Sovereign wealth funds (SWFs) are an underutilised resource that have the potential to play a major role in African development financing efforts. The financing needs of infrastructure projects surpass the capabilities of traditional financing mechanisms, and so SWFs are becoming increasingly urgent and necessary to bridge this infrastructure financing gap. Africa is the fastest-growing region in the world for the creation of SWFs, and many recently created African SWFs have explicit mandates dedicated to infrastructure financing.
What Are Sovereign Wealth Funds?
Sovereign wealth funds are government-owned investment funds that invest globally in assets such as stocks, real estate, infrastructure, and precious metals. As more and more countries have created funds in recent years, SWFs have become increasingly major players in international capital markets and the global economy. African countries have also joined this movement, and it is estimated that SWFs in Africa now command
African countries have also joined this movement, and it is estimated that SWFs in Africa now command an asset base of over US$159 billion, or 6.4% of Africa’s GDP. The rise in commodity prices during the 2000s coupled with the discovery of oil, gas, and minerals in many African countries has driven this rapid growth in Africa’s SWFs.
Infrastructure is central to Africa’s continued growth and development, and there is a strong connection between infrastructure development and economic growth, as described by Calerdon and Serven in their 2010 study. By lowering transactions costs, easing the flow of information, increasing the quantity and accessibility of basic services, and integrating markets into the global economy, infrastructure enhances productivity and accelerates economic growth.
Financing Infrastructure: Gaps in the Road
The World Bank estimates that only about half of the $93bn needed annually to meet the continent’s infrastructure needs is being reached, leaving a sizable infrastructure financing gap. Meeting this financing gap is all the more urgent in the context of booming population growth and increasing life expectancy, which increases demand for utilities such as water and power.
19% of roads in Sub-Saharan Africa are paved, and railways and ports are also provided in insufficient quantities. The quality of existing infrastructure, such as ports, remains a hindrance to trade integration. Estimates by the World Bank show that the current state of infrastructure “reduces growth by two percentage points every year, and can cut business productivity by as much as 40%.”
Sovereign wealth funds could play a major role in infrastructure financing in a global economy where financing from traditional sources has become increasingly limited. Even during times of financial uncertainty, SWFs have increased in size and now globally now command over $7.2 trillion in assets.
Holding Back the Flow
Domestic developments within donor countries have major implications for aid flows, and the recent economic performance and political climate of major international donors have led to decreased aid flows to Africa. Other traditional financing mechanisms, such as private capital, are vulnerable to the volatility of the global economy. African capital markets have also remained small players when it comes to financing major infrastructure projects.
Funds on the Horizon
Though the biggest sovereign wealth funds are still to be found in Europe, Asia, and the Middle East, Africa’s SWFs are on the rise. As reported by the Quantum Global Group, there were 19 African SWFs as of 2014, with only 10 in existence before 2010. These SWFs are largely commodity-based, and about 83% of African sovereign wealth fund assets are drawn from oil and 17% from minerals and other sources.
African SWFs recognise infrastructure as integral to sustaining future economic development, with Angola, Côte d’Ivoire, Ethiopia, Gabon, Ghana, Kenya, Namibia, Nigeria, Rwanda, Senegal, Seychelles, Tanzania, and Zambia all having issued sovereign bonds to finance infrastructure development.
Most African SWFs, including Nigeria, Ghana, and Kenya’s SWFs have explicit mandates to prioritise investments in domestic activities, especially infrastructure and industrial development. The Nigerian Sovereign Investment Authority (NSIA), for example, is based on oil, and has an asset base of $1bn, of which 40% of assets are allocated to the Infrastructure Fund.
The Infrastructure Fund focuses on domestic infrastructure development, including power, transport, and water, and partners with major international financiers like the International Finance Corporation (IFC). Kenya’s SWF also has a fund for infrastructure and economic development, and is based on natural resource revenues. In contrast to many of its African peers, Rwanda’s Agaciro Development Fund is not funded from minerals and is instead financed from contributions from Rwandans at home and abroad in addition to other partners.
Catching Up Successfully?
Though African sovereign wealth funds are still small in size compared to SWFs in Europe, the Middle East, and Asia, they represent much potential in the face of large infrastructure financing gaps. New resource discoveries in East and West Africa and higher commodity prices in the 2000s led to a dynamic increase in the number of SWFs on the continent. SWFs are well positioned to finance
SWFs are well positioned to finance infrastructure, and can provide the long-term capital needed to finance major infrastructure projects. A study from Quantum Global Group, for example found that “allocating about 20% of the current African sovereign wealth funds could cover Africa’s annual infrastructure financing gap for one year”. Domestic financing of development is becoming more and more prominent on the continent through financing mechanisms such as SWFs, as revenue from resources is increasingly being used to improve the local quality of life and service provision via investment in infrastructure.