Africa’s Infrastructure Backlog

By Russell Duke & Michael Tichareva   |   16 September 2015   |   3:58 am  

Michael TicharevaRecently, we had an opportunity to review another great World Bank publication entitled Africa’s Infrastructure: A Time for Transformation edited by Vivien Foster and Cecilia Briceño-Garmendia and published in 2010. It was undertaken by the director’s office of the Department for Sustainable Development in the Africa Region of the World Bank as part of the Africa Infrastructure Country Diagnostic (AICD), a project designed to expand the world’s knowledge of physical infrastructure in Africa. Following research, the report articulates findings and outlines recommendations to address the challenges identified. We report on these issues in this and future articles as we analyse this comprehensive World Bank report. Apart from the ever increasing infrastructure backlog and funding gap as the population expands, nothing much has improved since then and the publication will probably remain relevant for the next decade or so as Africa grapples with her infrastructure backlog.

Findings
The publication articulates the following ten findings relating to Africa’s infrastructure: Finding 1: infrastructure contributed over half of Africa’s improved growth performance in the past and has the potential to contribute even more in the future; Finding 2: Africa’s infrastructure lags well behind that of other developing countries and are characterized by missing regional links and stagnant household access; Finding 3: Africa’s difficult economic geography presents a challenge for infrastructure development; Finding 4: Africa’s infrastructure services are twice as expensive as elsewhere, reflecting both dis-economies of scale in production and high profit margins caused by lack of competition.; Finding 5: Power is Africa’s largest infrastructure challenge by far with 30 countries facing regular power shortages and many paying high premiums for emergency power; Finding 6: Africa’s infrastructure spending needs require US $93 Billion each year, about one-third of which is for maintenance, is more than double previous estimates by the Commission for Africa; Finding 7: The infrastructure challenge varies greatly by country type, with fragile states facing an impossible burden and resource-rich countries lagging despite their wealth; Finding 8: A large share of Africa’s infrastructure is domestically financed with the central government budget being the main driver of infrastructure investment.; Finding 9: After allowing for potential efficiency gains, Africa’s infrastructure funding gap is a minimum of US $31 Billion per year, mostly in the power sector; and Finding 10: Africa’s institutional, regulatory, and administrative reform process Is only halfway along, although they were already proving their effect on operational efficiency.

Recommendations
The report then makes the following ten recommendations to each of the findings:
1: Addressing Africa’s infrastructure efficiency gap is a pressing policy priority with potential dividends of US $17 billion a year;

2: One of the most flagrant inefficiencies is the failure to maintain existing infrastructure assets—maintenance needs to be understood as an investment in asset preservation;

3: Institutional reform remains essential for tackling utilities’ operational inefficiencies, both through private participation and through governance reforms for state-owned enterprises;

4: Institutional reform should also go beyond utilities to strengthen the planning functions of the line ministries and address serious deficiencies in the budgetary process;

5: Reforms are needed to get full value from existing infrastructure, where widespread administrative and regulatory bottlenecks prevent facilities from being fully used;

6: Regional integration can contribute significantly to reducing infrastructure costs, by allowing countries to capture scale economies and manage regional public goods effectively;

7: Development of infrastructure networks needs to be strategically informed by the spatial distribution of economic activities and by economies of agglomeration;
8: Infrastructure’s social policy needs to be rethought, placing more emphasis on recovering costs from those who can afford it and on recasting subsidies to accelerate access;

9: Achieving universal access will call for greater attention to removing barriers that prevent the uptake of services and offering practical and attractive second-best solutions; and

10: Closing Africa’s infrastructure financing gap is critical to the region’s prosperity, and the global financial crisis of 2008 only made infrastructure more relevant.

We have written about these issues repeatedly in our previous articles. These are issues we need to continue talking about and finding solutions. Of critical importance, and something that is squarely within our control, is addressing the funding gap. This requires financial innovation.

Addressing the Funding Gap
Addressing the massive funding gap remains a very large challenge. We have previously noted the participation of emerging economic powerhouses such as China in Africa’s infrastructure over the past decade, and the decreasing participation in recent years as the political objectives shift. We have also in the past noted the lack of investments from pension funds and the need to create an enabling environment to promote more private sector financing.

In our efforts to develop sustainable solutions working with partners, we noted that, as concluded in the World Bank report, some of Africa’s larger low-income countries have the potential to raise a significant amount of local and foreign finance for infrastructure if suitable instruments can be developed. Although in some African countries, domestic capital markets are beginning to look wide and deep enough to provide significant volumes of infrastructure finance, we continue to see the lack of sophistication in many others and great effort is required to develop the domestic capital markets, supported by foreign capital markets. With most of the current infrastructure finance taking the form of relatively short-maturity commercial bank lending, typically between 3 and 7 years, this type of funding is often not the best suited for infrastructure projects as we have reported repeatedly in the past – in the United States for example they use 25 to 30 year financing for infrastructure. In the same conclusion as the World Bank report, we recognise the great need that exists to further develop the domestic debt capital markets and to create regulatory conditions for greater participation by institutional investors in funding infrastructure investments.

National Standard is currently pursuing solutions and global partnerships within this area working with identified partners to deepen the access to finance for African projects, Sovereigns and Sub-Sovereigns including our African Marshall Plan initiative. With more than US $130 Billion required annually towards infrastructure, it is imperative that we continue to seek innovative financial solutions and alternative sources of funding to address the funding gap challenge and unlock Africa’s potential. African Governments have their own work to do to improve the environment for investment from a policy viewpoint to make such projects and investments more streamlined and less government red tape, but we have to do our bit even if it takes time.

Russell Duke is Chairman & Managing Principal at National Standard Finance, LLC. Mr. Duke can be reached at RDuke@NatStandard.com.
Michael Tichareva is Principal & Managing Director of Africa operations at National Standard Finance, LLC. Mr. Tichareva can be reached at MTichareva@NatStandard.com.
The website can be accessed here: www.NatStandard.com



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