Transforming Africa’s Infrastructure

Introduction

A new study, published in November 2009, ‘Africa’s Infrastructure: A Time for Transformation’, a co-publication by Agence Française de Développement and the World Bank, highlights the findings of a 24-country study of four sectors, including energy, transport, ICT, and water. The study was conducted by institutions including the African Union Commission, African Development Bank, Development Bank of Southern Africa, Infrastructure Consortium for Africa, the New Partnership for Africa’s Development, and the World Bank.

The study highlights the findings of surveys that were conducted among 16 rail operators, 20 road entities, 30 power utilities, 30 ports, 60 airports, 80 water utilities, and over 100 ICT operators, as well as the relevant ministries in 24 countries on the African continent. The results were derived from detailed analysis of spending needs, fiscal costs and sector performance benchmarks.

The study concludes that an annual investment of US$93 billion is required to close the infrastructure gap with other parts of the world, meet the Millennium Development Goals, and achieve national development targets in Africa within a decade.

Positive and negative

Africa has taken large steps forward in terms of mobile telecommunications infrastructure over the last decade or so. More than half of Africa’s population lived in range of a GSM mobile phone signal in 2006. In the water and road sectors, the statistics also make for positive reading: five African countries have met the millennium targets for universal water access and 12 others are on-track to do so; and around 80 percent of Africa’s main road network is in good or fair condition.

Although these facts are encouraging, other statistics make for more sober reading. Only one third of Africans in rural locations has access to a usable road throughout all seasons; more than a fifth of the populations of Cameroon, Ghana, Mauritania, Niger, and Tanzania must travel more than two kilometres to their main water supply; African consumers pay twice as much for basic services as people elsewhere in the world; and a monthly basket of prepaid mobile telephone services costs US$12 in Africa, six times higher than in South Asia.

International competition

The study suggests that the inadequate state of the continent’s infrastructure (electricity, water, roads and information and communications technology) restricts national economic growth by 2% per annum and productivity by 40%. This marks not only a problem for Africans within Africa but also for Africa in terms of its ability to attract investors and to compete in world trade as the basic infrastructure needed to sustain competitive and effective commerce and an efficient and cheap route to market simply does not exist. Power shortages, the high cost of fixed-line telecommunications and broadband access in Africa further increases the cost of doing business on the continent.

The level of investment required by those countries with the weakest infrastructure exceeds one third of GDP, more than double the amount (in terms of percentage of GDP) spent by China. Of course, those countries with the greatest infrastructure gap tend to be those that are off the radar for most investors. The study supports the widely-held view of the investor community that the development of the continent’s infrastructure must be undertaken urgently.

Power sector

The power sector is essential to Africa’s further development and is a sector that requires enormous investment. 30 African countries suffer from terrible power shortages with only one quarter of Africans having access to electricity. The study says that almost half of the US$93 billion annual investment requirement is needed to improve Africa’s generation capacity. To achieve this, the financing to support the installation of new power generation capacity would need to be at the rate of seven times the annual average of the last 10 years. There is also a need to refurbish and maintain the existing non-operational power generation assets on the continent.

The study estimates that improving the operating efficiency of power utilities through reforms at the institutional level would save Africa US$2.7 billion a year. The study highlights that the lack of efficiency in the collection of payments from customers represents a significant lost opportunity in terms of revenue and, therefore, capital for further investment. In certain African states (Burkina Faso, Ghana, Niger and Uganda, for instance) uncollected power bills represent as much as 1% of GDP.

The study also suggests that increasing regional trade in power through the likes of the West African Power Pool and the Southern African Power Pool represents a potential saving of US$2 billion per year in energy costs.

Financing Infrastructure

The study states that Africa is already spending US$45 billion a year on infrastructure but suggests that much of this (about US$8 billion per year) is wasted through inefficiencies and poor management (excessive staffing, distribution losses, undercollecting revenue and inadequate maintenance, for example). African utilities are unable to collect around US$2.4 billion a year of services billed whereas the efficient use of existing resources could release an additional US$17.4 billion in finance for infrastructure per annum. If these efficiencies were achieved, it would leave a substantial funding gap of approximately US$31 billion.

A more positive angle

The study makes for a rather depressing read and it is clear that reducing the US$31 billion-per-year infrastructure funding gap is a daunting challenge.

However, on a more positive note, the massive need for basic infrastructure should ­ and does – represent a very attractive opportunity for all of those in the infrastructure development market: developers, equity investors, operators, construction contractors, banks and financial institutions and, indeed, the African public sector.

In the years leading up to the global financial crisis, foreign direct investment into Africa was strong and growing from US$4 billion in 2002 to $20 billion in 2007. National sources of finance during that time also grew, benefitting from the growth and high prices of natural resources, amongst other factors.

Although the global financial crisis has stemmed the growth of investment into Africa for now, as a law firm specialising in African infrastructure development and financing, we have certainly noticed an increase in the numbers of projects being tendered and undertaken.

It is also clear that there is no lack of interest or money from the development finance institutions and multilaterals as well as from the large number of debt and equity funds that focus on the continent when it comes to infrastructure projects.

With African-based commercial banks having been less affected by the financial turmoil, there is good evidence to show that the appetite of the commercial bank market is returning (though at relatively low levels still). The domestic capital markets, at least in certain African countries, also seem to be strengthening again as demonstrated by the success of the recent infrastructure bond issued by the Central Bank of Kenya. The Central Bank of Kenya received US$589 million in bids for the bond (more than twice oversubscribed) and has announced a plan for a third infrastructure bond.

These positive indicators do not make the challenge any less daunting but certainly suggest that there are those ready to rise to it.