This study, commissioned by the Infrastructure Consortium for Africa, assesses the current and past contributions of African Sub-Regional Development Banks (SRDBs) to infrastructure development in Africa.

The study reviews four out of the six African SRDBs that have been established by African Regional Economic Communities: the Eastern and Southern African Trade Development Bank (commonly referred to as the PTA Bank), the East African Development Bank (EADB), the West African Development Bank (BOAD – Banque Ouest Africaine de Développement) and the Ecowas Bank for Investment and Development (EBID).

Their operations cover three separate regional economic communities (RECs) although some have overlapping boundaries. These RECs are the East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA) and the Economic Community of West African States (ECOWAS) respectively. The study also looks at other SRDBs from Asia, Latin America and the Caribbean regions for comparison purposes.

The study was designed primarily to provide answers to questions relating to the relevance of African SRDBs in bridging the infrastructure financing gap and the enhancement of these sub-regional banks, taking into account their strengths, challenges and the opportunities facing them in meeting their infrastructure financing mandates and assesses their level of interest in networking among themselves, as evidenced by their willingness to share information, best practice and lessons learned. It also looks at the expected outcome of the proposed networking.

The study makes a number of recommendations around issues such as the mandate of African SRDBs, their capital and financing, their role in supporting regional development and integration, governance & institutional processes and capacity building.

Main findings of the review

Historically, African SRDBs have been established and are used by regional member countries to promote economic development especially through supporting regional economic integration activities, in particular financing the construction of roads and highways, energy plants, dams and telecommunication infrastructure, and to foster the development of embryonic industries, such as small and medium enterprises (SMEs), in support of industrialisation.

SRDBs usually constitute the main source of long-term credit, loan guarantees, and other essential financial services in the infrastructure, industry, finance and agriculture sectors. Across the world, these institutions are prevalent in regions where private financial institutions and capital markets have limited capability in bridging the financing gap of longterm resources required for development.

Financing gap for infrastructure projects

Access to development finance is one of the most important issues that RECs around the world, including those in Africa, face today. The effectiveness of financial markets is one of the biggest differentiating factors between developed and developing countries. As has been noted in development economics literature, “the financing gap for infrastructure and industrial projects is not so pronounced in developed countries compared to developing countries”. This study finds that in all three sub-regional groupings reviewed, the financing gap for infrastructure projects is huge. For instance, it is estimated that the sub-Saharan Africa, Latin America and the Caribbean, and Asia sub-regions will require a total of US$700 billion to bridge the infrastructure financing gap.

Implications of the financing gap

The excessively large financing gaps faced by the sub-regions constrain growth potential and add to the failure of most RECs to adequately contribute to the regional integration agenda and specifically, to the funding of infrastructure projects. The study finds that most RECs have, for the most part, relied on multilateral and bilateral institutions to fund regional projects. This limits their full potential and leads to a lack of political ownership and diminished growth.

For the reasons outlined in the preceding section, shareholders and in particular member countries of sub-regional groupings need to ensure that African SRDBs are developed, well capitalised, and have well-defined mandates, so that they can contribute positively to the regional integration agenda of the regional economic community.

Size of African SRDBs

At the end of 2013, the African SRDBs in the study reported total assets of US $6.2 billion dollars. The largest share of the assets was held by BOAD (US$2.8 billion), followed by PTA Bank (US$2.5 billion), EBID (US$0.62 billion) and finally EADB (US$0.24 billion). This trend in asset values partly reflects the failure of African SRDBs to mobilise enough resources to bridge the financing gap of US$48 billion.

Ownership and funding

African SRDBs are institutions owned, administered, and controlled by regional member countries (States), which provide the strategic direction of the SRDBs and appoint their senior management and board members. The extent of government ownership in African SRDBs is very similar in all the four sampled SRDBs, with (almost all the four) SRDBs being majority owned by borrowing member countries. The other striking feature about the SRDBs is that even though these banks reserve a certain percentage of shares for nonborrowing members, very few of these shares have been subscribed to.

Capitalisation of DFIs

The capital structures of SRDBs in Africa are similar, though options for funding their business operations differ. The capital structures of all four sampled African SRDBs are made up of authorised, subscribed, callable and paid-in capital. However, the size of the capital varies significantly among the four SRDBs – from US$1.1 billion for EADB to US$3.0 billion for PTA Bank. The difference can also be seen in their ratios of paid-in to subscribed capital, and the ratio of long-term resources to total external resources mobilised by each SRDB. For example, in the case of the ratio of paid-in capital to total subscribed capital, only two African SRDBs (PTA Bank and EBID) had their ratios above 20%. Furthermore, in terms of resource mobilisation, the study finds that three out of the four sampled SRDBs were able to mobilise more long-term to total external resources. The study also found that, taking into account their broad mandates, all four of the sampled SRDBs were not adequately capitalised.

Financial performance and sustainability

Financial sustainability refers to the capability of the SRDBs to generate sufficient income from their operations to enable them to continue operating at a stable and increasing rate. African SRDBs are expected to be profitable and financially self-sustainable, and not dependent on government subsidies or transfers to (partially) fund their operations. The study found that, with the exception of EBID, all the sampled SRDBs were financial sustainable. The study also found that of the three SRDBs which are sustainable, their return to equate and return to asset ratios were positive.

Mandates of African SRDBs

The study found that all the sampled African SRDBs have been established with a wide range of policy or developmental mandates. While all the four African SRDBs have been established with a broad mandate, there are no easy answers as to whether a bank should be narrowly focused (and therefore small) or multi-sectoral (and large). Although most ‘successful’ development banks are multi-sectoral (Diamond, 1996), each form has both advantages and disadvantages. For instance, multi-sectoral banks run the danger of being ineffective and unfocused, and are more prone to mission shrink or drift. They may present more problems of corporate governance, be less transparent and be more susceptible to political interference. Because of the broad mandate of African SRDBs, the study found that most of these banks may have drifted away from supporting regional projects (which are more difficult to implement) to supporting more national projects.

Corporate governance arrangements

The issue of governance is very sensitive in all of the sampled SRDBs, where borrowers hold a majority of the voting power. The regional ownership of these SRDBs is fundamental to their sense of identity and ‘character’. To this end, the move towards more openness and accountability (or any other initiatives of this nature) in these SRDBs must respect their regional character. Furthermore, and despite the fact that all the sampled African SRDBs have strong boards, there is still room for improvement. These boards, which are appointed mainly by member countries, are critical to the good performance and survival of the institutions.

Coordination of African SRDBs

While SRDBs may not be homogenous, they may face similar problems in their quest to meet their developmental mandates, especially in financing infrastructure projects. It is vital for these institutions to work together to address common challenges including credit enhancement and acquisition of better credit ratings, resource mobilisation of funding with long tenor and capacity building.

Overall assessment and conclusion

Despite having a niche position in financing infrastructure projects, African SRDBs’ contribution to infrastructure financing has been rather weak (with the exception of BOAD and EBID which have allocated approximately 79% and 67% of their funding respectively to infrastructure projects). In addition, the study found that the commutative total value of investments in infrastructure projects for all four sampled African SRDBs has been relatively small compared to their peers.

Apart from BOAD and EBID, the African sub-regional banks have contributed little to both regional integration and regional infrastructure projects. In addition all four African SRDBs have struggled to mobilise adequate long term external resources. For instance, at the end of 2014, the four African SRDBs managed to mobilise only US$4.6 billion compared to US$19.6 billion raised by CAF in the same year.

Capacity is another serious issue which has impacted negatively on the funding of infrastructure projects. For instance, due to lack of capacity, these banks have been unable to package some of the projects.

The study found that the size of the African SRDBs by asset size and capitalisation is relatively small compared to their peers.

There also appear to be a lack of clarity about the mandates, objectives, roles and functions of SRDBs vis-à-vis those of national and regional development banks in their respective areas of operation.

From the study of African SRDBs, it can be concluded that these institutions are an appropriate means of funding infrastructure projects as well as supporting the process of regional integration. The major challenge however remains the modest size, strength, capacity and mandate clarity of these institutions, all of which limits their impact.