Infrastructure development in Africa

July 2013 | FEATURE | SECTOR ANALYSIS

Financier Worldwide Magazine

Infrastructure development in Africa is entering a crucial period. Following decades spent in the economic shadows, the continent is experiencing an economic drive and, despite facing a number of daunting challenges, is making great strides in political and socio-economic development. Since 2000, economic growth in the region has accelerated, making it the world’s third fastest growing region. Indeed, it currently boasts some of the world’s fastest growing economies, and is ideally placed to continue to experience tremendous levels of economic growth over the next few years. But despite the impressive figures, Africa still has to contend with significantly underdeveloped infrastructure. The gap between Africa’s economic need and available funding continues to widen.

Africa is currently positioning itself as the world’s leading ‘resource frontier’ as its number of resource rich economies increases. This position should help drive local demand for infrastructure investment, which is one of the continent’s greatest challenges as it attempts to achieve sustainable economic development.

Infrastructure development is crucial to the economic development of any region; public infrastructure development drives economic growth. According to a report issued by the World Economic Forum, ‘Strategic Infrastructure: Steps to Prioritize and Deliver Infrastructure Effectively and Efficiently’, for every dollar spent on public infrastructure development the gross domestic product (GDP) of a country rises between $0.05 and $0.25. Yet globally investment in infrastructure is currently grossly under-financed.

The Group of 24 (G24) developing countries in particular have championed the need for increased infrastructure funding in Africa. The G24 states that global demand for infrastructure investment will be between $1.8 trillion and $2.3 trillion by 2020 – more than double the 2008 level of $800bn to $900bn. The group has called on the International Monetary Fund and the World Bank to take action to tackle the growing underinvestment.

The World Bank has estimated that $48bn a year is required to fund unfinanced African infrastructure projects. With public infrastructure financing still under immense pressure, following the financial crisis of 2008 and the enforcement of the Third Basle Accord, private capital must be pressed into action in helping to fund African projects if development is to stay in line with demand.

Many analysts feel that the lack of infrastructure investment across the continent is stymieing true economic development. Dr Ken Giami, CEO of African Leadership Magazine, agrees. Dr Giami told the 2013 African Energy and Infrastructure conference that the prevailing energy and infrastructure deficit on the continent prevents Africa from reaching its true economic potential. He also called on African governments to create a bold and visionary energy and infrastructure future for the continent. Dr Giami noted that this could only be achieved by international organisations, universities, multinational corporations and other developmental partners investing in human capital and research and development.

Infrastructure has also been earmarked as a key priority for African economic development, under the African Union’s Strategic Plan for 2009-12. Out of the strategic plan came the Programme for Infrastructure Development in Africa (PIDA). The overall goal of the PIDA is to promote socio-economic development and poverty reduction in Africa through improved access to integrated regional and continental infrastructure networks and services. Accordingly, the PIDA was created in order to help engender a reasoned, strategic and long term plan for pan-African infrastructure development. The PIDA was ratified by the African heads of state in Ethiopia in May 2012. The PIDA states that the continent requires transformational infrastructure development in order to push Africa to the next level economically. The PIDA hopes to increase access to energy and reduce power generation costs. According to PIDA’s estimations, access to power in Africa will rise from 39 percent of the population in 2009 to around 70 percent in 2040 – an additional 800 million people. PIDA also aims to reduce transportation costs while boosting intra-African trade, and to guarantee access to water and food security.

In May the World Economic Forum, in conjunction with the Boston Consulting Group, released a report concerning strategic infrastructure in Africa. That report states that, driven by burgeoning populations, increasing levels of education and technology absorption, spreading industrialisation and a greater demand for goods and services, the average economic growth rate for African states will be around 6 percent per year between 2010 and 2040. The report also notes that the GDP of African countries will increase six fold, average per capita income will break the $10,000 barrier, and demand for infrastructure will also increase.

The PIDA believes that the continent has demonstrated, by partnering with the wider international community, the necessary tenacity and political desire to push through wide ranging transformative projects by utilising its own vast resource base. Yet estimated investments of $67.9bn up to 2020, and $360bn up to 2040, will be required in a number of critical sectors, including energy, cross-boundary water supply, transport and information and communications technology (ICT), if Africa is to maximise its potential. The private sector must be pushed into action, not merely “as financiers and implementers, but also as conduits of technology, innovation and skills”.

Projects

Clearly, finding the right projects is as important to the economic growth of Africa as the funding of infrastructure development. Therefore, the task of selecting appropriate projects to move forward is a difficult one. Given the time, labour and capital limitations it is imperative that decision makers give priority to those projects that will bring the greatest social and economic benefits to the area. There are, understandably, myriad factors which go into green-lighting a project, but the challenge is all the more urgent in areas where severely underdeveloped infrastructure is prohibiting potentially large scale economic growth.

At the heart of the PIDA is the Priority Action Plan (PAP), a list of 51 immediately actionable infrastructure programs. In an attempt to promote regional integration, these programs are all due to be auctioned by 2020. In mid-May the PIDA announced that it was on the verge of identifying two “transformational” regional infrastructure projects for development. Announcements on the two projects, which will be selected from a shortlist of 15, will be made in July.

In May 2012, as part of the World Economic Forum on Africa, 35 companies, multilateral development banks, NGOs and regional experts, and organisations formed a Business Working Group (BWG) designed to provide a private sector perspective to the implementation of the PAP programs. The World Economic Forum’s report proposes a methodology for indentifying infrastructure projects for acceleration. Their method includes a number of analytical tools to be employed in four basic steps including: (i) unbundling complex programs into individual projects to help facilitate direct comparisons; (ii) grouping projects by their potential along three key thresholds (data quality and availability, project environment, and project complexity); (iii) utilising “two lens clustering” in order to identify a project’s readiness for acceleration and the likely value creation and impact; and (iv) fine tuning the shortlist of high value creation/impact projects on other considerations, such as public support and regional diversity. Philip Gerbert, a senior partner at BCG, notes in the report that the tools presented in the report “support potential investors in their analysis but more importantly will also help African governments in understanding private-sector thinking”.

Funding

The World Bank and other analysts have stated that Africa requires an annual investment of around $93bn a year in order to catch up with other developing regions. Currently just under half of that figure ($45bn) is financed; the majority of which is sourced from governments, multilateral and bilateral sources of finance, via Official Development Assistance (ODA), and from the private sector.

But public infrastructure funding is becoming increasingly more difficult to acquire. The aftershocks of the financial crisis are still being felt across the globe, with public budgets becoming more and more strained. Furthermore, the traditional channels of aid and investment are also facing increasing pressure as a result of the European sovereign debt crisis. As a result, ODA is likely to fall in the near future.

The implementation of the Third Basel Accord has also had a detrimental effect on infrastructure funding globally. Introduced in 2010, the accord has made it significantly harder for banks to lend. It was estimated in a study by the Organisation for Economic Co-Operation and Development (OECD), released in February 2011, that the medium term impact of Basel III on GDP growth would be in the region of -0.05 percent to -0.15 percent per annum.

The World Economic Forum’s report suggests a number of innovations and new products in African project financing which could help attract the necessary funding to the region, as well as highlighting other efforts currently underway to increase infrastructure delivery in the continent. Tenbite Ermias, a partner at BCG, notes that “These new products to de-risk African infrastructure projects will play a crucial role in attracting the international private sector investors needed to meet Africa’s infrastructure demand and support economic growth across the continent”.

Chief among those innovations is infrastructure bonds. These bonds can be raised from either domestic or international currency markets, provided that adequate credit enhancements and project structuring provide an investment grade rating. Failure to gain an investment grade rating could mean that some international institutional investors would be unable to invest.

Project preparation facilities are also being overhauled. This is particularly important for projects in the feasibility stage. Project preparation is crucial for moving projects to bankability, and, although data held by the Infrastructure Consortium for Africa states that there are currently 67 project preparation facilities in Africa, only a handful of these facilities are viable due to limitations of finance, skill set and institutional capacity. To tackle this, a number of regional economic communities have begun to establish their own project preparatory facilities. The OECD report notes that “Ensuring synergies and complementarities across existing and emerging project preparation facilities will be important going forward”. Additionally, these new institutions should be adequately resourced, in terms of both financing and skills.

These innovations, if properly and comprehensively implemented in African infrastructure financing, would help bring more and more projects to bankability. The African Development Bank is also attempting to create a broad infrastructure facility, which would serve as a financing mechanism as well as work in conjunction with the above new measures, smoothing out any potential pitfalls or impediments in the finance value chain while offering advisory services, development equity, and helping to scale up and compliment existing infrastructure financing.

In the aftermath of the financial crisis and the eurozone sovereign debt crisis, the world’s economic strength is shifting from West to East and from North to South. If Africa is to benefit from this economic reboot, it is imperative that private sector funding is sourced and put to work as soon as possible.

Richard Summerfield