## How to Attract Private Finance to Africa’s Development

_IMF Blog, June 14, 2021_

## Source details

**Canonical URL:** [How to Attract Private Finance to Africa’s Development](https://www.imf.org/en/blogs/articles/2021/06/14/blog-how-to-attract-private-finance-to-africa-s-development)

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## Bibliographic details
- Authors: Luc Eyraud, Catherine Pattillo, Abebe Aemro Selassie
- Published: June 14, 2021

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### Overview and context
- The COVID-19 pandemic has brought economic activity to a standstill and risks reversing Africa’s hard-won gains of the last two decades.
- High public debt levels and the uncertain outlook for international aid limit the scope for growth through large public investment programs.
- The private sector will have to play more of a role in economic development for a strong recovery and to avoid economic stagnation.
- Heads of state from Africa emphasized private financing at the “Financing African Economies” summit in Paris in May.

### Infrastructure needs and potential private finance contribution
- Africa’s infrastructure development needs are huge—in the order of 20 percent of GDP on average by the end of the decade.
- IMF staff research shows the private sector could bring additional annual financing equivalent to 3 percent of sub-Saharan Africa’s GDP for physical and social infrastructure by the end of the decade.
- This 3 percent of GDP represents about $50 billion per year (using 2020 GDP) and almost a quarter of the average private investment ratio in the region (currently 13 percent of GDP).

### Current constraints on private finance
- Public entities, such as national governments and state-owned enterprises, carry out 95 percent of infrastructure projects in Africa.
- The volume of infrastructure projects with private sector participation has significantly declined in the past decade, following the commodity price bust.
- Africa attracts only 2 percent of global flows of foreign direct investment.
- When foreign investment does go to Africa, it is predominantly to natural resources and extractive industries, not health, roads, or water.

### Key investor risk concerns limiting private participation
- Project risk:
  - The pipeline of projects that are truly “investment-ready” remains limited.
  - Investors avoid early-stage concepts or unfamiliar markets; donors and development banks can fund feasibility studies, project design, and preparatory activities to expand bankable projects.
- Currency risk:
  - Example from the text: a project yielding a return of 10 percent a year could see half of profits eliminated if the currency depreciates by 5 percent at the same time.
  - Prudent macroeconomic policy and sound foreign exchange reserve management can greatly reduce currency volatility.
- Exit risk:
  - Narrow and underdeveloped financial markets, capital controls, and weak legal frameworks increase the difficulty and cost of exiting investments.

### Incentives and design principles to attract private investment
- Rationale:
  - Development sectors often have large upfront costs with returns realized over long periods, making private assessment difficult.
  - Private sector growth depends on networks and value chains that may not yet exist.
  - Many projects in development sectors may not happen without government-provided incentives (subsidies, guarantees).
  - In East Asia, 90 percent of infrastructure projects with private participation receive government support.
- Design principles for public incentives:
  - Targeted: address specific market failures.
  - Temporary: avoid permanent fiscal commitments.
  - Based on proven market dysfunctions.
  - Transparent: ensure clarity on support and terms.
  - Leave sufficient risk with private parties.
  - Display additionality: incentives should make worthy projects happen that would not otherwise occur.
  - Well calibrated in size to avoid overcompensating the private sector.
- Fiscal considerations:
  - Incentives can be costly and carry fiscal risks.
  - Given limited public funds, countries and development partners could consider reallocating some resources used for public investment toward financing public incentives for private projects.
  - When reallocation is gradual and supported by sound institutions, transparency, and governance, it could increase the amount, range, and quality of services for people in Africa.
- Innovation:
  - More innovative thinking is needed to realize the transformative potential of infrastructure on the continent.

*Source: How to Attract Private Finance to Africa’s Development (IMF blog, June 14, 2021).*

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## References

- [the scale of the needs](https://blogs.imf.org/2021/05/12/the-policymakers-trilemma/)
- [Recent research published by IMF staff](https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2021/05/14/Private-Finance-for-Development-50157)

_Source: https://www.imf.org/en/blogs/articles/2021/06/14/blog-how-to-attract-private-finance-to-africa-s-development_