The West treads a path beaten by China

Kenya's SGR build by China: Africa
could do with a trans- Africa Railroad.

The West has woken up to the reality that investment in infrastructure development is simply not for the private sector. The returns from such investments are way outside the private sector’s definition of returns.  For the private sector, returns are purely financial- profits and dividends.

However, returns from infrastructure are both financial and economic. The financial returns count for little as economic returns outweigh the financial returns. Infrastructures are enablers of economic activity as they provide goods and services that raise the productivity - and profitability-of other sectors. That is why governments invest in infrastructure to catalyze robust economic growth.

In the last month, the west has launched a total of US$1.5 trillion plans to invest in infrastructure. These are; the US$ 1.2 trillion Infrastructure Act in the US, and the $340 billion Global Gateway initiative launched last week by the European Commission.

The seven-year- $340 billion global plan targets to invest in infrastructure, digital, and climate projects as a better alternative to China's Belt and Road Initiative report Reuters.

Although roundly demonized, China’s BRI has produced infrastructure in Africa and Asia, jolting the West out of inertia.  Though still demonizing BRI, the assertion that GGI is a “better alternative” is an admission that the Chinese BRI is a good program.

 China’s BRI is demonized as oppressive, opaque, and “a debt trap” for the developing world, especially Africa. Reuters quoted an official as saying; “Unlike China, the EU would ensure local communities benefited from the infrastructure projects under Global Gateway.” Skeptics, this writer among the number, are yet to be convinced that the West is a better creditor. In fact, even critics in the West caution that GGI could fail just like the Build Act in the US if its raison de’ etre is to counter BRI.

Will Africa gain from these initiatives including the Trump era Build Act?  The Act, the US counter to BRI, authorized the US private sector to invest US$60 billion in infrastructure in Africa.  It even created a government agency, the International Development Finance Corporation, IDFC to de-risk corporate America’s entry into Africa by buying a stake in the projects of interest to US engineering firms. It came a cropper.  See also http://eaers.blogspot.com/2018/10/usa-hastens-pace-for-african-market.html

The failure to take off is a pointer that the US private sector has no stomach for high capital outlay projects anywhere, not even at home. The Chinese on the other hand are churning out project after project at home and elsewhere accumulating critical expertise in the process. The lack of experience in working in Africa gives China an advantage over the West.

A Solar farm:
Africa needs more of these

As a measure of the shift of engineering power, the Chinese control 42 percent of all EPC contracts to date. This does not lock other players out, as there is another 58 percent of EPCs crying for takers. A 2018 report by the African Development Bank estimated that the continent must invest an estimated US$170 billion a year in infrastructure for seven years to 2025. Given the available resources, there was a financing gap estimated at US$105 billion a year, said the report.

 Three years to 2025, there is no significant dent in this gap. The implication here is there are plenty of opportunities in the infrastructure sector in Africa. The question is how much of an impact the European Global Gateway initiative will have on Africa’s infrastructure sector. 

The GGI, if it comes into effect, will provide some competition for China in the debt market. In Europe, as in China, governments invest in infrastructure, so there will be no paradigm shift unlike in the US. Africa will thus be spoilt for choice, and this is a form of leverage that could force China to modify its lending terms to Africa, assuming that they don’t favor Africa, that is.

However, as the proverb says, proof of the pudding is in the eating. Once the first contract is signed and the shovel put on the ground, we shall have something to compare. For now, it is all marketing hype.

There is a lesson to learn from the hoisting of public investment in infrastructure, especially in the US. Although the US$1.2 trillion bill is a domestic infrastructure plan with no impact in the developing world, It is proof that large capital outlay projects are out of bounds for the private sector.

This debunks Milton Friedman's “efficient market thesis.” Milton advocated for free markets and limited government. His thesis was the theory behind the “Privatization craze” of the 1980s promoted by the Bretton Woods institutions. It advocated for brutal capitalism. In the process, stripping economies of resilience, replacing it with efficiency.

The Nairobi Expressway:
 Under construction by the Chinese

In the US, that theory resulted in 173,000 miles of poor roads and 45,000 rotting bridges as Federal government investment in infrastructure declined to a trickle.  Incidentally, the US became the leading economy because of massive investment in infrastructure in 1933, 1950, and 1970 before the Miltonian theory took the world by storm.

China rejected the 1980s fad of liberal Economics and charted its own path- a mixture of economic philosophies- that resulted in its rapid growth since 1978. China has grown to the second-largest economy in the world, in less than 50 years, pulling some 800 million people out of poverty and into the middle class. A key plank of China’s progress was massive government investment in infrastructure.  

Infrastructure projects are good at creating local direct and indirect jobs. That is how China’s investment infrastructure and cities distributed wealth and catalyzed robust economic growth. GGI is likely to achieve similar results.  So the argument that it will benefit local communities better is a just a story. Whatever the marketing pitch, Africa can still make hay while the sun shines.

Since donor-funded projects are tied to contracting firms from the donor country, European Civil engineering firms will gain. Some have delivered stillborn projects in Kenya due to financial difficulties at home. This is not surprising, as Europe is yet to recover fully from the ravages of the 2008 financial market collapse that restrained public spending. The consequence of that was a lack of jobs for civil engineering firms and the concomitant financial distress. That GGI will tag along the private sector is a clear indicator that it is a lifeline for their engineering firms.

 Africa is the only large market for infrastructure projects for them hence the need to mobilize resources to enter the market and create jobs for their redundant firm.