Project finance as a driver of economic growth in Africa
Thesis (MPhil Development Finance)--Stellenbosch University, 2015.
ENGLISH ABSTRACT: Like many developing countries in the world, African countries face real economic growth, poverty and inequality challenges. To exacerbate these challenges, African countries also face severe infrastructure backlogs. These infrastructure backlogs are not limited to the creation of new assets, but includes the upgrading, refurbishment and rehabilitation of existing infrastructure. Many researchers have investigated the infrastructure-growth nexus and found that infrastructure contributes towards an increase in productivity and national output. It is, therefore, important to understand the role that project finance is, and can be playing in infrastructure development in African countries, with the ultimate aim of increasing economic growth and development. The question whether or not project finance contributes towards economic growth was based on an empirical analysis, making use of secondary data. The control variables chosen for the study comprised the most common variables used in the literature. A standard panel regression model was used to determine whether project finance had an impact on economic growth in the African countries over the period 2000 to 2013. Both a one-way and two-way fixed-effect model was analysed using three panels. The research focussed on the finance-growth nexus with a specific focus on project finance. It was shown that the flow of foreign capital into a country is often a function of the level of development of the financial system in that country. Project finance as a specific financing mechanism is particularly successful in attracting local and foreign capital to projects in perceived riskier markets, i.e. growing economies with weak or underdeveloped financial, legal, institutional and governance systems. Project finance is, therefore, an effective tool to finance projects in high-risk environments. Financial development contributes to both the quality and quantity of capital available in the financial markets. It is, however, the ‘quality of capital’ that contributes towards, and influences economic growth and development in an economy. The results of this study are consistent with the literature and imply that project finance fosters economic growth. Although project finance is a complex financing mechanism, it is particularly successful in economies with weak financial and legal systems, and the use of project finance should be encouraged by governments in Africa for the provision of public infrastructure. Project finance as an alternative financing mechanism can play an important role in eradicating infrastructure backlogs on the African continent and thereby contribute towards economic growth on the continent. Policy changes should create an enabling environment conducive to and promoting project finance as a preferred financing mechanism in African countries.
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