Fifteen years of brisk GDP growth have turned Africa from a "hopeless" into a "rising" continent, with tremendous economic potential. According to the IMF, of the 22 countries that will expand by at least 7% a year on average in 2014-19—a rate that enables an economy to double its size in a decade—14 will be in Africa.
The unplugged continent
Yet Africa's growth story has occurred predominantly despite its shoddy infrastructure. According to the World Bank, just 16% of Sub-Saharan African roads were paved in 2011, compared with 26% in Latin America, 65% in East Asia and 79% in OECD countries. Likewise, only one in three Africans had access to electricity, against nine in ten people elsewhere in the developing world. Poor infrastructure is a major impediment to even faster economic development; the continent loses 2 percentage points of GDP growth annually as a result of its infrastructure deficit. To close this gap, investment in infrastructure needs to be more than doubled to about US$93bn a year within a decade[1].
A funding challenge as much as a spending one
African governments lack the resources to finance their investment needs. Aid money is not doing the job either, as traditional donors typically favour sectors such as health and education, where the impact of aid tends to be more visible. Private investors have not filled the gap, deterred by long project timeframes, political risk and the complexity of operating in African countries.
However, China's expanding African footprint is changing the picture. With its financial muscle and get-things-done approach China has become the champion of infrastructure investment in Africa. Partly in reaction to this, other players, such as Brazil, India and Japan, but also the US, have woken up to the opportunities of infrastructure investment on the continent. To make the most of these, new partnerships have emerged, such as the newly formed development bank led by Brazil, Russia, India, China and South Africa and Power Africa, a US initiative that has so far received US$20bn worth of pledges from public and private institutions. Thanks to more robust and transparent macroeconomic policies and improved growth prospects, African governments are now also able to tap international capital markets, which was unthinkable a decade ago.
Innovative funding models, which aim to bolster private investors' contribution to infrastructure investment, are being implemented. They seek to share better the risks and costs of a project by combining different sources and forms of financing and by allocating them according to the risk profile of a project's life-cycle (preparation, delivery, operation). These alternative models must be added to the infrastructure financing mix in Africa, pooling funds from national governments, donors, utility consumers, as well as domestic and international financial institutions.
Boosting infrastructure requires that funds are spent, and spent well. This means careful project selection, appropriate planning, effective procurement and, critically, maintenance. To increase the efficiency of infrastructure spending, alternative solutions, such as independent power producers and localised off-grid systems, will be worth considering. Cutbacks to costly and often ill-targeted energy subsidies may also facilitate a more efficient allocation of funds. By some estimates, efficiency gains worth up to US$17bn can be made every year across the continent[2].
The (paved) road ahead
Bringing African infrastructure up to scratch would lower production and transport costs, thereby boosting productivity and facilitating the emergence of a competitive manufacturing sector. Better land, water and air connections would also unlock regional trade, boosting integration. Yet huge challenges remain. For one thing, higher spending on infrastructure is already fuelling a rapid build-up in public debt across African countries. The expanded contribution of private finance will compound the risks of higher public debt, leaving African economies increasingly vulnerable to volatile international capital markets. Enhancing business operating environments, increasing transparency, improving regulations, strengthening the capacity of state-owned utilities and building robust financial sectors will help to mitigate these risks and prevent Africa from missing the next growth train.
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