A German-led initiative under the auspices of the G20 is aiming to boost private investment in Africa, especially in infrastructure, but some critics are questioning whether the plan is realistic and focuses on the right priorities.

Germany currently holds the presidency of the G20 or ‘Group of Twenty,’ which is an international forum for governments and central banks of 20 major countries, including France, the UK, the USA, Canada, China, Japan, Russia, Saudi Arabia, India and Turkey, among others.

Chancellor Angela Merkel’s government is using the G20 presidency to promote a so-called “Compact with Africa,” which aims to improve the climate for private investment in Africa, in particular by creating new blended investment vehicles for infrastructure spending. Merkel’s government has touted the compact as a ‘signature issue’ and ‘a central project of Germany’s G20 presidency.’

The guiding policy document of the G20 Compact with Africa was drafted jointly by the Africa Development Bank, the International Monetary Fund and World Bank Group, and was adopted by G20 finance ministers and central bank governors in Baden-Baden on March 17-18th, 2017.

‘Compact’, which means ‘agreement’ or ‘pact’, is somewhat of a misnomer for the document, however, since it has not been endorsed by African nations, with the exception of South Africa, which is a member of the G20. Finance ministers of Côte d’Ivoire, Morocco, Rwanda, Senegal and Tunisia attended the Baden-Baden summit, but on the whole the document is a product of non-African institutions and contains proposals yet to be supported by African governments.

Chancellor Merkel held a high-level dialogue with African leaders in Berlin on June 12-13th to drum up support for the plan. African countries attending were invited to make proposals for how to lower investment risks while G20 states in turn are meant to propose steps to boost investment flows.

The German-backed policy document stresses large infrastructure projects such as roads, schools, waterworks, power plants, access to the Internet, dams, airfields, and hospitals. “Priority should be given to investment in infrastructure, which is critical to attract private investment, connect Africa’s regional markets, and better integrate them into global value chains,” reads the document. “Productivity gains and better integration of Africa into the global economy are hampered by the massive infrastructure gap, which weighs heavily on the continent’s productive potential and deters private investment.”

Infrastructure or human capital?


A new report published by the German political foundation Friedrich-Ebert-Stiftung questions the logic of the G20 compact, saying it is especially unsuitable for low-income or fragile countries.

“Many least or less developed African countries are not able to invest in infrastructure, because they do not have the available resources and cannot raise taxes, improve the bureaucracies, and avoid rising debts. These countries lack appropriate human resources and institutional capacities,” says the report co-authored by Professors Robert Kappel and Helmut Reisen, who are economists at a prominent German thinktank and economic consultancy, respectively.

Kappel and Reisen contend that the Compact With Africa report “does not offer a comprehensive approach that includes business, labor, education, and the environment.”

The two German scholars want to see more investment in education as a complement to any investment in physical infrastructure. They stress that the G20 plan “does not even mention the role of investment in education – technical competences, vocational training, tertiary education – which many studies have identified as a main restraint to further development, including the development of local and national industries, small and medium enterprises… [and] agriculture.”

‘The education gap has negative economic consequences.’

Other critics of the G20 document include the ONE Campaign, an advocacy group headquartered in Washington, DC, which called the document adopted at Baden-Baden a “missed opportunity.” The group says more investment is needed in education. “51 million African girls today do not have access to education… This education gap has very real, negative consequences, both in human and economic terms,” reads an articule published by ONE Campaign on its website.

“If every girl in sub-Saharan Africa completed secondary school, it could save the lives of 1.2 million children under the age of 5. And if girls in developing countries received the same levels of education as boys, it could yield $112 billion to their economies each year.”

The Compact is also coming under fire for a one-size-fits-all approach and apparent lack of concrete commitments at this stage. “Unfortunately, what was agreed upon in Baden-Baden fell short of expectations. The meeting didn’t decide on anything concrete,” says Joe Kraus of the ONE Campaign.

Kappel and Reisen reason that the G20 policy recommendations aren’t necessarily a good fit in all African countries, saying that hard choices need to be made as to what’s important and what’s achievable: “The Compact with Africa has suggested a great number of ‘policy commitments’ for African partner countries that are deemed necessary to facilitate private infrastructure and corporate foreign direct investment. These commitments have to face reality tests for the difficult political and institutional environment in Africa’s low-income countries.”

“As past experience with policy reforms in developing countries suggests, the Compact with Africa risks being proved ineffective, because it assumes that all developing countries suffer from the same problems, and that all of the problems were equally important. Yet an unweighted checklist of selected governance elements has often led to an undifferentiated reform program that fails to target an economy’s most severe bottlenecks under the constraint of scarce political and administrative capital,” says the report of the Friedrich-Ebert foundation.

Investment vehicles

G20-Afrika-Konferenz 2017
Angela Merkel plays host to African leaders in Berlin to discuss new investment vehicles, June 2017

The G20 proposal for more global investement in Africa is being sold in Germany as a way of stemming African migration to Europe. Last month German Foreign Minister Gerd Muller said he fears 100 million African refugees might come to Germany if nothing is done.

A signature part of the plan is creating new innovative vehicles for boosting foreign capital flows to Africa, contingent upon improvements in the regulatory environment for foreign businesses and investors. For example, the plan proposes that G20 governments increase the attractiveness of bonds issued by African governments by guaranteeing them, on the condition that the African countries implement economic policies imposed by the G20 guarantors.

“The G-20 and other partner countries could play a role in lowering the financing costs of public investment. The international community could develop instruments to de-risk sovereign securities to finance incremental public investment (for instance, through guarantees for international bonds issued by African countries),” reads the German-backed policy document. “Within the Compact with Africa, these guarantees could be conditional on the implementation of sound macroeconomic policies and structural reforms by the receiving country.”

In this scenario, African countries would benefit from affordable debt instruments backed by G20 economies, while foreign investors would benefit from lower-risk investments than otherwise would be impossible if the African sovereign bonds were not externally guaranteed. However, the security of such foreign investments would clearly depend on the sustenance of political will in the respective African countries to maintain neoliberal policies imposed from outside.

Another mechanism for boosting infrastructure development is direct foreign investment in infrastructure projects through partnerships between the government and private sector. The Compact with Africa puts a heavy emphasis on this type of arrangement.

“Meeting Africa’s infrastructure financing needs crucially depends on the countries’ ability to prepare, execute and monitor project contracts, including through public-private partnerships (PPPs),” reads the Compact report. “The PPP capacity of governments… needs to be strengthened,” the report adds, recommending World Bank capacity-building in this area.

Kappel and Reisen, on the other hand, think it is ‘unrealistic’ to expect that public-private partnerships will bridge the infrastructure gap in low-income African countries. They point out that public investment and concessionary aid are currently the major funding sources for infrastructure and many African countries have not even progressed to the stage of using bank loans for large-scale projects, which makes it less likely that complex plans for using private equity and project bonds will succeed.

‘Unrealistic’ to expect public-private partnerships will bridge the infrastructure gap.

They also caution that “when privately financing large infrastructure projects in immature markets, there is a risk that private returns come at the expense of long-term fiscal costs.” In other words, private corporations could profit from public utilities and infrastructure to a degree that would prove too costly for low-income countries to sustain.

A third way of raising funds for African infrastructure is through domestic debt markets. However, historically, almost all African countries have faced challenges in long-term borrowing in local currencies and found international borrowing in foreign currencies to be less costly. To address this, the Compact with Africa recommends several ways that G20 countries can help African countries develop their domestic debt markets to complement external sources of financing. “Developing domestic debt markets brings several benefits. Domestic bond issuance (corporate or public)… [can] facilitate the availability of longer-term finance for infrastructure,” the G20 report says.

Economist Helmut Reisen, co-author of a paper criticizing elements of the G20 ‘Compact with Africa’ (shiftingwealth.com)

The two German economists differ on this recommendation, cautioning against using domestic credit to finance big infrastructure projects. They say this approach may end up being more costly: “Most poor countries do not borrow in their own currency, which has time and again triggered debt crises as a result of strong currency depreciation… Substituting external, foreign currency debt with domestic, local currency debt may increase rollover and interest rate risks because of shorter maturities of the latter; this implies it will have to be refinanced more frequently and possibly at a higher rate.”

‘Surge’ toward growth – or a heavy debt burden?

The Compact for Africa offers lofty promises for African nations that play along. An unprecedented level of financing — “a surge in private investment…from some industrialized countries to Africa ” — is awaiting African states that are willing to lift regulatory barriers and improve the risk climate, the report suggests.

“When international firms invest, they bring finance as well as new ideas and the organizational know-how that lift productivity and help link Africa into global value chains,” says the World Bank co-authored report.

But what if the promised infrastructure projects run overbudget, don’t generate the anticipated economic growth and employment, or create unforeseen environmental or social impacts? In scenarios such as these, African nations could find themselves burdened not only by external debt but also by new maintenance costs for underperforming infrastructure.

Kappel and Reisen say the new G20 plan “ignores the risk of debt sustainability linked to blended finance,” advising the group of developed nations against “forcing foreign private debt” on poorer African economies that aren’t ready for it. They urge African countries to study their options carefully before taking on more debt.

Nonetheless, capital-hungry African governments are unlikely to ignore European overtures that could bring in billions of dollars in investments; in some quarters, the G20 Compact is already well-received. But elsewhere, African leaders may have reservations about a foreign-led initiative promoting unspecified mega-projects, demanding deep structural changes in their own economies and societies, and plunging them deeper into debt.

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