Africa’s Infrastructure Boom – Will This Time Be Different?

Africa infrastructure
Across Africa there are massive projects going on

High inflows to Africa’s infrastructure sector bode well for growth. But stubborn obstacles – from procurement to currency denomination choices – now need to be tackled.

From new airports in Kenya, Senegal and Rwanda to the interstate railway project promising to connect Sudan and Chad, Africa is in the throes of an infrastructure boom. Construction industries are flourishing in Angola and Nigeria. In sandy Lamu, a new port could transform the export potential of Kenya, Ethiopia and South Sudan.

Transport corridors along southern Africa promise to strengthen integration, especially between South Africa and Mozambique. Ambitious new financing mechanisms are under debate; most recently, the African Development Bank’s infrastructure bond scheme to raise $22bn for ports, railways, roads and energy. China’s presence has brought undreamed-of quantities of infrastructure capital, and Western mining companies are drawing up infrastructure proposals to improve the competitiveness of their resource bids.

But this is not the continent’s first infrastructure investment frenzy. After independence, governments penned similarly ambitious plans, and European and American financiers piled in. Even Zaire, one of the continent’s most chaotic countries, attracted billions of dollars to support copper, manufacturing, steel and energy projects. But for all the transformational rhetoric across the developing world in the post-war era, it was only East Asia that deployed infrastructure spending at the rate and quality necessary to set off sustained high growth. Investment trends were low in Africa. Between 1960 and 1994, the continent invested 9.6 percent of GDP overall, while the proportion of other developing countries was 15.6 percent.

The public investment that was released often served prestige purposes rather than progressive ones. In the 1960s, when Ghanaian hospitals were out of medicines and industries starved of materials, the country spent $16m on a gigantic conference hall, with water fountains and banqueting halls, for a single meeting of the Organisation of African Unity. Siaka Stevens copied, spending two thirds of Sierra Leone’s budget on buildings for the OAU, while the Togolese government spent half the national budget on a thirty storey hotel in Lomé. More mundane investments like rural road infrastructure and sewage systems often went wanting.

And infrastructure spending for the general good was often undermined by economic policy. Half-finished projects littered the landscape because – while donors lent money – African governments were co-financiers. When budgets were squeezed due to the oil crisis, global recession, and fiscal overstretching, state funds dried up and projects were left incomplete.

Poor economic policy hampered completed projects. “When a country’s macroeconomic policies, such as exchange rate, tax and trade policies, are distorted, well-intentioned investment projects can turn out to be unproductive,” says Shanta Devarajan, chief economist for Africa at the World Bank. Prior to price liberalisation, Ghana’s overvalued exchange rate – reflected in a black market premium of 100 percent – meant farmers had little incentive to sell cocoa through official channels.

In these contexts, “An investment project that built roads to help farmers get more of their produce to market was unlikely to lead to greater output being sold, let alone reduce poverty by increasing farmer incomes,” Mr Devarajan argues. Even when there was no black market premium, as in the West African franc zone, governments paid farmers a lower price than the world price for their cocoa and coffee, with an implicit tax rate sometimes reaching 80 percent. Farmers’ incentives to produce – even if infrastructure was improved – were limited.

Protected industries were also costing economies in terms of forgone exports and higher domestic prices. Shoe factories, steel plants and car manufacturing plants weighed heavy. “When the protection could no longer be sustained and the tariff barriers came down, these projects failed and did not deliver the intended development dividend,” Mr Devarajan concludes.

From the 1980s, donors starting giving project aid on the condition that markets were liberalised and state-run infrastructures privatised. But utilities put up for sale received few bids. Of water contracts signed, most were in distress, or faced early termination. In electricity, private sector engagement in concessions and leases was disappointing, with around a third of contracts signed in distress, or cancelled. “Private enterprise showed a weak appetite for investment in water and electricity in Africa, in part because the region was considered relatively risky but also because of the nature of infrastructure investment,” says Kate Bayliss, a privatisation expert at the School of Oriental and African Studies. “These sectors require high up-front costs while returns accrue over a long payback period. The investment is not moveable and these sectors have high political, economic and social significance. Hence, from the perspective of investors, they are potentially subject to political interference which is even more risky in a weak institutional context.”

Private operators did not necessarily prove better than public. One of the best performing water utilities, the National Water and Sewerage Corporation in Uganda, is government-owned, while one British operator, City Water, performed worse than Tanzania’s public operator and lost its contract in 2005. “Evaluation of the relative performance of public and private utilities is difficult, because it is not easy to isolate the impact of the private sector when there are other changes going on at the same time,” says Ms Bayliss. “Privatisation is often linked to the release of donor funds which will lead to performance improvements which can be mistakenly attributed to privatisation.”

The financing of the private sector in the water industry has been “virtually zero” over the past 20 years, she concludes. Private investment in electricity generation meanwhile, on an annual basis, is less than 4 percent of required spending.

Today, while growth rates are higher, the infrastructure deficit yawns. Indeed it is becoming an even bigger problem. “Africa is more chronically short of infrastructure than ever because it is now growing fast, placing a greater strain on a stock that was already inadequate,” says Paul Collier at the University of Oxford. The cost of freight on African roads is four times more expensive than other developing territories and travel between African countries is costly and lengthy. Thirteen countries have no operational rail infrastructure. It costs Citadel Capital $25,000 to get a 40 foot container from Mombasa to their agriculture project in South Sudan. Power cuts shave percentage points off growth. Africa has invested just 4 percent of its GDP in infrastructure over the last decade, compared to China’s domestic investment ratio of around 14 percent.

One continuing obstacle is the long decision-chains involved in procurement selections on ports, airports, roads and utilities, which increase the likelihood of political meddling. “Sometimes these processes don’t survive more than one administration…there is quite a lot of perceived risk, which does deter some companies,” says Chris Brown, a lawyer at Norton Rose.

Donors can slow the wheels too. “The World Bank makes its processes so complicated, so drawn out, so difficult to access,” says Neil Upton, energy and infrastructure partner at SJ Berwin. “For large scale projects to succeed, they need momentum. It can take you five or six years in a really big project to get there and if you don’t have momentum you could have government changing more than once, and when government changes everything gets re-looked at. That delay is substantial on a balance sheet.”