Addressing Africa’s infrastructure deficit

When it comes to addressing the infrastructure deficit in Africa, it’s all about the preparation, says EY’s Bill Banks. Here, he explains why proposed projects need both planning and a strong business case to succeed.

Amid a turbulent global economy, there’s no doubt that the pipeline of positive news from Africa in recent years has been a much-needed boost to policy-makers and investors alike. Increased political stability, the emergence of a middle class already equal to that of India’s and demographic changes that mean by 2035 the continent will have the world’s largest workforce, have all contributed toward the rapid economic growth that many African countries continue to experience.

And yet this growth has occurred despite the continent suffering from significant infrastructure problems. With greater demand come greater expectations in terms of services and, as economies have expanded, the need for new infrastructure has intensified. In addition, trends such as urbanisation, together with surging trade levels, are reshaping the face of the continent.

By 2030, for example, 40% of Africans are projected to be living in cities and, since 2006, African trade has increased from about US$48bn a year to more than $100bn a year. What has not kept pace is the infrastructure itself.

Deficits and development

Africa’s largest infrastructure deficit is to be found in the power sector, according to research from The World Bank Group (WBG), which has found that Africa’s power systems deliver only a fraction of the service found elsewhere in the developing world. The 48 countries of sub-Saharan Africa (with a combined population of 800m) generate roughly the same amount of power as Spain (with a population of 45m).

The WBG has also raised concerns regarding Africa’s network of roads – especially when seen in the context of the sheer size of the continent. Only one-third of Africans living in rural areas are within two kilometres of an all-season road, compared with two-thirds of the population in other developing regions.

While estimates vary, the cost of addressing Africa’s infrastructure deficit is seen to be approximately $90bn every year for the next decade, with spending needed not only for new investments, but also for operations and maintenance of what is already there. Given that the reliance on overseas development spending has fallen back since the financial crisis, infrastructure financing must look beyond aid and governments have to look at alternative financing solutions that are economically feasible.

Policy-makers are increasingly looking at different flows of capital, such as Africa’s foreign exchange reserves invested abroad, pension funds and sovereign wealth funds, all of which can kick-start private sector investment in infrastructure. Given the competition for infrastructure investment around the world – for example, Eastern Europe requires more than €2tn for its infrastructure over the next decade – there is little time to waste.

It’s important to note, however, that important progress is already occurring. EY’s latest Africa attractiveness survey found that, in 2012, there were over 800 active infrastructure projects across different sectors in Africa, with a combined value in excess of $700bn.

South Africa had the most infrastructure projects (with a combined value of close to $130bn). Nigeria was next, with 106 infrastructure projects with a value of close to $100bn. The East African countries of Kenya, Uganda and Tanzania, together with Mozambique, are also all in the top 10 in terms of number of infrastructure projects, while Angola has the fourth-highest capital value overall. The large majority of the total infrastructure projects were related to power (37%) and transport (41%).

Financing and funding

Many of these infrastructure projects contribute to toward nation building and so should spur further economic growth. To ensure that these projects continue to advance, governments and the private sector need to be involved to help facilitate that investment. Africa is not alone in facing this challenge – far from it. Around the world, similar issues have been addressed by other policy-makers. In countries such as Australia, the UK, and the Philippines, governments have partnered with the private sector to deliver capital that can be deployed alongside their own funds.