Business Times Africa Magazine 2017 /vol 9/ No2 BT2Edition2017_web | Page 19

OPINION: A BIG BOND FOR AFRICA
massive increase in infrastructure
investment across Africa. Public in-
frastructure is particularly important.
This includes highways, bridges, and
railways linking rural producers in
landlocked countries to Africa’s ur-
ban consumers and external markets;
mass transit and Internet infrastruc-
ture to accommodate greater com-
mercial activity; and electricity trans-
mission lines integrating privately
financed power plants and grids.
Major regional projects are also
needed to knit together Sub-Saharan
Africa’s many tiny economies. This is
the only way to create the economies
of scale needed to increase the export
potential of African agriculture and
industry, as well as to reduce domes-
tic prices of food and manufactured
goods.
While governments in Africa are
spending more on public infrastruc-
ture themselves, outside finance is
still required, especially for regional
projects, which are rarely a top pri-
ority for national governments. Yet
aid from Africa’s traditionally gen-
erous foreign donors, including the
United States and Europe, is now set
to shrink, owing to political and eco-
nomic constraints.
But there may be a solution that
helps Africa recover its growth in a
way that Western leaders and their
constituents find acceptable. We
call it the “Big Bond” – a strategy for
leveraging foreign aid funds in inter-
national capital markets to generate
financing for massive infrastructure
investment.
Specifically, donors would borrow
against future aid flows in capital
markets. That way, they could exploit
current low interest rates at home, as
they generate new resources. With 30-
year US Treasury rates of about 3%,
donors would have to securitize only
about $5 billion to raise $100 billion.
That money could come from the $35
billion in annual official development
assistance (ODA) to Africa (which to-
tals about $50 billion) that takes the
form of pure grants.
Donors would pass on the interest
cost to African countries, reducing
their own fiscal costs. For African
countries, the terms would be better
than those provided by Eurobonds.
In fact, as audacious as it may sound,
passing on the interest costs to recip-
ient countries could actually bolster
their debt sustainability.
According to a study of eight coun-
tries by the African Development
Bank’s Policy Innovation Lab, a 3%
interest rate in US dollar terms would
be lower than the marginal cost of
commercial borrowings undertaken
by several African countries over the
last five years. Moreover, far longer
maturities and grace periods, com-
pared to market finance, would ease
growing pressure on foreign-ex-
change reserves.
Frontloading aid in this way is not
new. Doing so in the early 2000s to
finance vaccines saved millions of
lives in the developing world. Big
Bond resources, managed by the Af-
rican Development Bank, could be
used to help guarantee financing for
major regional infrastructure projects
that have long been stuck on the back
burner, such as the East Africa Rail-
way connecting Tanzania, Rwanda,
and Burundi, and a highway stretch-
ing from Nigeria to Côte d’Ivoire. Such
projects could also be co-financed by
private investors.
Moreover, the Big Bond could help
to reinvigorate the relationship be-
tween donors and African countries.
And, as it supports investments with
important country-level benefits, it
could serve as an incentive for Afri-
can countries to pursue reforms that
increase their absorptive capacity, in
terms of choosing and executing pub-
lic infrastructure investments.
The Big Bond approach represents
a much-needed update to the ODA
framework – one that supports high-
er and more sustainable growth in
recipient countries, while lowering
the burden on donor countries. At a
time when aid is under political pres-
sure, perhaps such a bold approach
to maximizing the efficiency of donor
resources is exactly what the world
needs.
One way to sustain
growth and create
jobs would be
to collaborate
on planning and
implementing a
massive increase
in infrastructure
investment across
Africa.
Nancy Birdsal
President Emeritus and a senior fellow at the
Center for Global Development.
Ngozi Okonjo-Iweala
a former finance minister of Nigeria and
managing director of the World Bank, is a
distinguished visiting fellow at the Center for
Global Development.
2017 | Business Times Africa 17