Funding Mechanisms
Funding Mechanisms
The COMESA Fund has two components: the COMESA Adjustment Facility and the COMESA Infrastructure Fund (CIF) which should be considered separately because the Adjustment Facility is not a Fund and is fully grant-funded whilst the CIF is a Fund and should deliver a positive return on investments .
It is planned that the Fund will provide investors and financiers with the opportunity to invest at two levels:
· At the fund level by taking up equity or providing debt to the Fund and in that manner benefit from the returns on the broad portfolio of infrastructure assets, or
· Directly at the project level by taking up equity or extending loans for specific projects.
Prior to approaching the private sector though, the first step towards resource mobilisation will be through contributions or subscriptions from the RECs’ member States in order to demonstrate their commitment. Grants and soft loans from donors, together with the member States’ contributions, will form the basis of the permanent capital and will be used to launch the operations.
By far the largest donor to the RECs is the European Commission and if the fund is to operate effectively, a mechanism will need to be devised which will allow EDF 10 resources to be channelled through it. Another potential source is the World Bank’s IDA and also the AfDB. (Since the RECs are not members and cannot take out loans, there has been a suggestion that the World Bank’s informal ‘matching grant’ scheme could be used. However, since it requires countries to allocate IDA credits to the RECs, this may not prove fruitful.) Another source of funding could be the sovereign funds available to oil exporting countries and others with high-growth economies although there is already substantial competition for these resources.
To be in line with the principles of the Paris Declaration, funding of the activities in the action matrix (which will be drawn up by the Aid for Trade Unit), needs to be in the form of budgetary support at the country level and channelled through the COMESA Fund at the regional level. If donor countries are not able to provide budgetary support then, at least at the regional level, the Fund is flexible enough to accommodate programme support. If budget support is to be provided then the recipient countries would need to demonstrate that their public expenditure management is transparent, accountable and effective and that the country is following a well-defined trade reform programme.
Since the 90s there has been a major growth in Infrastructure Funds with projects appealing to institutional investors, including private equity, because of the potential for long-term, relatively predictable and steady cash flows (particularly when seen against the volatile stock markets of the last ten years). Long asset lives also permit long-term debt amortisation which has the potential of generating larger cash flows.
Although elsewhere in the world there has been a phenomenal growth in Infrastructure Funds, in Africa the investment has still been mostly led by governments with the assistance of IFIs although private investors are now realising the potential opportunities. They are attracted to projects with credible sponsors; predictable government policies; management of vested interests; legal constraints and affordability. In addition, political (as well as commercial) risk can be mitigated through various forms of guarantees, insurance and appropriately structured finance packages.
So that whilst the RECs and their development partners may already be convinced that Aid for Trade is the way to go, a feasibility study prepared by an independent institution (which will need to focus on the financial aspects, including profitability, return on investment, capitalisation and cash flows) will be necessary to make the Fund attractive to, and give it credibility with, the private sector.
See the study on the Design of the Implementation Arrangements of the proposed COMESA Regional Infrastructure Fund. October 2008