Africa’s infrastructure gap remains a critical barrier to the continent’s development. With an estimated $130-170 billion needed annually to meet infrastructure demands, the challenge is both significant and complex. However, bridging this gap is not just a matter of securing financing; it also requires a deep understanding of the risks, returns, and long-term viability of infrastructure projects. This is where financial modelling plays a pivotal role.
The Importance of Accurate Projections
“Financial models are the backbone of decision-making for infrastructure projects,” says Chris Ashworth, Associate Director, Cresco. “They provide a quantitative basis for evaluating the feasibility of projects, allowing stakeholders to assess potential risks and returns.” Ashworth notes that in Africa, where many projects involve multiple stakeholders and cross-border complexities, accurate financial modelling is crucial. It offers a roadmap for navigating the intricacies of funding, construction, and operation, ensuring that projects are both financially viable and sustainable.
Inaccurate or overly optimistic projections can lead to project delays, cost overruns, and, ultimately, failure. By contrast, robust financial models incorporate a range of scenarios, stress tests, and sensitivity analyses to anticipate potential challenges. “This proactive approach not only helps secure investment but also builds confidence among stakeholders, including governments, financiers, and local communities,” he explains.
Modelling for Risk Mitigation
Infrastructure projects in Africa often face a unique set of risks, from political instability to currency fluctuations and regulatory changes. Financial modelling is essential for identifying and mitigating these risks. By incorporating risk factors into the model, stakeholders can better understand their potential impact and develop strategies to manage them.
“For example, a financial model for a cross-border energy project might include scenarios for currency devaluation or shifts in tariff structures. By analysing the effects of these variables on project returns, developers can structure deals that are resilient to such changes. This level of foresight is especially important in Africa, where the success of infrastructure projects often hinges on their ability to adapt to a dynamic environment,” says Ashworth.
A Roadmap for Sustainable Development
Sustainability is increasingly becoming a focal point for infrastructure development in Africa. Ashworth explains that investors and developers are now required to consider not only the financial returns but also the social and environmental impact of their projects. Financial models can help balance these competing priorities by quantifying the long-term benefits of sustainable practices.
“For instance, a model for a renewable energy project can compare the upfront costs of green technologies against the long-term savings and environmental benefits. By demonstrating the economic viability of sustainable solutions, financial models can attract investment from impact investors and development finance institutions,” he says. “This, in turn, supports Africa’s transition to a more sustainable and resilient infrastructure network.”
The Way Forward: Enhancing Financial Modelling Capabilities
While financial modelling is already a powerful tool, there is still room for improvement. As Africa’s infrastructure needs grow more complex, so too must the models used to evaluate them. “Emerging technologies like artificial intelligence and machine learning offer new opportunities to enhance the accuracy and predictive power of financial models. These technologies can process vast amounts of data, identify patterns, and generate insights that would be difficult, if not impossible, for traditional models to achieve,” adds Ashworth.
“Moreover, capacity building is crucial. Many African countries lack the specialized skills needed to develop and interpret advanced financial models. Investing in training and education for local professionals will be key to ensuring that financial modelling continues to play a central role in infrastructure development across the continent.”
Unlocking Africa’s Potential
Ashworth claims the role of financial modelling in bridging Africa’s infrastructure gap cannot be overstated. “It provides the clarity needed to make informed decisions, the foresight to manage risks, and the insights to promote sustainability. As Africa embarks on an ambitious path toward development, enhancing our financial modelling capabilities will be essential. By doing so, we can not only attract the necessary investment but also ensure that infrastructure projects deliver lasting benefits for generations to come.”
“The question now is: How can we leverage these advancements to unlock Africa’s full potential?”
About Cresco
Cresco is a specialist project finance advisory company, which enables growth by working closely with both project promoters and project funders across Africa. The Cresco team is made up of highly skilled individuals, with experience in closure and execution of major capital projects across many industries in Africa. The company has significant inhouse logistics skills to complement its project development and financing experience to ensure the best service for the stakeholders.
