Africa’s yawning gap in investment in infrastructure

Lake Turkana wind power station

Africa needs to spend a total of US$ 130-170 billion a year over the next seven years on productive and profitable infrastructure projects, says the Africa Development Bank. The expenditure in order of priority is US$ 35-50 billion on energy, $35-47 billion on transport, and $55-66 billion on water and sanitation.  Of the total capital needed, some $65 billion is already committed by governments and donors. That leaves a yawning gap of $68-108 billion dollars that must be mobilized from elsewhere.

There is no shortage of funds looking for sound investments. An estimated $100 trillion are held by Institutional investors and Commercial banks and sovereign fund managers.  A small proportion of these huge savings is needed to develop Africa’s infrastructure.

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 All Africa needs is to craft bankable resource mobilization strategies to tap into this reservoir in order to industrialize, create jobs and enable inclusive development and dent the poverty rate.  . The continent, therefore, needs to dust off funds mobilization strategies. These include; Private-Public Partnerships and Foreign Direct Investments and bankable debt instruments.  Such attractive strategies would make Africa a major destination for investments funds.  And the economic prospects in the continent are mouth-watering. The middle class on the continent is growing and driving domestic demand for goods and services.

In fact, says AfDB, the growing middle class is part of the factors that insulate African economies from external shocks. The continent has proven resilient to external shocks, posting robust growth rates amid declining fortunes elsewhere. It is this growing middle class that is driving the growth in tax collection because it is driving demand for local manufacturers making them profitable tax-payers. This has seen tax collection in Africa rise to US$500 billion a year, elbowing out donor funding which stands at US$50 billion, below remittances which stands at $60 billion. Africa is thus a ready market for infrastructure services and a high return market for investment in such services.

But why, given the huge tax revenue does Africa need investors in infrastructure? why not devote more funds to infrastructure? Simple, there are more competing demands for the limited tax revenue. Therefore, more funds are needed targeting infrastructure development. The resources should be preferably ring-fenced to develop infrastructure.

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AfDB prioritizes energy because of its huge economic potential. More than 640 million Africans have no access to energy, giving an electricity access rate for African countries at just over 40 percent— the world’s lowest. Per capita consumption of energy in Sub-Saharan Africa is 180 kWh, against 13,000 kWh per capita in the United States and 6,500 kWh in Europe. Further, access to energy is crucial for reducing the cost of doing business, unlocking economic potential and creating jobs.

Africa’s energy potential, especially renewable energy, is enormous, yet only a fraction is employed. Hydro power provides around a fifth of current capacity, but not even a tenth of its potential is utilized. Similarly, the technical potential of solar, biomass, wind, and geothermal energy is huge.  What is lacking is a pipeline of bankable projects which can attract foreign investors.

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The ball is now in Africa’s court to structure debt instruments to tap into that huge pool. The structuring should be geared towards attracting private investors into the actual development of certain infrastructure projects. Wind and solar are emerging as quick to install sources compared to say, geothermal energy, which takes decades to develop fully.

 But why prioritize investment in physical infrastructure? Unlike other social investments such as in health and education, infrastructure directly affects productivity and output in the short-run. Increased output in electricity generating capacity will not only raise the stock of energy generating plants, it is also part of GDP formation as an input to the production function of other sectors. Increased availability of electricity will reduce power rationing, thus eliminating the need to invest in standby generators by manufacturing plants. This cuts the production costs by enabling a more efficient use of conventional productive inputs.

Modern transport systems could increase manufacturing competitiveness by cheaply and quickly, moving raw materials to producers and manufactured goods to consumers. Investment in transport infrastructure compliments investment is energy by opening up the market for the goods produced in the continent and cuts the cost of doing business. And the resulting growth creates demand for employees thus reducing unemployment and poverty levels.

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 However, African governments must now start weaning themselves from the provision of all infrastructure.  They must begin to charge the market price for Infrastructure services such as water, electricity, and road tolls. Such payments will ensure that there is enough money to repay the debt, a return to investors and foot maintenance costs thus easing the burden on the government budget. Dependence on tax revenue leads to decaying infrastructure due to a limitation of funds for maintenance.

Studies show that other infrastructure sectors are also profitable with IRRs ranging between 16 percent and 25 percent. Thus they are a good candidate for private sector investment providing a source of stable income flows in the longer term.

 Studies also show that  Capital markets in Africa are vibrant and sufficiently sophisticated to mobilize funds for infrastructure projects. Funds managers out there are you listening?