418. World Bank, Washington, DC. ### 8418. World Bank, Washington, DC. ### Major thematic areas covered by the referenced literature - Private participation in infrastructure and sectoral PPP experience - "Private Participation in Infrastructure in Developing Countries. Trends, Impacts and Policy Lessons." World Bank Working Paper 5. World Bank, Washington, DC. Harris, Clive. 2003. - World Bank. 2003a. Private participation in infrastructure: trends in developing countries in 1990–2001. - World Bank. 2006b. "Approaches to Private Participation in Water Services: A Toolkit." - World Bank. 2016. "The State of PPPs. Infrastructure Public-Private Partnerships in Emerging Markets & Developing Economies 1991–2015." - Yescombe, E. R. 2017. "Public-Private Partnerships in Sub-Saharan Africa: Case Studies for Policymakers." - Menzies, Iain, and Cledan Mandri-Perrott. 2010. "Private Sector Participation in Urban Rail: Getting the Structure Right." - Fiscal risk, government guarantees, and PPP costing/management - Hemming, Richard. 2006. "Public-Private Partnerships, Government Guarantees, and Fiscal Risk." - Irwin, Tim. 2003. "Public Money for Private Infrastructure—Deciding When to Offer Guarantees, Output-Based Subsidies, and Other Fiscal Support." - Irwin, Tim, Samah Mazraani, and Sandeep Saxena. 2018. "How to Control the Costs of Public-Private Partnerships." IMF How To Notes 18/04. - Saxena, Sandeep. 2017. "How to Strengthen the Management of Government Guarantees." IMF How-to Note. - World Bank and IMF. 2019. "PPP Fiscal Risk Assessment Model, PFRAM 2.0" Use Manual, September 2019. - Razlog, Lilia, Chris Marrison, and Tim Irwin. 2020. "Scenario Analysis Tool for Assessment and Monitoring of Government Guarantees." World Bank Discussion Paper MTI Global Practice No. 21 May 2020. - Institutional investors, pension funds, and private finance mobilization - Inderst, Georg. 2009. "Pension Fund Investment in Infrastructure." OECD Working Papers on Insurance and Private Pensions, No. 32. - Inderst, Georg, and Fiona Stewart. 2014. "Institutional Investment in Infrastructure in Emerging Markets and Developing Economies." PPIAF, World Bank Group. - World Bank. 2018a. "Contribution of Institutional Investors. Private Investment in Infrastructure 2011-H1 2011." - Preqin. 2016. "Special Report: The Infrastructure Market in Africa." Preqin Alternative Assets Intelligent Data. - Preqin. 2020a. Preqin Global Infrastructure Report. London. - OECD. 2017a. "Pension Markets in Focus No. 14." - OECD. 2020a. "OECD Institutional Investors Statistics 2020." - Private equity, venture capital, and impact/fintech in emerging markets and Africa - International Finance Corporation (IFC). 2018a. "Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment." - IFC. 2018b. "IFC SME Ventures: Investing in Private Equity in Sub-Saharan African Fragile and Conflict-Affected Situations." - McKinsey & Company. 2020. "A New Decade for Private Markets." McKinsey Global Private Markets Review 2020. - Preqin. 2020b. Preqin Investor Outlook: Alternative Assets H1 2020. - Private Equity International (PEI). 2020. "Africa. Mapping Out the Continent’s Hotspots." September 2020. - Mittal, Abhishek. 2020. "Low Returns: How African Private Equity Needs to Change Its Approach." - Sy, Amadou, et al. 2019. "FinTech in Sub-Saharan African Countries: A Game Changer?" Departmental Paper 19/04. - International Monetary Fund (IMF). 2019a. "Fintech in Sub-Saharan African Countries: A Game Changer?" African Departmental Paper. - Project preparation facilities, risk mitigation, and project finance performance - Oberholzer, et al. 2018. "Summary of Good Practice of Successful Project Preparation Facilities." - USAID. 2016. "Project Preparation Facilities Toolbox." Power Africa. - Moody’s Investors Service. (2020a). "Default and Recovery Rates for Project Finance Bank Loans, 1983–2018." - Moody’s Investors Service. (2020b). "Infrastructure default and recovery rates, 1983–2019." - O’Neill, Phillip. 2009. "Infrastructure Investment and the Management of Risk." - Rall, Jamie, James B. Reed, and Nicholas J. Farber. 2010. "Public-Private Partnerships for Transportation: A Toolkit for Legislators." - Policy guidance, macroeconomic links, and IMF/World Bank frameworks - International Monetary Fund (IMF). 2004. "Public-Private Partnerships." IMF Policy Paper. - International Monetary Fund (IMF). 2014. "Is It Time for an Infrastructure Push? The Macroeconomic Effects of Public Investment." Chapter 3, World Economic Outlook, Washington, DC, October. - IMF. 2013a. "Guidance Note for the Liberalization and Management of Capital Flows." - IMF. 2016a. "Macroeconomic Developments and prospects in Low Income and Developing Countries—2016." IMF Policy Paper. - International Monetary Fund (IMF). 2019d. "Public Investment Management Assessment (PIMA). Strengthening Infrastructure Governance." IMF Fiscal Affairs Department. - Sectoral private engagement: health, education, water, power, transport, and logistics - World Bank. 2003b. "Private Participation in Health Services." - Lagomarsino, Gina, Stefan Nachuk, and Sapna Singh Kundra. 2009. "Public Stewardship of Private Providers in Mixed Health Systems." - Lewis, Laura. 2013. "Is There a Role for the Private Sector in Education?" - Lusk-Stover, Oni, and Harry Anthony Patrinos. 2015. "Education for All: The Private Sector Can Contribute." - Hertzmark, Donald. 2008. "Private Sector Participation in the Power Sector." USAID and NARUC. - Zegras, Christopher. 2003. "Private Sector Participation in Urban Transport Infrastructure Provision." - Maury, Frédéric, and Amaury de Féligonde. 2019. "African Logistics: Time for Revolution." - Philanthropy, foundations, and private giving in development finance - Moyo, Bhekikosi. 2010. "Philanthropy in Africa: Functions, Status, Challenges and Opportunities." - Moyo, Bhekikosi. 2017. "The Infrastructure for Philanthropy in Africa: Developments, Challenges and Opportunities." - OECD netFWD. 2014. "Venture Philanthropy in Development: Dynamics, Challenges and Lessons in the Search for Greater Impact." - Schwier, Jan, et al. 2020. "The Landscape of Large-Scale Giving by African Philanthropists." Bridgespan Group. - United Nations (UN). 2019. "SDG Bonds: Leveraging Capital Markets for the SDGs" Prepared by the UN Global Compact Action Platform on Financial Innovation for the SDGs. - Research on capital flows, financial market development, and domestic resource mobilization - Jahan, Sarwat, and Daili Wang. 2016. "Capital Account Openness in Low-income Developing Countries: Evidence from a New Database." IMF Working Paper 16/252. - Laeven, Luc. 2014. "The Development of Local Capital Markets: Rationale and Challenges." IMF Working Paper 14/234. - International Monetary Fund (IMF). 2018c. "Domestic Revenue Mobilization in Sub-Saharan Africa: What Are the Possibilities?" Chapter 3, Regional Economic Outlook: Sub-Saharan Africa, Washington, DC, April. - Mlachila, Montfort, et al. 2016. "Financial Development in Sub-Saharan Africa." African Department Paper. ### Key report types and notable documents listed - IMF Policy Papers and How-to Notes (examples include 2004 PPP paper; 2014 WEO Chapter 3; 2013 Guidance Note on capital flows; 2018 How to control PPP costs; 2017 How to strengthen management of government guarantees). - World Bank publications on PPPs, PPI databases, sector toolkits, and PFRAM 2.0 Use Manual (September 2019). - OECD and UN thematic reports on institutional investors, philanthropy, and SDG financing. - Industry reports and datasets from Preqin, Moody’s, McKinsey & Company, Wealth-X, PEI, and Principles for Responsible Investment (PRI). ### Observations implied by the bibliographic composition - Cross-cutting focus on mobilizing private finance for infrastructure and development across sectors (transport, power, water, health, education). - Recurrent attention to fiscal risks from PPPs and government guarantees, and to tools for assessment and management (PFRAM 2.0; scenario analysis tools). - Emphasis on institutional investors and pension funds as potential long-term capital sources for infrastructure, with OECD and World Bank analyses and Preqin/Preqin Global Infrastructure datasets cited. - Growing interest in private equity, venture capital, fintech, and alternative finance channels for emerging markets and Sub-Saharan Africa, reflected in IFC, IMF, Preqin, and industry reports. - Project preparation and risk mitigation instruments and facilities are a consistent theme (project preparation facility toolkits, good practice summaries, risk mitigation gap analyses). *References list excerpt from "PRIVATE FINANCE FOR DEVELOPMENT" (selected entries as provided).* --- _Source: https://www.imf.org/-/media/files/publications/dp/2021/english/pfdwttobea.pdf_