From Aid to Equity: How DFIs Are Rethinking Infrastructure Investment in Africa

Africa’s infrastructure deficit remains one of the most formidable barriers to sustainable economic growth and regional integration. With an annual funding gap estimated at USD 68–108 billion, closing this gap requires a fundamental shift in how development finance institutions (DFIs), private investors, and governments approach infrastructure financing. Traditionally reliant on grants and concessional loans, the continent is now witnessing a strategic pivot towards blended finance, equity stakes, and catalytic capital—an evolution aimed at unlocking sustainable investment, fostering local ownership, and catalysing private sector participation.

The Evolving Role of DFIs in Africa’s Infrastructure Financing

DFIs like the African Development Bank (AfDB), the World Bank, and regional development banks have historically played a crucial role in mobilising capital, de-risking investments, and supporting project development. Their interventions often involved grants, low-interest loans, and technical assistance. However, these approaches, while impactful, have proven insufficient to bridge Africa’s vast infrastructure gaps, largely because of limited domestic resources, high perceived risks, and structural constraints within local capital markets.
In response, DFIs are increasingly adopting innovative financial models that shift from grants towards blended finance, equity investments, and catalytic capital—aimed at attracting more private sector involvement and ensuring long-term sustainability.

The Shift from Grants to Blended Finance and Catalytic Capital

Blended finance combines concessional funds—such as grants, low-interest loans or guarantees—with commercial investments to improve project bankability and mitigate risks. This approach leverages public or philanthropic capital to unlock private sector funding, making projects more attractive to investors who seek stable returns.
Catalytic capital refers to risk-tolerant investments that serve as catalysts for broader market development. Such capital can take the form of first-loss guarantees, equity stakes, or impact investments that absorb initial risks and demonstrate proof of concept, encouraging other investors to participate.
Equity stakes provide DFIs and private investors with ownership rights in projects, fostering a sense of long-term commitment and enabling them to share in both risks and rewards. Equity investments align incentives, promote operational efficiency, and facilitate technology transfer.

Case Study: Financing the Tema Port Expansion

A notable example illustrating this shift is the 2016 USD 667 million syndicated loan for Ghana’s Tema port expansion, led by the International Finance Corporation (IFC). The project involved multiple private actors and development partners, with blended finance mechanisms de-risking the investment. While concerns about political influence and low government equity remain, this approach exemplifies how combining concessional and commercial funding can address infrastructure needs while attracting private capital.
Challenges and Opportunities in the New Financing Paradigm

Challenges:

• Project bankability: Many African projects face difficulties in meeting the stringent criteria of private investors, often due to poor project preparation, unclear revenue streams, or regulatory uncertainties.
• Risk perception: High political, currency and regulatory risks deter private investment, despite de-risking measures.
• Limited local capital markets: Underdeveloped bond markets, low savings rates, and liquidity constraints limit the availability of long-term domestic financing.
• Dependence on external funding: Heavy reliance on foreign debt and geopolitical funds raises concerns about debt sustainability and sovereignty.

Opportunities:

• Innovative financial instruments: Green bonds, diaspora bonds, and infrastructure bonds tailored to local contexts can mobilise domestic savings and deepen capital markets.
• Public-private partnerships (PPPs): Well-structured PPPs, supported by blended finance, can share risks and foster local ownership.
• Catalytic investments: DFIs’ early-stage risk-taking can demonstrate project viability, encouraging further investment.
• Regional integration: Cross-border infrastructure projects, facilitated by regional development banks and initiatives like the African Continental Free Trade Area (AfCFTA), can unlock economies of scale and attract larger pools of capital.

The Role of International Geopolitical Funds

Geopolitical funds—such as China’s Belt and Road Initiative (BRI), the European Union’s Global Gateway (GGI), and the G7’s Partnership for Global Infrastructure and Investment (PGI)—are significant sources of infrastructure financing. While primarily driven by strategic interests, these funds increasingly emphasise private sector engagement, often through partnerships, equity investments, and blended financial models.

Opportunities:

• Large-scale capital flows: These funds offer substantial financial resources for transformative projects.
• Private sector involvement: Encouragement of PPPs and joint ventures can foster local capacity building.
• Technology transfer: Strategic projects can facilitate knowledge sharing and technological upgrading.

Challenges:

• Debt sustainability: Heavy reliance on non-concessional loans risks creating debt traps.
• Conditionalities and tied aid: Project costs inflated by requirements to use foreign contractors or materials.
• Opaque terms: Limited transparency complicates project assessment and local stakeholder engagement.
• Geopolitical considerations: Projects driven primarily by strategic interests may not always align with local development priorities.
Building African Agency in Infrastructure Financing
To harness the potential of blended finance, equity stakes, and catalytic capital, African countries must strengthen their own financial ecosystems and policy frameworks
• Develop domestic capital markets: Expanding bond markets, establishing infrastructure funds, and mobilising pension and insurance funds can provide long-term local funding.
• Enhance project preparation capacity: Improving feasibility studies, risk assessments, and contractual frameworks increases project bankability.
• Strengthen regulatory environments: Clear legal frameworks, transparency standards, and dispute resolution mechanisms attract private investment.
• Leverage regional initiatives: Platforms like the Africa Investment Forum and regional development banks can facilitate cross-border investments and knowledge sharing.
• Promote local ownership: Engaging local private sector actors as partners, investors, and operators ensures sustainability and alignment with community needs.

Conclusion

The transition from reliance on grants to innovative financing models—blended finance, equity stakes, and catalytic capital—marks a pivotal evolution in Africa’s infrastructure development landscape. By effectively mobilising private capital within a supportive policy environment, African nations can bridge their infrastructure gaps, foster economic resilience, and deepen regional integration. The strategic engagement of international geopolitical funds, aligned with local priorities and sustainable development goals, can serve as catalysts for transformative change. Ultimately, embracing this new paradigm requires concerted efforts from governments, private investors, DFIs, and regional institutions to build an ecosystem where infrastructure investment becomes a shared driver of Africa’s inclusive growth and socioeconomic transformation.