Africa needs to invest $1.2trn to fast track infrastructure

Karuma Hydro Dam  in Uganda:
More energy generation needed

According to the Africa Development Bank’s Africa Economic Outlook for 2018, Africa needs to invest a total of US$1.2 trillion over the next seven years on productive and profitable infrastructure projects.  This works to an average spend of US$170 billion a year at the top end.

Of this amount, the continent, through budgetary allocations and donor support, can manage $65 billion a year, leaving a yawning gap of US$105 billion or a total of $735 billion over the seven-year period. The AEO breaks down the sectoral needs as follows in order of priority: US$ 35-50 billion on energy, $35-47 billion on transport, and $55-66 billion on water and sanitation. 

Africa is under increased pressure to invest in infrastructure in order to remove the inefficiencies that could stall the recently launched continent-wide free trade area. AfCFTA billed the largest free trade area in the world holds the key to Africa’s economic independence and security.

 However, the continent’s productive sectors are uncompetitive due to structural deficiencies, among which is small markets, and low capacity utilization due to infrastructure bottlenecks. For AfCFTA to succeed, experts say, the continent needs to invest in transport and energy infrastructure. 

Thika Highway in Kenya:
More of these needed

It needs to improve productivity by removing nontariff barriers among which is poor infrastructure. Ports are inefficient because of the lack of reliable transport inland. Goods take weeks to reach the customer because of poor roads and lack of high-speed railway lines. Manufacturers invest in their own generators because of unreliable grid power supply, rationing, and outages.

All these bottlenecks increase the cost of production leading to high consumer prices, low demand, and the proliferation of cheap imports. Industrialization cannot grow in such a business environment. Yet Africa must industrialize to create jobs and reduce the incidence of poverty.

Given that domestic sources cannot meet the continent’s demand for infrastructure, external sources will be necessary. The continent will need to raise at least US$0.8 trillion from external sources to build infrastructure over the next seven years as a top priority.

Offloading at a Port: Lack of good
  overland Transport cause delays at Ports

This is a huge amount for a continent whose GDP now stands at US$2.5 trillion. Therefore innovation in funds mobilization is necessary.

Of course, the GDP will not remain static. In any case Africa’s GDP growth is robust at around 4.0 percent, way above the growth in other emerging economies. However, this growth cannot generate the funds needed to build infrastructure hence the need to mobilize resources through all mechanisms.

The AEO 2018 says that Institutional investors, Commercial banks and Sovereign fund managers are sitting on US$ 100 trillion in savings. This means that the funds needed to invest in Africa’s infrastructure is a drop in the ocean. However to mobilize these resources, Africa needs to develop a pipeline of bankable projects, says AfDB   www.afdb.org.

Kenya's SGR: More of these will ease
landlocked countries develop

The AFDB has set up the Africa50, www.Africa50.org, an investment vehicle whose job is to help develop such a pipeline of bankable projects in the continent. Africa50’s goal is to move the bulk of project development away from the public to the private sector in order to fast track investment in infrastructure. It, therefore, targets private sector-driven projects or those designed on a PPP model in transport infrastructure, energy, and ICT. These sectors, it is estimated, will consume 80 percent of the total investment in infrastructure.

  Africa50 capitalized at US$870 million, is owned by 30 shareholders including 27 countries and three Central Banks.

Although a step in the right direction, it is doubtful that Africa 50 can achieve the target infrastructure levels on its own in the short-run. Some Borrowing by African states is therefore unavoidable. Even then, the active participation of Africa50 could reduce the risk profile of debts in Africa and reduce the cost of borrowing.