How do we pay for Africa's infrastructure?

Late last year I appeared on Odd Lots with Tracy Alloway and Joe Wiesenthal to discuss Africa- China infrastructure and the debt financing situation. And over the course of the conversation, Tracy asked an interesting question. If China has financed and built this much infrastructure, why is the infrastructure gap still so massive? That question is the subject of this post.

Let’s use land transport infrastructure to demonstrate the depth of the infrastructure deficit on the continent. Africa is a very, very large continent and its sheer size is not usually appreciated. The distance between Cape Town and Cairo is 11,010 km. That is over 1,400 km longer than the distance by road between Berlin and Beijing (9,590 km). Over the last 20 years, China has financed the construction of over 6000 km of roads in Africa. As impressive as that may appear, it is not nearly enough to compensate for the infrastructure gap. The distance between Lagos and Algiers alone is 4500 km. The scale of Africa’s transport infrastructure gap is formidable and requires innovative solutions, especially when the conversation extends to secondary roads.

Africa’s rapid urbanization (cities are growing at about 4 percent a year) increases the need for urban transportation solutions such as light rail and roads. Investment in infrastructure has not kept pace with this growth – in cities like Harare and Maputo, more than 30 percent of land within five kilometers of the central business district remains unbuilt. In the average African city, roads occupy a lower share of urban land than comparable cities around the world.

This infrastructure gap persists even though over the last decade, African countries have invested significant amounts in their transport sector. McKinsey quotes an ICA (Infrastructure Consortium of Africa) report that found that between 2013 and 2017, the average annual funding for infrastructure development was $77 billion. Forty-two percent of that came from African governments. African countries have thus been responsible for close to half of their infrastructure financing and in most instances, have breached their utmost budgetary limits.

The cost of weak and non-existent transport infrastructure has come at a significant cost to African lives and livelihoods. There is a story in the Africa Report that demonstrates this cost for Liberia. Despite being just over the border from the world’s largest cocoa producer (Cote d’Ivoire), the Liberian cocoa sector is loss-making and lagging. The main reason is that the harvest coincides with heavy rains and the roads are impassable – trapping the harvest in the bush.

The pandemic induced recession will severely limit the already constrained capacity for African governments to finance their infrastructure. Borrowing for infrastructure will also be limited (in the short to medium term) as most African countries struggle to service existing debt. None of these challenges reduce the need for infrastructure as the continent’s population continues to rise placing significant stress on existing infrastructure and social services.

Faced with sagging budgets, donor fatigue, and high debt levels the African Union is setting up a fund to finance the construction of much-needed roads, railways, and power plants on the continent. The goal is to ask pension funds and sovereign wealth funds in Angola, Egypt, Kenya, Nigeria, and South Africa to invest about 5 percent of the holdings in the fund. It is unclear how much uptake there will be since sovereign wealth fund governance usually limit investment in investment grade assets. It is still possible for these funds to create SPVs that could then make onward investments in such a fund.

Another innovation that remains a viable option to finance infrastructure in Africa is an option I tried in Liberia as Minister of Works. Using a grant from the World Bank’s Global Infrastructure Facility, we hired Ernst & Young as transaction advisors to structure a road project that would attract private financing into Liberia. Liberia did not and still does not have a sovereign rating, the project in question did not include either a toll or a sovereign guarantee. So how did we do it? That will be the subject of a subsequent post.