Africa has a steady and gradual growth rate in the last 15years. This is with an average GDP growth rate estimated at 4.5% in 2015. However, this is yet to show in corresponding job creation or significant economic transformation. Infrastructure deficit continues to efforts towards achieving sustainable development. This situation is made even more difficult with the rapidly growing population.
Furthermore, the onset of a large middle class estimated at nearly 350m by 2010 has since driven the demand for socio-economic infrastructure. Additionally, structural transformation and industrialization require well-developed infrastructure not only for growth but also to foster regional integration.
According to Zimbabwe Transport and Infrastructural Development, Minister Dr. Obert Mpofuthe, the continent’s infrastructure deficit has been identified as one of the most significant barriers to sustaining Africa’s growth.
The deficits
Infrastructure services in Africa cost more than almost any place in the world, according to the Infrastructure Consortium for Africa. For instance, African rural population pay around 60 to 80 times per unit more for energy than urban populations in the developed world. Moreover, according to the Global Infrastructure Outlook Report 2017, the total infrastructure investment forecast for Africa to 2040 is projected to be US $4.3tn, or US $174bn per year. If African economies were able to raise their performance to match that of their best performing peers the total investment need would be US $6.0tn, or US $240bn per year—a difference of almost 40%.
The share of public investment to GDP in the Middle East and North Africa (MENA) region exceeds other regions in the developing world. In particular, historically Egypt has had a high share of public investment in infrastructure even among MENA countries. Over the last few decades, however, public infrastructure investment in Egypt has been falling, and the decline in public investment has not been compensated by a rise in private investment.
The projected new level of Egypt’s infrastructure expenditure in recent years is about 5% of GDP in total, whereby around 1.3% is allocated to electricity and 3.7% to transportation and telecommunication.
Bridging the African infrastructure deficit is therefore of paramount importance so as to have a well-functioning regional and national infrastructure including transport, energy, water and housing.
Transport
A study by the World Bank indicates that, road infrastructure development in Africa will require US $90 billion annually for better development in the next decade in order to sustain economic growth and development as a whole.
According to Dr. Mpofuthe, the economy of the South African region is growing and more development in transport infrastructure is needed to support growth.
Recent announcement by the World Bank showed Zimbabwe for instance required at least US $33 billion in the next decade to develop its infrastructure. Transport and Infrastructure Development Permanent Secretary Mr. Munesu Munodawafa said Zimbabwe required US $5bn for its entire road network rehabilitation in the coming half a decade, noting that construction of roads was expensive. One kilometer will cost at least US $1m.
World Bank senior transport specialist Mr. Justin Runji has called for a sound monitoring and evaluation policy for road construction funds within transport ministries in the continent “Road sector reforms had a negative capacity impact within the parent transport ministries and some have not fully recovered. Furthermore, transport policy objectives and related performance indicators should be simplified and limited to a set of measurable commonly used and understood key transport indicators that are known to contribute to intended outcomes,” he said.
Energy
The power sector in Africa alone is currently experiencing a funds shortfall of about US $40-45bn each year since achieving universal access to electricity requires investment of about US $55bn every year until 2030.
When it comes to clean energy specifically, Kenya is ranked second to South Africa in clean energy investment in the continent and sixth globally. US $3.6bn has been invested in Kenya’s clean energy from 2009 – 2014. But even with the massive investments and projects, it is clear electricity production will need to grow at a faster rate as demand grows. The country’s ambitious plan of raising electricity capacity from the current 2.4GW to 22.7GW by 2030 is pegged on producing cheaper sustainable energy, improving distribution and exploring clean energy. In that case, more investments are required in the sector in order to achieve the ambitious vision 2030.
Therefore, seeing projects such as Lake Turkana Wind Power -which is set to cost Kenyans a whooping US $552m as penalties arising from the government’s failure to connect power from the project to the national grid, due to lack of a line to evacuate power from the energy project- come on-line, will undoubtedly raise investor confidence that projects can be completed and that the grid can absorb their energy. It is also important for investors to see a sustained growth in energy demand and a grid infrastructure to support new developments. Regulatory clarity on land, licenses and permits will also help boost investor confidence and appetite.
Water
African countries need water infrastructure to improve the livelihoods of their citizens and their quality of life. While there are many constraints to the delivery of water infrastructure, one of the most obvious factors that hampers delivery is project costs. Access to finance is the lifeblood of water infrastructure delivery, as is the packaging of the funding model for each project or groups of projects. Unfortunately, the cost of water infrastructure delivery continues to escalate to the point where many African countries simply cannot afford such infrastructure.
Conservatively, according to report from the World Bank, sub-Saharan Africa has a combined infrastructure deficit for water and sanitation of an estimated US $93bn annually. Thus, meeting Africa’s infrastructure needs calls for a substantial programme of infrastructure investment and maintenance. Some two-thirds of this estimate relate to capital expenditure, with the remaining third linked to operation and maintenance requirements.
Most African countries are currently facing a water crisis exacerbated by drought. Dams running dry and water rationing are the new reality. Even South Africa has not been spared. In the Western Cape news reports said recently that the province needs another US $35.5m to deal with the current water crisis. The drought in the area has dams running below capacity. Currently, dam levels fare at 38.5% compared to 61.1% at the same time last year.
Experts have previously moaned the lack of private sector funding for water infrastructure in the country. Dr. Mao Amis, Executive Director, African Centre for a Green Economy, suggested last year that, the market-driven financing solutions such as bonds and commercial loans could be the answer to financing water projects. “The private sector has a role to play as already in 2015, top 10 JSE-Listed companies collectively lost over US $60m, due to water impacts,” he said.
Solutions
It is of paramount importance to consider innovative funding products like Listed Special Purpose Vehicles, while at the same time tapping into African financial markets, Diaspora remittances, intra-African investment and sovereign wealth funds. The Kenyan government is currently persuading the private sector through Public Private Partnerships (PPP) to invest more in infrastructure in the country. In addition, the World Bank has offered their support by loaning US$43 million to support the public-private partnership through the Infrastructure Finance Public-Private Partnership Project.
Nevertheless, in order to attract investors, it is critical to reduce transaction costs (such as taxes, fees, dues, levies, etc.) payable by investors and financiers. It is also essential to transform continental bodies such as the African Union Commission, RECs ECA, OSAA, the NEPAD Agency, the African Development Bank, and the Africa Finance Corporation, into resource centres to clear the way for public-private sector dialogue.
Africa has the capability of financing upto 70% of its projects through domestic resources. This is in accordance with a report by the NEPAD Agency and the Economic Commission for Africa (ECA) on ‘Mobilizing Domestic Financial for Implementing NEPAD National and Regional Program and projects – Africa looks within’. For instance, building credible tax systems in African countries could allegedly help redirect about US$21Bn spent on subsidies to wasteful utilities and kerosene to productive energy investment.
On the other hand, funding remains a key challenge. Budgetary restrictions are responsible for straining and or hampering infrastructure rollout. This is attributed to African governments’ habit of financing a sizeable share of the continent’s infrastructure development on balance sheet. Furthermore, local banks are unable to supply the type of loans needed for long term infrastructure investment. Consequently, some form of collaboration with private sector players is a necessary and important precondition for the continent’s infrastructure backlogs to be cleared.
Presently, the most plausible option at hand is the diversification of the available sources of funding. This is through both developing domestic and regional capital, debt capital markets as well as boosting public private partnerships (PPPs). This, in turn, will help public sector entities achieve better value for their money and increase innovation in their infrastructure rollout and provision of services. Moreover, since the infrastructure gap is large and growing causing countries to spend 5% of their gross domestic product (GDP) annually. This is where the PPPs come in to alleviate the situation.
