Month: August 2014

Africa’s Infrastructure Hype: Recommendations

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In last week’s post I discussed the opportunities and risks that Africa faces in what will inevitably be significant and targeted investment in infrastructure from local and foreign investors. The next question is: What can Africa do to make the most of opportunities in a manner that minimises the risks? The suggestions below are not exhaustive but rather seek to highlight key reccomendations:

1. Avoid Legacy Projects

Simple point but difficult to execute given African leader’s predilection for such projects as means of ensuring immortality and eternal adulation. The reality is that in some countries the culture will support legacy projects. In such cases it is imperative that such projects still be vetted for practicality, contributions to productivity and growth and just basic usefulness. As the World Bank states, ‘all investments under political consideration should pass at least a minimum threshold of economic viability’.[1]

2. Match infrastructure projects with specific economic development goals

In order to generate revenues for newly built infrastructure, investment should be concentrated in high potential areas through developmental corridors and primary production centers which promise the greatest economic return such that they become infrastructure hubs with efficient ports and airports to maximize scale. [2] After all, Africa must avoid‘unsustainable infrastructure development that pose a huge financial burden on the host government.’[3]

spag_1872179c

3. Secure funds for maintenance spending

While raising investment capital governments should be cognizant of maintenance needs and ensure these are catered for. Further, ‘maintenance offers one of the highest returns to infrastructure spending; it may be more helpful to think of maintenance as a kind of investment in asset preservation’.[4

4. Use infrastructure to catalyse regionalism and African integration

Where possible and pragmatic, African governments should work with other governments in regional and multi-country infrastructure projects to reap benefits such as:

  • Cost effectiveness: For example the West Africa Power Market Development Project could see Nigeria and Cote d’Ivoire reduce their power generation costs from 8-10 US cents per kWh to only 3.5 and 4-4.5 cents per kWh.[5] Other projects include those in Southern and East Africa. This trend should be encouraged.
  • Creates economies of scale: Regional infrastructure not only harnesses regional public goods, it fosters intra-regional trade and global trade.[6] Shared inter-country infrastructure also, ‘addresses the problems of small scale and adverse location by increasing the scale of construction, operation, maintenance and revenue. It reduces costs, pools scarce technical and managerial capacity and creates a larger market’. [7]
  • Peace building: Connected countries foster cultural interaction and provide a platform for the development of collaborative arrangements to deal with peace and security concerns.[8]

5. Foster Public Private Partnerships (PPPs)

The private sector has mainly invested in expanding the ICT footprint on the continent with investment in power plants and container terminals as well. The private sector, particularly the LOCAL private sector, not only can play a role in tackling costly management inefficiencies such as undercollected utility revenues, low labor productivity, or neglected road maintenance, ‘companies have an important role to play in evaluating the social and environmental impacts of their activities’.[9],[10] The private sector role can be expanded by African governments by making PPPs attractive through mechanisms such as [11],[12]:

  • Identifying the contributions that the private sector can make using costs/benefits analysis
  • Create risk-mitigating instruments such as guarantees and co-financing facilities that can help to attract private sector investment
  • Ensure appropriate risk allocation across partners
  • Engage the private sector to formulate their requirements and constraints in order promote mutual understanding and better appropriateness of contracts.
  • Develop appropriate tariff schemes and/or funding mechanisms that allow for proper operation and maintenance of infrastructure and account for the different levels of affordability

Bear in mind that, ‘in countries with well-developed frameworks for PPPs, project preparation costs are generally about 1% as a percentage of total project costs, but for countries without much PPP experience, the project preparation costs run between 3% and 10% of total project costs.’[13] Africa has to get this right.

Public Private Partnerships_4

6. Strengthen line ministries

Ministries related to infrastructure have to be engaged and strengthened since they, ‘take the lead in sector planning, participate in the formulation of the public budgets, and execute investments.’[14] One approach to strengthening line ministries is through, ‘creating engineering universities within line ministries to support infrastructure development’, as China did.[15] This means there needs to be a conversation between the line ministries and the ministry of education to ensure the universities teach the skills the ministry needs. Other strategies include[16]:

  • Strengthening sector planning such that the construction of critical new assets begins early enough to come on stream when needed
  • The development of sound technical methodologies for identifying and selecting infrastructure projects
  • More rigorous project screening such that infrastructure investments are selected according to their expected returns and are appropriately sequenced and synchronized with one another and broader development plans
  • Another key element of strengthening line ministries is improving the budgetary process such that the process is medium-term, link sector objectives and resource allocations and are underpinned by clear sector plans that go down to specific activities and their associated costs

7. Address the land issue

Crucial to infrastructure projects is ensuring the lands on which the projects are built are not beleaguered in conflicting claims and acrimony. There are examples of strategies to address this. For example in Burkina Faso, Rwanda and Sierra Leone the Investment Climate Facility for Africa automated land registration processes which led to facilitating access to credit and prevented land disputes.[17]

uganda-famring-6521597667

8. Foster Harmonisation [18]

Given the multitude of actors that will be involved in African infrastructure projects, there should be coordination between different bodies where possible. This could be done via pan African bodies such as the AfDB due what some consider as its robust financial management systems and firm commitment by all stakeholders. Such coordination would also allow for common reporting and joint monitoring and evaluation processes. Investors and implementers can also organise informational exchange meetings on infrastructure activities at national or regional levels. Further, division of labour among investors such that each administer small portions of the total investment for Africa’s infrastructure can be considered.

9. Create an enabling environment

Bear in mind that, ‘the enabling environment cannot be dissociated from broader governance reforms—for instance, anti-corruption measures or a developed financial sector’.[19] African governments have to prove they have the capacity to manage the incoming investment, deliver on projects and ensure deadlines are met efficiently. This means eliminating issues such as poor policy planning and weak operational performance or poor municipality/county functioning crucial to project implementation.[20] These key elements, also addressed in points 5,6 and 8, are crucial to fostering confidence for continued investment in infrastructure.

10. Remember affordability

Infrastructure development, particularly basics such as roads, water and electricity, cannot afford to leave out the poor. This is a challenge because in the case of water and sanitation ‘an estimated 60 percent of the African population cannot afford to pay full cost-recovery tariffs or extend consumption beyond the absolute minimum subsistence level’.[21] African governments and investors have to find a means through which access to infrastructure such as water, energy will be affordable where affordability is, ‘measured by the share of infrastructure spending in the total household budget and whether it exceeds a set threshold.’[22] African governments therefore must take the time to consider affordability needs at the public finance level. If households, ‘cannot afford to pay cost-recovery tariffs, the move toward universal access will create burgeoning liabilities for the state, which must bridge the gap between the tariffs the public can afford to pay and the real cost of service provision’.[23] Therefore governments must assess how, when and, ‘whether subsidizing services to reach universal coverage is an affordable strategy at the country level.’[24]

piggybank-broke-640x493

 

[1] Vivien Foster and Cecilia Briceño-Garmendia (2011), ‘Africa’s Infrastructure: A Time For Transformation’, Agence Française de Développement and the World Bank,, http://infrastructureafrica.org/library/doc/552/africa%E2%80%99s-infrastructure-time-transformation

[2] Tanya Konidaris and Clare Allenson (2011), ‘Africa’s Infrastructure Regional Challenges And Opportunities, Johns Hopkins University-Sais, http://www.wilsoncenter.org/sites/default/files/Infrastructure%20Discussion%20Paper.pdf

[3] OECD (2012), ‘ Mapping Support for Africa’s Infrastructure Investment’, http://www.oecd.org/daf/inv/investment-policy/MappingReportWeb.pdf

[4] Vivien Foster and Cecilia Briceño-Garmendia (2011), ‘Africa’s Infrastructure: A Time For Transformation’, Agence Française de Développement and the World Bank,, http://infrastructureafrica.org/library/doc/552/africa%E2%80%99s-infrastructure-time-transformation

[5] Benno Ndulu, Lolette Kritzinger-van Niekerk and Ritva Reinikka (2005), ‘Infrastructure, Regional Integration and Growth in Sub-Saharan Africa’, Africa in the World Economy – The National, Regional and International Challenges, http://www.fondad.org/uploaded/Africa%20in%20the%20World%20Economy/Fondad-AfricaWorld-Chapter9.pdf

[6] Tanya Konidaris and Clare Allenson (2011), ‘Africa’s Infrastructure Regional Challenges And Opportunities, Johns Hopkins University-Sais, http://www.wilsoncenter.org/sites/default/files/Infrastructure%20Discussion%20Paper.pdf

[7] Benno Ndulu, Lolette Kritzinger-van Niekerk and Ritva Reinikka (2005), ‘Infrastructure, Regional Integration and Growth in Sub-Saharan Africa’, Africa in the World Economy – The National, Regional and International Challenges, http://www.fondad.org/uploaded/Africa%20in%20the%20World%20Economy/Fondad-AfricaWorld-Chapter9.pdf

[8] Benno Ndulu, Lolette Kritzinger-van Niekerk and Ritva Reinikka (2005), ‘Infrastructure, Regional Integration and Growth in Sub-Saharan Africa’, Africa in the World Economy – The National, Regional and International Challenges, http://www.fondad.org/uploaded/Africa%20in%20the%20World%20Economy/Fondad-AfricaWorld-Chapter9.pdf

[9] Vivien Foster and Cecilia Briceño-Garmendia (2011), ‘Africa’s Infrastructure: A Time For Transformation’, Agence Française de Développement and the World Bank,, http://infrastructureafrica.org/library/doc/552/africa%E2%80%99s-infrastructure-time-transformation

[10] Céline Kauffmann(2008), ‘ Engaging the Private Sector in African Infrastructure’, NEPAD and OECD, http://www.oecd.org/investment/investmentfordevelopment/41775965.pdf

[11] Céline Kauffmann(2008), ‘ Engaging the Private Sector in African Infrastructure’, NEPAD and OECD, http://www.oecd.org/investment/investmentfordevelopment/41775965.pdf

[12] Tanya Konidaris and Clare Allenson (2011), ‘Africa’s Infrastructure Regional Challenges And Opportunities, Johns Hopkins University-Sais, http://www.wilsoncenter.org/sites/default/files/Infrastructure%20Discussion%20Paper.pdf

[13] OECD (2012), ‘ Mapping Support for Africa’s Infrastructure Investment’, http://www.oecd.org/daf/inv/investment-policy/MappingReportWeb.pdf

[14] Vivien Foster and Cecilia Briceño-Garmendia (2011), ‘Africa’s Infrastructure: A Time For Transformation’, Agence Française de Développement and the World Bank,, http://infrastructureafrica.org/library/doc/552/africa%E2%80%99s-infrastructure-time-transformation

[15] Calestous Juma (2012), ‘Poor Infrastructure Is Africa’s Soft Underbelly’, Forbes, http://www.forbes.com/sites/mfonobongnsehe/2012/10/25/poor-infrastructure-is-africas-soft-underbelly/

[16] Vivien Foster and Cecilia Briceño-Garmendia (2011), ‘Africa’s Infrastructure: A Time For Transformation’, Agence Française de Développement and the World Bank,, http://infrastructureafrica.org/library/doc/552/africa%E2%80%99s-infrastructure-time-transformation

[17] Omari Issa (2013), ‘Africa Infrastructure Investment Report 2013’, Commonwealth Business Council http://www.cbcglobal.org/images/uploads/docs/The_CBC_Africa_Infrastructure_Investment_Report_2013.pdf

[18] OECD (2012), ‘ Mapping Support for Africa’s Infrastructure Investment’, http://www.oecd.org/daf/inv/investment-policy/MappingReportWeb.pdf

[19] OECD (2012), ‘ Mapping Support for Africa’s Infrastructure Investment’, http://www.oecd.org/daf/inv/investment-policy/MappingReportWeb.pdf

[20] OECD (2012), ‘ Mapping Support for Africa’s Infrastructure Investment’, http://www.oecd.org/daf/inv/investment-policy/MappingReportWeb.pdf

[21] Sudeshna Ghosh Banerjee and Elvira Morella (2011), ‘Africa’s Water and Sanitation

Infrastructure: Access, Affordability, and Alternatives’, World Bank http://www.oecd.org/daf/inv/investment-policy/MappingReportWeb.pdf

[22] Sudeshna Ghosh Banerjee and Elvira Morella (2011), ‘Africa’s Water and Sanitation

Infrastructure: Access, Affordability, and Alternatives’, World Bank http://www.oecd.org/daf/inv/investment-policy/MappingReportWeb.pdf

[23] Sudeshna Ghosh Banerjee and Elvira Morella (2011), ‘Africa’s Water and Sanitation

Infrastructure: Access, Affordability, and Alternatives’, World Bank http://www.oecd.org/daf/inv/investment-policy/MappingReportWeb.pdf

[24] Sudeshna Ghosh Banerjee and Elvira Morella (2011), ‘Africa’s Water and Sanitation

Infrastructure: Access, Affordability, and Alternatives’, World Bank http://www.oecd.org/daf/inv/investment-policy/MappingReportWeb.pdf

Africa’s Infrastructure Hype: The Opportunities and Risks

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Earlier this month over 40 African Heads of State gathered in Washington DC at the inaugural US-Africa Leaders’ Summit. This is the first ever initiative of this scale initiated by an American President specifically targeted towards Africa and with a core focus on infrastructure. 90 U.S. companies participated in the forum including Chevron Corp , Citigroup Inc, Ford Motor Co, Lockheed Martin Corp and Morgan Stanley.[1] We in Africa understand that the world is beginning to wake up to the potential and capabilities of the continent but this summit was still important in order to garner the type of international attention required to continue to drive investments of significant scale on the continent by the North which has been losing ground to the East in recent times. This summit is also important because it has allowed African leaders to articulate their commitment to moving away from a relationship of “aid donor and aid recipient” to one of investment and trade.[2]

 According to the White House, US companies pledged investments totalling more than $33 billion to Africa.[3] US and African companies as well as the World Bank pledged new investment in construction, energy, water and information technology projects in Africa. This article will focus on infrastructure deals as these were where key pledges were made, where Africa’s needs are dire and where the scale of investment will be significant. The key deals in the summit include:[4],[5],[6],[7],[8]

  • General Electric Co: $2 billion to boost infrastructure, worker skills and access to energy
  • Power Africa: $12 billion in new commitments from US private sector partners, the World Bank and the government of Sweden
  • Beyond the Grid program: US Private sector commitments of more than $1 billion, including new investments in off-grid and small-scale energy solutions to rural communities.
  • IBM: $2 billion into the region over seven years
  • $5billion partnership between private-equity firm Blackstone and Carlyle, and Aliko Dangote (Africa’s richest businessman) for energy infrastructure projects.
  • Coca Cola: $5 billion for projects including safe water access programs

 GROUP4

How does the USA compare with China?

In terms of how this investment fits into the trend in energy and investment, $33 billion sounds massive but pales in comparison to what China has been putting into Africa, in infrastructure alone, over the past few years. China, invested more than $13 billion in infrastructure in Africa in 2012 alone. [9] But that’s not all, let’s take a handful of recent deals; in May 2014 China committed US 20 billion in loans for infrastructure development to Nigeria alone.[10] In terms of East Africa, 2013 saw Kenya sign deals worth $5 billion with China for the construction of a railway line and an energy project.[11] Earlier this year, China announced that it will finance a $1.2 billion gas pipeline project in Tanzania from Mtwara to Dar es Salaam as well a railway network at Bagamoyo with investment of more than $10 billion.[12] Uganda is not far behind where China is financing 85% of two hydroelectric projects worth $1.4 billion and $556 billion respectively. Also in Uganda 2013 saw the China National Offshore Oil Corporation win the right to develop Uganda’s Kingfisher field with investments worth $2 billion. You get the picture; the USA has a lot of catching up to do.

Other major foreign players in African infrastructure are Brazil, India and South Korea in addition to a significant increase in commitments from the Arab Coordination Group, totalling $5.15bn in 2012.[13] 

Africa’s Infrastructure Needs

One may wonder if Africa truly needs all these billions in targeted at infrastructure. According to the Africa Infrastructure Country Diagnostic, the continent’s infrastructure spending needs stand at about $93 billion per year.[14] Over 40 % of the expenditure needed is in the power sector; 20 % the for the transport sector to achieve a reasonable level of regional, national, rural, and urban connectivity and slightly more than 20 percent is for water supply and sanitation.[15] The main element of the infrastructure puzzle that Africa is getting right is the increase in penetration of telecommunications; but this sector can and must be further developed.

 131217110359-kenya-chinese-railway-1-horizontal-gallery

 

Why is Infrastructure Important?[16]

  • Electricity: Supply creates benefits for health because vaccines and medications can be safely stored in hospitals and food can be preserved at home. Electricity also improves literacy and primary school completion rates because students can read and study after sundown. Access to electricity lowers costs for businesses and increases investment and driving economic growth.
  • Transport: Enables isolated rural communities to move into commercial agriculture, thereby increasing their income, and to use health and education services some distance away. By reducing the time and money it takes to move goods, better transportation improves competitiveness, helping create more jobs and boost incomes.
  • Water and Sanitation: Prevents serious illnesses transmitted through unsafe water and better water and sanitation service is associated with less malnutrition and stunting. Waterborne illnesses can be a substantial economic burden, affecting both adult productivity and children’s overall health and education. Sufficient water also reduces the substantial opportunity cost in travel time when women in particular have to fetch water.
  • ICT: Expansion of ICT networks democratizes access to information. It can be particularly critical for rural populations otherwise cut off from important technological know-how or critical information about market prices. telecommunication improvements also reduce transportation spending by allowing people to avoid fruitless journeys or to perform transactions remotely

 So dire is the negative effect of poor infrastructure on economic growth that for most of Africa that power deficiencies alone reduce per capita growth by 0.11-0.2 percentage points. For many countries, such as Ethiopia, Malawi, and Senegal, the negative effect of deficient infrastructure is at least as large as that of crime, red tape, corruption, and lack of financing.

 Kenya is the number one choice in Africa for investors in infrastructure[17]

According to the African Development Bank, Kenya is considered the most attractive infrastructure investment destination in Africa,; South came second. When respondents to the Survey of Private Sector Investors (in infrastructure) were asked why Kenya, the following was stated:

  • Transparent operating environment.
  • Growing economy and emerging sector in ICT and low rate of criminality and corruption
  • The Kenyan government is very pragmatic in its approach when dealing with private investors
  • Institutional capacity and its clear and fit-for-purpose regulatory framework, which ensured projects are run relatively efficiently

 

 Opportunities in investment in Infrastructure

So what opportunities does investment in infrastructure offer the continent now?

Firstly, Africa’s energy needs are dire. In fact, ‘Africa will need to install 7 gigawatts of new power generation per year’ to meet energy needs. This means that the African market is still underserved therefore opportunities for investments exist in a context where Africa is tabling robust growth. In a continent where, ‘power costs 14 US cents per kilowatt-hour against 5– 10 US cents elsewhere’, investment presents attractive opportunities that ensure, ‘returns to investors are high’. [18] This creates an environment where investors want to invest in infrastructure in Africa at a time when Africa needs it the most. Win-win.

 

Secondly, a massive opportunity lies in the fact that Africa’s infrastructure needs are going to be met at a time when high-tech, clean and efficient energy options are available. Renewable energy is seen as an ideal fit for Africa across the board. In a report on investment and trends in Africa’s clean energy sector that surveyed 140 senior executives and industry stakeholders from around the world, respondents stated that, ‘Africa’s strong wind and solar resources as a strong driver for renewables deployment’ and that, ‘wind, solar, hydro and biomass projects will play a major role in meeting Africa’s growing power needs’. Added to this Africa can focus on building clean coal capacity as well. Africa stands to become the continent with cleanest energy infrastructure in the world.[19]

 RES-Southern-Africa

Linked to the point above Africa stands to gain more bang for the buck as,’ Renewable energy is relatively quick and cheap to deploy on a small scale compared with fossil fuels’.[20] This affordability for Africa is enhanced by the fact that there is competition in the sector for energy, ‘Japanese trading houses and industrial corporations, the big five Chinese power companies and Chinese wind and solar equipment manufacturers’ are keen to get a slice of the pie in addition to Northern partner. Africa has the solid opportunity to get clean energy affordably.[21]

 

Thirdly investment in infrastructure, specifically the transport sector, has multiplier effects by not only linking people, goods, services, knowledge and markets but also by more creating a more attractive environment for foreign investors.[22]

 

Fourthly, investment in infrastructure will help Africa develop economically; indeed, infrastructure could, ‘add 2% to Africa’s GDP growth rate and improve productivity by 40%’.[23] Infrastructure will also enhance intra-African trade and take an important step towards broader regional integration.[24] Indeed, ‘regional infrastructure will create scale economies, harness regional public goods, increase intra-regional trade and global trade, and improve competitiveness’.[25] Africa can use this opportunity to drive intra-African trade and make use of economies of scale.

 

Fifthly, investment in infrastructure will help Africa meet development and poverty reduction goals. The MDG Africa Steering Group which consists of representatives of the UN, AfDB, AU, EC,IMF, OECD and the World Bank Group, argues that, ‘investments in transformational energy generation projects, including large-scale hydropower, and transmission net­works need to be increased substantially if the continent is to meet the MDGs’. [26] The visual below from the UN-Africa Working Group (2007) illustrates the power that improving infrastructure can have on African development by meeting 7 of the 8 MDGs:

Role of infrastructure in the MDGs [27]

 

Energy

ICT

Transport

Water and Sanitation

MDG 1: Eradicate extreme poverty

Energy increases productivity of firms

ICT increases productivity of firms

Transport facilitates trade of goods

Enables greater workforce participation

MDG 2:   Achieve universal primary education

Lighting facilities for reading and studying at home

Improved access to educational material

Ensure access to educational facilities

Reduces burden of domestic work on children

MDG 3: Promote gender equity and empower women

Energy facilitates domestic work

   

Reduces burden of domestic work

MDG 4: Reduce child mortality

Modern energy reduces respiratory illness

Improved access to public health messages

Ensures access to health facilities

Improved water and sanitation reduced the risk of waterborne diseases

MDG 5: Improve maternal health

Energy improves quality of health care

Improved access to public health messages

Ensures access to health facilities

Improved water and sanitation reduced the risk of waterborne diseases

MDF 6: Combat HIV/AIDS, malaria and other diseases

Modern energy reduces respiratory illness

Improved access to public health messages

Ensures access to health facilities

Clean water, sanitation and hygiene are significant elements of health programs including HIV/AIDS. Proper drainage contributes to control of malaria and other waterborne diseases.

MDG 7: Ensure environmental sustainability

Use of modern energy reduced the pressure on deforestation

   

Access to improved water and sanitation is one of the targets of this MDG

 

Another opportunity for Africa is that these incoming projects offer, ‘substantial short-term employment to counteract otherwise rising unemployment’.[28]

 

Additionally, this focus on infrastructure is happening in a context where there is a push for efficiency and organisation from infrastructure investors who, ‘do not want to be involved in projects where there are no clear implementation timelines or where the timelines, are repeatedly moved out. Infrastructure investors want to be involved in projects that are high priority for governments and thus are likely to come to a conclusion’. [29]This emphasis will serve the interest of African citizens many of whom are interested in ensuring projects are not only completed in a timely and efficient manner but also meet their needs.

 

Finally, infrastructure has a role to play in securing peace on the continent, ‘a national system of highways and railroads can provide opportunities for the types of cultural exchanges (e.g., between ethnic communities) that will greatly enhance national integration and minimize destructive ethnic and religious conflict’.[30]

 peace

It is clear there is ample room for Africa to benefit from the infrastructure hype but what are the risks?

 What are the risks?

Firstly there is the issue of malinvestment and the potential creation of ghost towns and bridges to nowhere. Here malinvestment means mistaken investment in infrastructure, ‘which inevitably leads to wasted capital and economic losses, subsequently requiring the reallocation of resources to more productive uses. “Wrong” in this sense means incorrect or mistaken from the point of view of the real long-term needs and demands of the economy’.[31] This becomes a risk particularly when there are numerous lines of credit and plenty of liquidity. Africa’s risks with regards to malinvestment do not lie in central bank policies setting artificially low interest rates or aggressive stimulatory policies as has been the case elsewhere, in Africa’s case, ‘infrastructure projects and their large scale require different types of financiers, including private sector, bilateral and multilateral partners’.[32] Thus given the number of players on the field, some with very deep pockets (from Africa’s point of view), there is a risk of money being thrown at infrastructure projects of poor merit. Lessons can be learnt from China’s Kongbashi District with, ‘sky high apartments, gleaming infrastructure and modern townhouses. Nearly empty of residents, it has been dubbed China’s ‘Ghost Town’.’[33] Africa simply cannot afford to indulge in projects that do not support or lead to economic activity. As Nderi, an investment analyst states, ‘in short we have to ensure that the infrastructure will grow businesses that will support and pay for the infrastructure. Imagine a road that links two towns but with no production to support it’.[34] Also bear in mind that African politicians have a penchant for, ‘”prestige projects” or “white elephants”- infrastructure projects that generate significant benefits for governing elites but provide very little or even negative social value’.[35] This should be a prescient warning that malinvestment will likely have a different face in Africa.[36] So while it is clear Africa needs infrastructure, each project should be rigorously analysed on its own merit so that Africa is not lured into investing in projects that build bridges to nowhere.

 bridge-to-nowhere

Secondly, there are uniquely high costs for infrastructure development in Africa. In fact, ‘Africa’s infrastructure services are twice as expensive as elsewhere, reflecting both diseconomies of scale in production and high profit margins caused by lack of competition.’[37] Further, ‘whether for power, water, road freight, mobile telephones, or Internet services, the tariffs paid in Africa are several multiples of those paid in other parts of the developing world’.[38] This is an issue for Africans because a number of infrastructure projects will be co-financed by government making the poorest continent in the world pay the steepest prices to meet basic infrastructure needs.

 

Linked to the point above is the risk that the new projects will be a sight to behold when completed but will fall into disrepair due to poor maintenance of new structures. Nderi alludes to the new Thika road in Kenya, ‘whose maintenance cost is proving to be a drain…it is possible to develop infrastructure that a country may not be able to afford’.[39]

 

Africa is already grappling with this next risk which is a failure to use projects to create local employment opportunities and ensure skills transfer to the local workforce. Just this month in Kenya, ‘at least 5,000 foreign workers will be shipped into the country from China to undertake the construction of the 609km standard gauge railway from Mombasa to Nairobi.’ [40] Although there will be a local workforce of 30,000, experience with China indicate that Africans employed on construction sites are often as cheap and poorly skilled labour, and even this isn’t guaranteed as China has been known bring in unskilled labour. Such patterns cannot continue as they not only keep Africa from reaping the benefits of the creation of jobs, they also condemn Africa to being eternally reliant on foreigners to build infrastructure and prevent Africa from developing the capacities required to maintain the new structures.

 

Another risk is government; there are, ‘concerns about governance and slow project approvals by the government…Clearances from various ministries and departments add to the delay. Since there is no single-window mechanism, considerable time is wasted addressing the protocols of multiple agencies. This complex clearance mechanism delays many projects… The pre-tendering process can extend for almost a year.’[41] Even the casual African observer would likely agree that government can be a slow and lethargic animal that can make one pull one’s hair out.

 

Fourthly, in Africa multiple agencies will be working on infrastructure projects which means various approvals required across the different stages of the project cycle. Multiple players will invariably mean conflict rooted in differing viewpoints and expectations, potentially making implementation of projects hard. Trinity International LLP, a law firm that advises on power, energy/renewable energy, resources and infrastructure in sub Saharan Africa shares experiences where, ‘public sector’s expectations as to the risks it should bear are different from the expectations of the developer and, the banks’ and thus ‘the developer continues to push the public sector in a direction it is unwilling to go, thereby (further) delaying the negotiation process.’[42] Although this delay also affects financiers and developers, Africans waiting for roads to be built will be affected by the fact that big deals may be mired in conflict thereby delaying urgently needed work.

 pump

Another risk that should make one shudder is the beast called land. There may be agreement across the board that Africa needs infrastructure, but issues such as land acquisition on which the structures will be built are not always adequately dealt with. In, ‘sub-Saharan Africa where land ownership is complex and legally uncertain, third party claims to land can often arise on an unregulated basis, free from planning constraints. This results in houses, businesses and often informal utilities connections being located illegally on areas of land ear-marked for the project’.[43] From the citizens’ point of view, there is the risk of being forced to relocate and leave ancestral land without necessarily being compensated adequately, if at all. And of course for African governments the risk is creating acrimony and political difficulties. Land use issues must be sensitively managed as a failure to do so may create pockets of instability on the continent.

 

Another risk is the environment and herein lays a conundrum; while Africa stands to benefit from becoming the cleanest energy producer in the world, ‘there is a dark side to infrastructural investments: they often lead to environmental degradation. Fossil fuel energy generation and transportation create emissions that contribute to acid rain locally and global warming. Hydropower and irrigation can lead to flooding, water pollution, and disruption of communities. Roads can lead to erosion, deforestation, and biodiversity loss. These environmental costs have been estimated to each four to eight percent of GDP for some developing countries, with most of the effects falling on the poor.’[44]

 

Asymmetrical investment is a risk for Africa as well because often, ‘the territories most in need of development are generally those that are in the direst of circumstances and therefore the least attractive to investors’.[45] As a result, investment may leave marginalized communities out of the loop as projects in remote areas are not viable. However, while the centrality of prudent investment should remain, Africa cannot afford to continue to neglect communities that have been left out of development projects for decades. This is a difficult risk to grapple with but it must be addressed.

 

Another important risk is that of overleveraging, particularly if Africa’s infrastructure will be financed by shadow banking which Standard and Poor’s define as, ‘the system of finance that exists outside regulated depositories, commercial banks, and publicly traded bonds. Shadow banking participants include pension funds, insurers, sovereign wealth funds, and export credit agencies, alongside finance companies, private investment funds, business development corporations, asset managers, hedge funds, and sponsored intermediaries such as money-market funds’. In 2013 S&P anticipated that for infrastructure projects around the world, Africa included, ‘up to $25 billion of project finance debt will sourced from the shadow banking sector’.[46] Such trends complicate what will be an already complicated financing structure for projects in Africa. Is there going to be a central point through which all projects will be monitored and managed? Will progress and financial transactions be communicated to the public? If not, it creates an overleveraging risk because if, ‘loans and private placements from institutions do not trade through a central exchange, there is no place to observe the activity. This leaves the potential for a build-up of debt to be largely overlooked’.[47]

 

Finally, government mismanagement of funds perhaps is the largest risk of all. Look at Ghana which not only, ‘anticipated too much revenue from its recently found oil reserves’ but also ‘frittered it away paying higher salaries to civil servants’ rather than using the funds for infrastructure projects.[48] When high infrastructure costs (which make it difficult to ascertain if budgets are inflated) are coupled with high liquidity and interfaced with corruption, it is a recipe for disaster. And it is the African people who will pay if their governments engage in financial misbehaviour.

 anti c

So what is Africa to do given that there are juicy opportunities yet worrisome risks associated with infrastructure investment? Find out next week where recommendations that address the risks and optimise the opportunities will be discussed.

 Anzetse Were is a Development Economist

anzetsew@gmail.com

 

Endnotes

 

[1] Reuters (2014), ‘UPDATE 4-U.S.-Africa summit garners over $17 bln in investment pledges’,

http://www.reuters.com/article/2014/08/05/africa-summit-idUSL2N0QB0MW20140805

[2] Reuters (2014), ‘UPDATE 4-U.S.-Africa summit garners over $17 bln in investment pledges’,

http://www.reuters.com/article/2014/08/05/africa-summit-idUSL2N0QB0MW20140805

[3] White House (2014), ‘President Obama Engages with African Leaders on Final Day of the U.S.-Africa Leaders Summit’,

http://www.whitehouse.gov/blog/2014/08/06/president-obama-engages-african-leaders-final-day-us-africa-leaders-summit

[4] Reuters (2014), ‘UPDATE 4-U.S.-Africa summit garners over $17 bln in investment pledges’,

http://www.reuters.com/article/2014/08/05/africa-summit-idUSL2N0QB0MW20140805

[5] Mipe Okunseinde (2014), ‘U.S. Companies Prove Eager To Take the Lead in Investing in Africa’, http://www.covafrica.com/

[6] BBC(2014), ‘US-Africa Summit: US firms to invest $14bn in Africa’, http://www.bbc.com/news/business-28668533

[7] White House Office of the Press Secretary (2014), ‘FACT SHEET: Powering Africa: Increasing Access to Power in Sub-Saharan Africa’

http://www.whitehouse.gov/the-press-office/2014/08/05/fact-sheet-powering-africa-increasing-access-power-sub-saharan-africa

[8] The White House Office of the Press Secretary (2014), ‘FACT SHEET: The Doing Business in Africa Campaign’. http://www.whitehouse.gov/the-press-office/2014/08/05/fact-sheet-doing-business-africa-campaign

[9] Rene Vollgraaff and David Malingha Doya (2014), ‘African Development Bank Raises Funding as China Boosts Role’, Bloomberg, http://www.bloomberg.com/news/2014-05-18/african-development-bank-steps-up-funding-as-china-boosts-role.html

[10] Patrick Atuanya (2014), ‘Nigeria to benefit from $12bn Chinese Africa infrastructure fund’,

http://businessdayonline.com/2014/05/china-promises-africa-robust-infrastructure-transformation/#.U-NYRKNasdU

[11] Reuters (2013), ‘Kenya signs infrastructure, energy deals worth $5 bln with China’, http://www.reuters.com/article/2013/08/19/kenya-china-idUSL6N0GK2MT20130819

[12] Henry Lyimo (2014), ‘Tanzania’s Economy On Right Track – – Chinese Ambassador’, Tanzania Daily News, http://allafrica.com/stories/201402261451.html

[13] African Development Bank (2013), ‘Infrastructure Financing Trends In Africa: Ica Annual Report 2012’, http://www.icafrica.org/fileadmin/documents/Annual_Reports/ICA%20_AnnualReport%202012.pdf

[14] Amadou Sy (2013), Financing Africa’s Infrastructure Gap

Brookings Institute, http://www.brookings.edu/blogs/up-front/posts/2013/10/09-financing-africa-infrastructure-gap-sy

[15] Vivien Foster and Cecilia Briceño-Garmendia (2011), ‘Africa’s Infrastructure: A Time For Transformation’, African Development Bank Group, http://infrastructureafrica.org/library/doc/552/africa%E2%80%99s-infrastructure-time-transformation

[16] Vivien Foster and Cecilia Briceño-Garmendia (2011), Africa’s Infrastructure: A Time For Transformation

[17] African Development Bank Infrastructure Financing Trends In Africa: Ica Annual Report 2012

[18] Albert Mafusire, John Anyanwu et al (2010), ‘ Infrastructure Deficit and Opportunities in Africa, The African Development Bank Group, http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/ECON%20Brief_Infrastructure%20Deficit%20and%20Opportunities%20in%20Africa_Vol%201%20Issue%202.pdf

[19] Baker & McKenzie (2013), ‘The Future for Clean Energy in Africa’, http://www.bakermckenzie.com/files/upload/The%20future%20for%20clean%20energy%20in%20Africa%20%28Final%29.pdf

[20] Baker & McKenzie (2013), ‘The Future for Clean Energy in Africa’, http://www.bakermckenzie.com/files/upload/The%20future%20for%20clean%20energy%20in%20Africa%20%28Final%29.pdf

[21] Baker & McKenzie (2013), ‘The Future for Clean Energy in Africa’, http://www.bakermckenzie.com/files/upload/The%20future%20for%20clean%20energy%20in%20Africa%20%28Final%29.pdf

[22] Oxford Business Group (2014), ‘ The multiplier effect: Public-private partnerships should provide a boost to infrastructure development’, http://www.oxfordbusinessgroup.com/news/multiplier-effect-public-private-partnerships-should-provide-boost-infrastructure-devel

[23] Tanya Konidaris and Clare Allenson (2011), ‘Africa’s Infrastructure Regional Challenges And Opportunities, Johns Hopkins University-Sais, http://www.wilsoncenter.org/sites/default/files/Infrastructure%20Discussion%20Paper.pdf

[24] Tanya Konidaris and Clare Allenson (2011), ‘Africa’s Infrastructure Regional Challenges And Opportunities, Johns Hopkins University-Sais, http://www.wilsoncenter.org/sites/default/files/Infrastructure%20Discussion%20Paper.pdf

[25] Tanya Konidaris and Clare Allenson (2011), ‘Africa’s Infrastructure Regional Challenges And Opportunities, Johns Hopkins University-Sais, http://www.wilsoncenter.org/sites/default/files/Infrastructure%20Discussion%20Paper.pdf

[26] MDG Africa Steering Group (2008), ‘Achieving the Millennium Development Goals in Africa: Recommendations of the MDG Africa Steering Group’, http://www.mdgafrica.org/pdf/MDG%20Africa%20Steering%20Group%20Recommendations%20-%20English%20-%20HighRes.pdf

[27] UN-Africa Working Group (2007) Infrastructure and Millennium Development Goals, http://www.icafrica.org/en/topics-programmes/focal-points/infrastructure-and-millennium-development-goals/

[28] IFC, (2009)Infrastructure: Crisis & Response, Energy Week 2009, http://siteresources.worldbank.org/INTENERGY/Resources/335544-1232567547944/5755469-1239633250635/Bernard_Sheahan.pdf

[29] Milla SA’s Infrastructure Division (2013), ‘The Africa Infrastructure Rollout Conference 2013’, http://assets-production-webvanta-com.s3-us-west-2.amazonaws.com/000000/23/58/original/The%20Africa%20Infrastructure%20Rollout%20Conference%202013%20-%20v5.pdf

[30] John Mukum Mbaku (2013), ‘Building Opportunities: Addressing Africa’s Lack Of Infrastructure’. The Brookings Institution, http://www.brookings.edu/~/media/research/files/reports/2013/01/foresight%20africa/foresight_mbaku_2013.pdf

[31] Ludwig Von Mises Insitute (2014), ‘Malinvestment’, http://wiki.mises.org/wiki/Malinvestment

[32] Amadou Sy (2013), Financing Africa’s Infrastructure Gap

Brookings Institute, http://www.brookings.edu/blogs/up-front/posts/2013/10/09-financing-africa-infrastructure-gap-sy

[33] Lin Henry (2013), ‘China’s Biggest ‘Ghost Town’: A Microeconomic Perspective, http://economicstudents.com/2013/02/microeconomic-factors-keeping-chinese-modern-city-a-ghost-town/

[34] Nderi Johnson (2014), personal interview

[35] John Mukum Mbaku (2013), ‘Building Opportunities: Addressing Africa’s Lack Of Infrastructure’. The Brookings Institution, http://www.brookings.edu/~/media/research/files/reports/2013/01/foresight%20africa/foresight_mbaku_2013.pdf

[36] John Mukum Mbaku (2013), ‘Building Opportunities: Addressing Africa’s Lack Of Infrastructure’. The Brookings Institution, http://www.brookings.edu/~/media/research/files/reports/2013/01/foresight%20africa/foresight_mbaku_2013.pdf

[37] Vivien Foster and Cecilia Briceño-Garmendia (Ed) (2010), ‘Africa’s Infrastructure: A Time for Transformation’, Agence Française de Développement and the World Bank, http://siteresources.worldbank.org/INTAFRICA/Resources/aicd_overview_english_no-embargo.pdf

[38] Vivien Foster and Cecilia Briceño-Garmendia (Ed) (2010), ‘Africa’s Infrastructure: A Time for Transformation’, Agence Française de Développement and the World Bank, http://siteresources.worldbank.org/INTAFRICA/Resources/aicd_overview_english_no-embargo.pdf

[39] Nderi Johnson (2014), personal interview

[40] Kiarie Njoroge (2014), ‘5,000 Chinese workers expected for railway project, http://www.businessdailyafrica.com/5000-Chinese-workers-set-for-railway-project—/-/539546/2409994/-/4kq0l9/-/index.html

[41] Milla SA’s Infrastructure Division (2013), ‘The Africa Infrastructure Rollout Conference 2013’, http://assets-production-webvanta-com.s3-us-west-2.amazonaws.com/000000/23/58/original/The%20Africa%20Infrastructure%20Rollout%20Conference%202013%20-%20v5.pdf

[42] Trinity International LLP (2010), ‘Are We There Yet? Sub-Saharan Africa Transport Projects, http://www.trinityllp.com/are-we-there-yet-sub-saharan-africa-transport-projects/

[43] Trinity International LLP (2010), ‘Are We There Yet? Sub-Saharan Africa Transport Projects, http://www.trinityllp.com/are-we-there-yet-sub-saharan-africa-transport-projects/

[44] African Development Bank, Asian Development Bank, European Bank for

Reconstruction and Development, European Investment Bank, Inter-American

Development Bank, International Monetary Fund, and the World Bank Group (2007) ‘ The Nexus Between

Infrastructure and Environment: From the Evaluation Cooperation Group of the International Financial’, Institutions, http://siteresources.worldbank.org/INTOED/Resources/infrastructure_environment.pdf

[45] Trinity International LLP (2010), ‘Are We There Yet? Sub-Saharan Africa Transport Projects, http://www.trinityllp.com/are-we-there-yet-sub-saharan-africa-transport-projects/)

[46] Mike Wilkins (2013), ‘Out Of The Shadows: The Rise Of Alternative Financing In Infrastructure’, http://www.infrastructureviews.com/2013/02/01/out-of-the-shadows-the-rise-of-alternative-financing-in-infrastructure/#sthash.KDaxEdLZ.dpuf

[47] Mike Wilkins (2013), ‘Out Of The Shadows: The Rise Of Alternative Financing In Infrastructure’, http://www.infrastructureviews.com/2013/02/01/out-of-the-shadows-the-rise-of-alternative-financing-in-infrastructure/#sthash.KDaxEdLZ.dpuf

[48] Financial Times (2014), Ghana tarnishes ‘Africa rising’ story, FT Editorial, http://www.ft.com/cms/s/0/d9c39f02-1c8c-11e4-88c3-00144feabdc0.html