Leveraging infrastructure funds to unlock private capital for sustainable development

BY AKOREDE FOLARIN

Infrastructure development plays a pivotal role in promoting economic growth, reducing poverty, and achieving sustainable development goals globally. In Africa, where over 50% of the population lacks access to electricity, the road access rate stands at a meagre 34%, and hundreds of millions lack access to essential services such as drinking water and basic sanitation and hygiene services, infrastructure gaps have severe repercussions on living conditions.

According to the World Bank, Africa’s decrepit infrastructure curtails its economic growth by up to 2 per cent annually and cuts productivity by as much as 40 per cent. This underscores the critical need for substantial investments and strategic development in the continent’s infrastructure.

However, infrastructure projects are typically large-scale and capital-intensive, and traditional public sector funding and commercial bank loans are often insufficient to address the extensive infrastructure requirements of emerging economies such as in Africa. 

Addressing Africa’s Infrastructure Deficit

To bridge this gap, infrastructure funds have emerged as a powerful tool, and can potentially prove instrumental in transforming Africa’s infrastructure. Leveraging on the over $100 trillion assets under management globally, infrastructure funds mobilize private capital to execute medium- to large-scale infrastructure projects that might otherwise be difficult to finance through traditional means. As specialized investment vehicles, infrastructure funds pool capital from diverse investors, including institutional investors, private equity firms, and development finance institutions (DFIs) to finance infrastructure projects across sectors, thereby enabling efficient deployment of capital and risk-sharing.

Professional Management and Structured Investment

Managed by professional investment managers with expertise in infrastructure investing, these funds identify and assess investment opportunities (including greenfield and brownfield projects), negotiate deals, and manage the assets once they are acquired or developed. Typically structured as closed-end investment vehicles, investors commit capital to the fund for a fixed period of time, ensuring stability and long-term focus. 

Infrastructure funds allocate investments across a range of sectors, including transportation, energy, and telecommunications, and may extend to water and sanitation facilities, and social infrastructure such as schools and hospitals. These funds exhibit flexibility in their investment destinations, spanning both developed and developing countries; however, there has been an uptick in funds focused majorly on emerging economies (like Africa) where there is a large infrastructure deficit and significant potential for economic growth.

Benefits for Investors

Infrastructure funds offer investors the opportunity to diversify their portfolios and access a new asset class. With long-term contracts or regulatory structures/incentives that provide long-term stable income, these investments are attractive to institutional investors like pension funds and insurance companies, who have long-term liabilities that require correspondingly long-term assets. Furthermore, by occasionally partnering with public sector financiers and multilateral development banks, these funds can help de-risk infrastructure projects thereby mobilising/attracting significant additional private capital for development projects.

Aligning Commercial and Societal Goals

Infrastructure funds can also provide a pathway for investors to achieve both commercial and social or environmental objectives. Many infrastructure projects have significant social or environmental benefits, such as improving access to clean water, reducing greenhouse gas emissions, or creating employment opportunities. Funds focusing on these types of projects can, therefore, enable investors to simultaneously achieve financial returns and positive social or environmental impact.

Challenges and Risk Mitigation

Despite their benefits, infrastructure funds face challenges in Africa, including project complexity and political and regulatory risks, particularly in emerging economies like Nigeria. Projects can be subject to delays and disruptions due to changes in government policies or political instability, creating uncertainty for investors and making it more difficult to achieve the desired returns. To this end, proper risk management and oversight are crucial, involving strategies such as diversification across asset types, hedging, sovereign guarantees, and other financial instruments such as put/call option agreements (PCOA), first-loss provisions, etc.

Infrastructure funds can also benefit from partnerships with other investors and stakeholders, including public sector entities and development finance institutions, leveraging their unique industry expertise, resources, governmental concessions, etc. By working together, these stakeholders can help mobilize the resources (fiscal, human, etc.) needed to reduce the infrastructure gap in emerging economies and promote sustainable economic growth.

Conclusion

Infrastructure funds offer a promising avenue for development finance. By structuring attractive investment opportunities and mobilizing much-needed private capital, these funds can help to address the infrastructure deficit in emerging economies (and Africa in particular) while also allowing investors to achieve both financial returns and positive social impact. However, careful management and oversight are essential to navigate the complexities of infrastructure investments and ensure that the desired outcomes are achieved.

Akorede Folarin is an associate at Nigeria’s premier law firm, Banwo & Ighodalo, where he specialises on private equity and M&A and project finance. He advises infrastructure funds on a myriad of greenfield and brownfield investments within Nigeria.