Securing investment inflows for Africa starts with reducing real and perceived risk

Africa is home to the world’s longest river, the Nile, the deepest and second-longest river, the Congo River, and the world's second-largest freshwater lake, Lake Victoria. These vast bodies of water have been sustaining life across the continent for centuries.

Despite the millions of litres of water that these rivers discharge into the ocean every second, this sense of endless supply is only surface-level. According to the United Nations, the Nile River has dropped 3 000 cubic metres, over the past 50 years. If the UN’s prediction is correct, the river flow will drop by 70 percent in the next 75 years.

With the Nile River’s basin flowing through 11 African countries, half a billion people, who depend on the river for survival will be affected.

This, however, is onlya drop in the proverbial bucket of a much larger water crisis that the continent is facing.

Apart from decreasing water levels, other vital natural water resources are also under threat. Glaciers across Mount Kilimanjaro, Mount Kenya, and the Rwenzori Mountains are melting at such an alarming rate, they could completely vanish by 2050.

Africa’s natural water supply is not only the lifeblood of its inhabitants’ survival, but that of the continent’s economy too. Apart from strategic climate change solutions, the state of Africa’s water infrastructure must be remedied. Sub-Saharan Africa loses approximately $170 billion per year due to poor water infrastructure.

As a result, a minimum of $30 billion annually is required to close the water investment gap due to decades of under investment.

African governments have pointed to several potential solutions including domestic sourcing for financing such as pension funds, and securing funds from global investors.

The fact that Africa faces a significant infrastructure gap is unquestionable. Despite this agreement, one cannot point to the infrastructure gap itself as the issue. Africa’s funding gap is only a symptom of many contributing factors, including Africa’s risk perception.

The continent’s risk perception is a two-sided barrier for infrastructure investment: it acts as both an inhibitor for investment flows into infrastructure and inflates Africa’s existing debt.

Every year, the continent pays a staggering R75 billion in extra borrowing costs due to inflateddefault perceptions and inaccurately priced risk. Despite having the second-lowest infrastructure loan default rate from 2010-2020, bondholders still require 9,8% returns.

Out of the 34 Sub-Saharan countries that have at least one sovereign credit rating on the continent, only two – Botswana and Mauritius – are currently rated investment-grade. If this investment barrier isn’t addressed first, these potential pockets of investment identified by government will eventually start to run dry.

A country’s investment rating does more than position it in the global investment landscape.

Research shows that the global rating system allocatedby the top three rating agencies in the world influence more than 95 percent of the world’s rated debt. This is the extent to which credit ratings influence perceived risk and returns, open or close access to finance, and determine borrowing costs.

This places African nations between a rock and a hard place. On the one hand, the International Monetary Fund (IMF) has said that Sub-Saharan African economies should work to increase their domestic revenue collection and avoid having to take on debt amid "turbulent global conditions”. On the other hand, investment risk perceptions are driving structurally high capital costs and inflating high financing costs for infrastructure projects.

Infrastructure forms a foundational part of Africa’s economic development.

To permanently reposition the continent for a sustainable inflow of domestic and global investment into these ritical sectors, current risk perceptions must first be adjusted to meet on-ground realities.

The Business 20 (B20) comes at a strategically opportune time to ensure that global risk perceptions about the continent are positively reshaped. This perceived disparity is based on the challenges of the past, such as macro-economic volatility, political and regulatory instability, limited funding capacity, institutional deficiencies, and weak project pipelines. While these all pose valid concerns, investors need to exchange a backward-looking perception with a future-focused view.

These skewed perceptions are based on data that face challenges regarding its accuracy, quality, transparency, and even credibility, which places a tremendous burden on credit rating agencies to conduct in-depth assessments. Unfortunately, subjective assessments are creating substantial repercussion for African countries.

A 2023 United Nations Development Programme (UNDP) study estimated hat the continent could save up to $74,5bn if credit ratings could be based on more precise quantitative data.

B20 discussions must identify actionable solutions to resolve the unavailability of accurate data in Africa. Partnerships with the same objective, such as the African Credit Rating Agency (AfCRA) established in 2024, could lead to practical solutions that speak to the continent’s realities, such as leveraging mobile data.

The B20 can also advance accurate, unbiased credit assessments by acting as a bridge between initiatives such as the Africa Credit Rating Agency (AfCRA) and African corporates, governments, and international investors, regulatory reforms. An example would be to help establish AfCRA as an independent, credible credit rating agency on a global platform.

In turn, government and financial institutions, especially development banks, have critical roles to fullfill when it comes bankable infrastructure projects. Many feasibility and pre-feasibility studies have not received adequate funds or support in the past, leading to detrimental operational and financial pitfalls.

This, in turn, exacerbates the existing perception of investment risk, a cycle that Africa’s water sector cannot afford.

The B20 must, therefore, support positive policy frameworks that advance the independent and transparent completion of a more robust pre-feasibility phase. If successful, ballooned project preparation funds will further lower the risk curve and increase private investors’ appetite.

Africa cannot risk focusing its efforts on securing funding without reframing archaic risk perceptions first and demonstrating a clear plan to de-risk future infrastructure projects. Funding alone is not enough to get the continent out of the deep waters we currently find ourselves in.

Only by collectively reframing risk can the continent startto finance, distribute, and preserve Africa’s most precious natural resource.