Building bridges

In search of solutions for Africa’s infrastructure gap
April 15, 2015

An examination of the infrastructure challenges facing Sub-Saharan African countries and the initiatives to solve those challenges.

The infrastructure and energy challenges currently facing sub-Saharan Africa are immense, as are the opportunities for public and private sector investors, developers and financiers. Speaking on the developmental challenges facing that country, Ellen Johnson Sirleaf, President of Liberia, provided a particularly poignant illustration when she lamented the fact that the AT&T Stadium near Dallas, Texas, home to American football team the Dallas Cowboys, uses more electricity than the total installed capacity of Liberia.

The good news

It is fair to say that the narrative regarding Africa has, in recent times, shifted from one of despair and pessimism to one of hope and affirmation. A particularly striking illustration of this can be found in the December 2011 special report of The Economist entitled ‘The hopeful continent: Africa rising’ which stands in stark contrast to the May 2011 special report in which The Economist labelled Africa ‘the hopeless continent’.

Much of this optimism is well founded:

  • In the past year, 12 of the 30 fastest-growing economies in the world have been from SSA.
  • Boston Consulting Group’s sustainable development assessment methodology (an indicator of a country’s general welfare) found that, of the top 30 countries with the greatest recent progress in well-being, eight were
    from SSA.
  • Standard Chartered forecasts that SSA’s economy will grow at an average annual rate of 7 per cent over the next 20 years.
  • Standard Bank estimates that the African middle-class households in 11 SSA countries (Angola, Ethiopia, Ghana, Kenya, Mozambique, Nigeria, South Sudan, Sudan, Tanzania, Uganda and Zambia) have trebled between 2000 and 2014.
  • Record amounts of foreign direct investment have flowed in – largely driven by high commodity prices over the past few years and China’s increasing demand for raw materials.
  • Democracy seems to have taken root in much of SSA, along with greater accountability and improved economic management.

The African Development Bank (AfDB) has identified infrastructure development as one of the keys to unlocking economic growth and development in SSA, and has estimated that inadequate roads, housing, water and electricity reduce SSA’s economic output by approximately 40 per cent.

The challenges

Despite the significant progress made over the past 15 years, there are still formidable challenges, with inadequate infrastructure being a major obstacle to sustainable growth.

The infrastructure gap

The African Development Bank (AfDB) has identified infrastructure development as one of the keys to unlocking economic growth and development in SSA, and has estimated that inadequate roads, housing, water and electricity reduce SSA’s economic output by approximately 40 per cent.

In 2011, the International Monetary Fund (IMF) published an exhaustive study comparing the infrastructure in SSA to that of other developing nations and Organisation for Economic Co-operation and Development countries. The results set out below make grim reading:

Utility outage

Infrastructure in sub-Saharan Africa is far less developed on average than in other low-income countries around the world.

  Low-income countries
  Sub-Saharan Africa Rest of World
Road density1 137 211
Paved road density1 31 134
Power generation capacity2 37 326
Electricity access3 16 41
Access to reliable water3 4 60 72
Access to sanitation3 4 34 51

Source: Yepes, 2008. 1 Kilometers per square kilometer. 2 Megawatts per population in millions. 3 Percentage of population. 4 At or above a standard threshold of quality. Source: IMF 2011 comparative study of African infrastructure

 

Poor roads, railways and ports are a major barrier to trade. Intra-Africa trade has traditionally been significantly lower than the continent’s trade with the rest of the world. In 2013, merely 11 per cent of total African trade took place within SSA. By way of contrast, 70 per cent of total European trade was intra-European. One of the barriers to intra-African trade is the poor infrastructure and the associated costs of transporting goods between African states.

  • According to a United Nations (UN) report from 2010, it costs US$1,500 to ship a car from Japan to Abidjan, a distance of 13,947 km, while shipping the same car from Addis Ababa to Abidjan (a distance of 4,698.3 km) costs US$5,000.
  • The US trade department estimates that it would cost more to ship a ton of wheat from Mombasa (in Kenya) to Kampala (in Uganda) than it would to ship the same consignment to Chicago.
  • Only one third of Africans living in rural areas are within 2 km of a paved road.

Africa’s power networks are woefully inadequate, contributing to the excessive cost of doing business in Africa and as a result economic growth and development suffer:

  • Nigeria, Africa’s largest oil producer and most populous country with more than 160 million people, only produces 4,000 megawatts of power (less than half its total demand), which costs the country approximately 4 per cent in lost GDP annually.
  • Power from private generators, a necessity in many African countries due to the unreliability of the national grid, costs up to ten times more than in OECD countries.
  • Power shortages trim more than 2 per cent from annual GDP growth in SSA.
  • The World Bank estimates that SSA (with a combined population of 800 million) generates roughly the
    same amount of power as Spain (with a population of 45 million).

The financial gap

In 2011 the World Bank estimated that approximately US$75 billion would be required each year to address Africa’s infrastructure gap. At the time, SSA countries were spending approximately US$40 billion each year on developing and maintaining existing infrastructure, leaving a financing gap of US$35 billion.

Mind the gap

Sector-specific spending requirements

Source: World Bank 2011 (‘Africa’s Power Infrastructure: Investment, Integration, Efficiency’).

 

Recently the World Bank revised its figures and now estimates that US$93 billion of infrastructure spending is required per year. This number is even more daunting when one considers that the total capital inflow into SSA for 2013 was only US$86.1 billion.

The AfDB estimates that in Nigeria alone, US$35 billion per year of spending is required for transport infrastructure, electricity, water, sanitation and telecommunications.

Financing infrastructure

Currently SSA attracts only two to three per cent of total global foreign direct investment, and only contributes one per cent to world GDP. The traditional model in many African countries has been for the government to act as the sole financier of infrastructure projects and to take responsibility for construction, operation and maintenance of these projects. However, it is clear that the sheer scale of the infrastructure and financial deficits require governments to look beyond their own means and develop partnerships with other African countries, multilateral financial institutions and, increasingly, private financial institutions.

Public private partnerships (PPPs)

While there have been a number of significant infrastructure transactions developed in SSA using the PPP model, many African countries have lacked the institutional capacity or even the legislative framework to facilitate greater private sector involvement in the development of key infrastructure projects. However, the South African government’s ambitious Renewable Energy Independent Power Producer Programme (REIPPP) has illustrated the hugely beneficial role that private sector know-how and capital can play in bridging the infrastructure and finance gaps. In 2011 the South African government launched a competitive tender process for the development of renewable energy power projects. Initial indications are that the programme has been a resounding success, with the initial projects reaching financial close and the process being widely considered to have been transparent and cost-effective. The projects attracted US$14 billion of funding from a mix of local and international banks, development finance institutions (DFIs), private equity and even institutional investors such as pension funds. South Africa is now ranked among the top ten countries globally in terms of renewable independent power investments.

PIDA

One of the most interesting recent initiatives has been the Programme for Infrastructure Development in Africa (PIDA), which the African Union has adopted as a framework for developing regional and cross-border infrastructure projects. Still in its infancy, PIDA has identified 51 priority action projects (PAP) which are of strategic importance in SSA. The projects that should be completed by 2020 will cost US$68 billion and will be funded by a broad mix of government coffers, public private partnerships, official development assistance (ODA), partners such as the EU–Africa Infrastructure Trust Fund, and regional development banks such as the AfDB.

Total capital cost of PIDA’s PAP by sector
and region: US$67.9 billion through 2020

By sector

 

By region


Increased cooperation and pooling
of funding

There has also been an increased emphasis on cooperation, partnerships and a pooling of funds by DFIs, state actors and private sector investors:

  • The Infrastructure Consortium for Africa was launched in 2005 as a partnership between the World Bank, the G8 countries, the AfDB and the European Investment Bank as a platform to increase infrastructure financing, sharing of knowledge, research and pooling funds for investments in energy, transport, water, and information and communication technology in SSA.
  • China and the International Finance Corporation (IFC) have pledged US$3 billion for joint investments aimed at supporting private-sector-led development in emerging markets, including Africa.
  • The African Finance Corporation (AFC) is a multilateral finance institution (established by treaty between Nigeria (the host country), Guinea-Bissau, Sierra Leone, The Gambia, Liberia, Guinea, Ghana, Chad and Cape Verde) whose public and private sector shareholders have contributed over US$1 billion in capital towards financing projects in SSA. Importantly, as one of the highest investment grade-rated multilateral finance institutions on the African continent (with an A3 (long-term)/P2 (short-term) foreign currency debt rating by Moody’s Investors Service), the AFC has the ability to raise funds on the international debt and capital markets at competitive rates – certainly much lower than any of its founding member states could on their own. Since its inception in 2007, the AFC has financed over 26 projects and deployed close to US$2 billion into private sector-led infrastructure projects.
  • President Obama’s recent Power Africa initiative envisages a broad partnership between various US institutions (such as the Agency for International Development, the Trade and Development Agency, and the Agency for International Development) and bodies such as the World Bank and AfDB as well as US and international private sector investors and sponsors working together to double electricity access in SSA by installing an additional 20,000 megawatts (MW) of generation capacity by 2020.

Diversified funding sources

Since 2006, African countries have managed to raise over US$25.8 billion from international capital markets. In 2014 alone, Zambia, Kenya, Ivory Coast, South Africa, Senegal and Ghana all issued sovereign bonds. Impressively, the yields on some of these bonds were comparable to those from some European states, which is an encouraging indicator of the shift in the perception of risk in Africa. African countries have also sought to harness the steady stream of cash remittances by the 140 million Africans living outside Africa by issuing ‘diaspora bonds’ which are aimed at retail investors and can be linked to specific projects. The diaspora bond issuances by Ethiopia and Kenya have had a mixed reception from Ethiopian and Kenyan emigrants, but the AfDB is optimistic that SSA states can draw on the successful diaspora bond issuances by Israel and India and adopt some of the measures used in these issuances, such as ensuring that the funds from ‘diaspora bonds’ are segregated from all other revenue and only deployed for specific projects.

Lessons from Europe

An unlikely solution may be found in Europe’s Project Bond Initiative. This initiative was launched by the European Commission (EC) and the European Investment Bank (EIB) as a means of kick-starting infrastructure investment in Europe. Infrastructure investment had slowed down in the wake of the global financial crisis and regulatory reform (in particular, Basel III), which rendered the sort of long-dated loans typically required for infrastructure finance increasingly costly, and thus less attractive to international banks. The EIB identified the US$50 trillion pot of capital managed by institutional investors (such as pension funds, sovereign wealth funds and long-term insurance) as a way of plugging the gap left by retreating banks. The EIB has sought to make infrastructure investments a more attractive asset class by providing some form of risk-sharing instrument, such as subordinated debt and/or debt guarantee, particularly in respect of projects that are deemed to be too risky for institutional investors or have not been able to achieve an investment grade credit rating.

Most African countries lack the necessary institutional, regulatory and economic environment for the successful issuance of project bonds. However, as EIB has shown in Europe, DFIs and multilateral institutions can play a crucial role in not only providing technical assistance but also in providing credit support where the conditions for a successful bond issuance are absent. In the same way that the EIB has sought to boost non-investment grade bond issuances, there is a clear role for DFIs (such as the AfDB and IFC) to provide credit support where the conditions for a bond issue are absent. Organisations such as the Multilateral Investment Guarantee Agency (MIGA) and the South African government backed Export Credit Insurance Corporation already provide credit enhancement and political risk insurance in developing countries, and one can certainly envisage an extension of their activities to providing support for project bond issuances.

African capital markets

The AfDB’s experience with local currency bond issuances has shown that there is an appetite among African institutional investors for local currency denominated debt securities. In 2014, the AfDB established an NGN160 billion (approximately US$1 billion) Medium Term Note Programme, and issued its first tranche of local currency notes for NGN12.95 billion (approximately US$80 million). Interestingly, these currency bonds were structured to match the underlying projects to which the Bank will lend the proceeds, including infrastructure projects. The South African REIPPP initiative is living proof that pension funds and long-term insurers can play a key role in providing equity and debt funding for infrastructure projects.

As Africa’s middle class continues to expand, pension assets are similarly increasing at a rapid pace. For example, Kenya’s pension investments grew by 27 per cent in the decade up to 2013. In South Africa, the Government Employee Pension Fund (GEPF) currently has over US$100 billion in net assets and has targeted infrastructure projects as a key investment class, not only because of their potential for developmental impact, but also because of the consistent long-term returns and diversification benefits.

With the optimal regulatory and investment environments and an innovative approach to the development of suitable financial products for the growing African middle classes, it is by no means a stretch of the imagination to envisage a future where the growing pool of savings in Africa is used to finance the roads, ports, railways and power stations that will bridge the infrastructure gap.