Improving African Regulatory Framework


A new report by the African Development Bank reveals how African countries can improve their regulatory frameworks to ensure a successful launch of infrastructure project bonds

|  By Maureen Chigbo  |  May 27, 2013 @ 01:00 GMT

AFRICAN countries need to improve their regulatory frameworks in order to ensure the successful launch of African infrastructure project bonds, a new report launched by the African Development Bank says. According to the report, titled “Structured Finance – Conditions for infrastructure project bonds in African markets,” Africa is ready for the launch of such infrastructure bonds provided some conditions are met.

The report is of the view that domestic capital markets can contribute to funding of some of the most important local and regional infrastructure projects. Given the limited ability of local banks to provide long-term funding and the shrinking international assistance, the report encourages project sponsors to turn to domestic institutional investors by issuing infrastructure project bonds.

The legal and regulatory framework for bond issuance exists in many countries which are active issuers of bonds for their own funding needs. However, competition between the sovereign and other issuers is a potential issue in all markets. Many of the ingredients for infrastructure project bond issuance are present, but more needs to be done to make it attractive for sponsors to tap local markets. From a sponsor’s perspective, issuing an infrastructure project bond must offer the optimal tenor and pricing compared to other options. It is therefore essential that governments do more to reduce local market rates and lengthen the yield curve.

Donald Kaberuka

According to the report, which was launched during the International Monetary Fund, IMF, and World Bank Spring Meetings in April 2013 by Charles Boamah, AfDB Finance Vice-President, a crucial barrier in African markets is the enabling environment for infrastructure. The regulatory and tariff framework in many sectors is incomplete. Many countries have established public-private partnership, PPP, laws and institutions, but often they lack the resources and capacity to prepare bankable projects for the market. There is often a lack of advocacy and political support for driving concessions and PPP projects through government, and too few are coming to the market, although it remains early days in many countries.

There is a crucial role for governments in promoting infrastructure project bonds. Governments can play a greater role in supporting stable economic conditions, developing local capital markets and strengthening institutions. Those actions will encourage all issuers to come to market, particularly corporations for whom bond issuance has been limited to date. Promoting reform and corporatisation of utilities and parastatals, including professional management and a clear regulatory environment, are preconditions for such entities to issue in the local bond markets – an important landmark in the development of local capital markets and the emergence of infrastructure project bonds.

With Africa having now no other option than to tap into its own internal resources, the book “points in the right direction. I hope it will be useful for all Africans who are involved in infrastructure development,” said Donald Kaberuka, President of the African Development Bank, in the foreword to the report.

 Cedric Mbeng Mezui, the report’s lead author, said: “The African Development Bank can play various roles in that regard. It can provide technical assistance in infrastructure, capital markets and domestic issuance, and work with intermediaries. For specific projects, it can use instruments such as the partial credit guarantee as well as any new tailored instruments to enhance bond issuance and catalyze the market. Direct funding for projects in early-stage preparation and through debt and equity investments at financial close will help promote the overall market. Finally, the AfDB can play a role in unblocking the political bottlenecks that obstruct projects from being developed and implemented,” he added.

For Moono Mupotola, regional integration manager, AfDB, “the book was prepared with a number of objectives in mind: firstly, to highlight the opportunity for project bonds; secondly, to elaborate on the conditions for efficient capital markets; thirdly, to explain the crucial role of constructive government policies; and finally to highlight lessons learned in other markets that might be useful for Africa.”

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