Funding the Digital Infrastructure Gap
Article written by the Energy Transition team at ThirdWay Partners.
Embracing a Sustainable Digital Future: Unlocking Opportunities and Bridging Divides Part 2
Background
In 2022, a staggering 2.9 billion people, roughly one-third of the global population, remained unconnected to the Internet, as reported by the International Telecommunication Union[1]. According to the OECD the situation is particularly pronounced in Africa, where 70% of young individuals reside in rural areas, but only 26% have Internet access. This represents a substantial untapped market for internet service providers and digital industries and could lead to the creation of millions of new jobs and the promotion of sustainable economic development in the region.
The COVID-19 pandemic accelerated the digitalisation of essential services, revolutionising healthcare worldwide, through automated delivery of medicines and epidemic monitoring platforms. However, this transformation also underscored the profound disparities in connectivity, leaving many without access to these critical resources. Latin America and the Caribbean, for instance, witnessed disruptions in non-communicable disease care, while vital pandemic updates were primarily circulated online and therefore not universally accessible [2]. Bridging these gaps is imperative, particularly as telehealth assumes a central role in healthcare delivery.
Furthermore, digital infrastructure is instrumental in achieving net-zero emissions targets by 2050, reducing greenhouse gas contribution to the energy mix, and driving efficiency. This, in turn, paves the way for circular and service-based business models, fostering resource conservation and transparency within supply chains. In this evolving landscape, the integration of digital infrastructure is not merely a choice, it is a necessity. This transition will need significant investment in (sustainable) digital infrastructure, especially in under-served locations such as Sub-Saharan Africa, South-East Asia and Latin America.
The Funding Gap
Quantifying the global digital infrastructure gap is subjective to the level of development desired. For emerging markets, connectivity (i.e., broadband) is the top priority. Once connectivity infrastructure has been established, local datacentres can be added to support locally deployed digital services and enable growth of a home-grown digital ecosystem. Moreover, an ITU study estimates that universal access to broadband by 2030 would cost an estimated $428 billion with 97% of this required in low-income and emerging market economies [3]. This is based on the assumption of providing universal 4G cellular broadband to users with approximately 40–50 GB of monthly data at 95 percent reliability [4].
In order to bridge this broadband gap and connect an additional 1.1 billion people in Africa by 2030, an estimated investment of $100 billion would be required, as stated by the Broadband Commission of the International Communication Union and UNESCO. The Africa Union (AU) Digital Transformation Strategy underscores the significance of digital infrastructure, envisioning an additional 300 million people coming online by 2025. However, its success is contingent on the success of other initiatives, such as the African Continental Free Trade Area (AfCFTA) [5].
Digital infrastructure investments would fund the deployment of 250,000 new 4G base stations and over 250,000 kilometres of fibre across Africa. The transition to 5G would further escalate data storage demands. In remote regions, investments in increased satellite coverage will be indispensable for expanding Wi-Fi and broadband access to 16 million individuals by 2029. While approximately 80% of investments would target physical infrastructure, this does not include the essential requirement of a reliable electricity supply. Indeed, investing in digital infrastructure, without parallel development in power generation and distribution, cannot ensure desired connectivity outcomes. Implementing a tailored strategy for 54 diverse countries is a multifaceted challenge that will have large costs associated with other sectors including infrastructure construction, healthcare and even education.
In the broader context, the funding gap for physical infrastructure in Africa is well-documented, with projections indicating a staggering annual gap of up to $170 billion by 2025, as per the African Development Bank. Additionally, the Global Infrastructure Facility estimates a financing shortfall of roughly $1.7 trillion over the next two decades.
The Main Players to Fund the Gap
In order to fund the gap, additional capital needs to be raised and allocated, however there are other mechanisms that can facilitate this transition through the reduction of costs and increased investment in research and development. Some of the key players funding these efforts include:
Public Sector:
African Governments
African governments play a central role in funding digital infrastructure development within their respective countries. They can allocate budgets, create favourable regulatory environments, issue tax incentives and implement policies that encourage investment in telecommunications, broadband, and related technologies.
Development Finance Institutions (DFIs)
International and regional DFIs such as World Bank and the African Development Bank, help reduce the financial risks associated with such investments, encouraging private sector participation.
Multilateral Organisations
Multilateral organisations like the United Nations and its specialised agencies – the International Telecommunication Union (ITU) and the United Nations Development Programme (UNDP) – coordinate efforts, provide technical expertise, and mobilise resources to advance digital infrastructure development in Africa.
Private Sector:
Private Companies
Private companies, including telecommunications providers, technology firms, infrastructure investors, and others, are critical players in funding and executing digital infrastructure projects. Companies invest in the construction and maintenance of networks, data centres, and other infrastructure components. Public-private partnerships (PPPs) are often used to leverage private sector expertise and capital.
Private Equity and Venture Capital
Private equity and venture capital firms invest in start-ups and innovative tech companies focused on digital infrastructure solutions, such as fintech, digital payment platforms, and broadband expansion. These investments can stimulate innovation and access to digital services.
Local and Regional Banks
Local and regional banks provide financing for digital infrastructure projects and support local businesses and entrepreneurs in the digital ecosystem.
Other Stakeholders:
Non-Governmental Organisations (NGOs)
NGOs can advocate for digital inclusion, promote digital literacy, and monitor the equitable distribution of digital infrastructure investments to ensure they benefit marginalised communities. NGOs may provide grants, technical assistance, and policy advice to help bridge the financing gap.
The Financial Instruments Available
Before being introduced to the 4 instrument types, it is important to understand the risk-return profiles of debt and equity. Market rate refers to the traditional risk-return expectation of high risk and return for equity and low risk and return for debt. Subordinate debt refers to taking a junior position in the capital stack and therefore a higher risk. Finally, concessional refers to accepting lower return and a longer time horizon. Subordinate equity could refer to either a first-loss tranche of capital (that provides downside protection to commercial investors), or that which affords commercial investors a preferred return as a way to mobilise private capital investment. These instruments often come together in blended finance to finance hard-to-fund impact projects [6].
Roles of Financial Instruments at Different Stages of Market Development
Return Profiles of the Financial Instruments
*Discussions are ongoing regarding the creation of a specific fund among development banks, which would develop new financial instruments, such as digital bonds, to support private sector investment in connectivity.
The Importance of Cooperation Between Private and Public sector: Blended Finance
Blended finance is a funding strategy that allows investors to select varying risk levels while collaborating on a single project. It is emerging as a valuable deal structuring method to get capital to critical, but hard-to-fund projects. This approach brings together philanthropic contributions, government support, and private sector investments, each having distinct risk and return preferences. Investors with a higher risk appetite (philanthropic investors) can serve as a financial buffer for those seeking lower risk exposure, but that are keen on supporting high-impact initiatives (private sector).
Cooperation between the public and private sectors on Public-Private Partnerships (PPPs), often facilitated through blended finance mechanisms, is crucial for addressing global challenges, fostering sustainable development, and achieving positive social and environmental outcomes. Here are some key reasons why this cooperation is essential:
We now face a global challenge that is not technological, but financial in nature. For the digital economy to truly succeed in promoting sustainable economic development, it must be inclusive. We must bridge the financial and geographic gap in digital infrastructure across the globe to ensure that the digital economy continues to play a positive role in our society while minimising its impact on the environment.
Together, through private and public collaboration, we can ensure that globally, our digital potential becomes a reality, driving economic growth and prosperity for all.
[1]: https://www.un.org/en/delegate/itu-29-billion-people-still-offline
[3]: https://www.itu.int/en/mediacentre/Pages/PR16-2020-ITU-publishes-Connecting-Humanity-study.aspx
[4]: https://www.elibrary.imf.org/view/journals/001/2023/027/article-A001-en.xml
[5]: https://ettg.eu/blog-posts/the-imperative-of-digital-infrastructure-for-africas-future/