The Pitfalls of Private Sector Investment in Infrastructure Financing

The virtues of private sector financing in infrastructure development are widely promoted: it supports countries in bridging their infrastructure financing deficit, helps countries diversify their financing portfolio, brings projects online quicker, and often respects countries’ sovereignty by not imposing conditionalities. Yet much research glosses over the shortcomings of private capital investment in infrastructure: the interest rate exceeds that of all other creditors with shorter maturities; and private financiers often lack a development mandate, are more selective of the projects they finance and are more risk averse. These factors, coupled with weak institutional structures and a volatile macroeconomic environment in many African countries, make private finance less attractive. This briefing highlights some of the challenges encountered when engaging private capital for infrastructure development. It offers recommendations to policymakers on how to avoid these pitfalls and enhance African agency in infrastructure development.