Infrastructure to Support Industrialisation in Africa

byAntonio M.A. Pedro, Director, UNECA/

SRO-EA

Infrastructure matters• Everybody knows it and talks about it• The Chinese are doing it their way• AfDB has made it a priority in its strategic plan• Caucus meeting (Abuja, March 2014) of Governors of

African Central Banks encouraged BS to use expansionary monetary policies to induce expansion of infrastructure services

• Vale is doing it in Mozambique• Rio Tinto will do it in Guinea• So, what is the problem and why are we here? We are not

doing it at the scale and pace that is needed and more people need to do it across the continent!

Some stylized facts• A telling story: In 2008, through her seminal report, the Africa

Infrastructure Country Diagnostic Report, Vivien Foster painted a picture which subsists to date

• What was the picture?1. Africa’s extensive infrastructure deficit hurts the continent’s

economic growth2. Infrastructure is a major business constraint and depresses

firm productivity by 40% (inadequate power being the most limiting factor)

3. In almost every measure of infrastructure coverage, African countries lag behind the rest of the world

4. The price of infrastructure services in SSA is the highest in the world

Some stylized facts (2) • By late 1980s and early 1990, the level of capital

investment in SSA as a share of GDP could not even sustain existing infrastructure

• Redressing Africa’s infrastructure deficit will cost US$38 billion of investment per year and about the same in operations and maintenance or 12% of Africa’s GDP [Current figure stands at US$93 billion of which 1/3 for maintenance]

• Middle income and oil-exporting countries could meet their infrastructure needs with commitments of about 10% of their GDP, low-income countries 20% and fragile states 40%

Some stylized facts (3) • Container dwell times (12-15 days) in East and West Africa are 2X

international best practice of 7 days• In 1970, SSA had 3X the generating capacity/per million people as

South Asia. By 200, South Asia had double SSA’s capacity• Power is Africa’s largest infrastructure challenge with 30 countries

facing regular power shortages• 60 million Nigerians owned generators and spent 1.56 trillion Naira

(US$9.5 billion) annually to fuel them• MTN spends 660 million Naira monthly to fuel its 6000 generators• In the High-level Dialogue on Extractives we organised in

Mozambique on 28 November 2013, infrastructure came up as one of the top issues for mining companies

• In Tanzania, until recently each of the mining companies operating in Lake Victoria Goldfields had its own power generating sets

OBSTACLES TO BUSINESS

Source: Enterprise Surveys(http://www.enterprisesurveys.org), The World Bank

Economy YearAccess to finance

Access to land

Business licensing and permits

Corruption Courts

Crime, theft and disorder

Customs and trade regulations Electricity

Inadequately educated workforce

Labor regulations

Political instability

Practices of the informal sector

Tax administration

Tax rates

Transportation

All Countries 17.5 3.3 2.9 6.7 1.0 5.1 3.6 9.8 8.3 2.8 9.6 12.3 3.2 10.5 3.4

Sub-Saharan Africa 24.0 5.4 3.0 7.6 0.6 4.0 4.0 12.9 3.0 1.0 8.3 10.8 4.0 7.3 4.0

Burundi 2006 16.1 3.4 1.5 2.3 0.2 2.9 3.8 41.3 0.1 0.0 14.3 6.4 0.9 3.7 3.2

Eritrea 2009 0.0 17.0 28.7 0.0 0.0 0.0 1.7 6.0 3.7 0.6 24.1 0.0 1.1 8.6 8.6

Ethiopia 2006 18.8 16.6 0.5 2.9 5.8 0.7 2.7 7.8 3.6 0.9 4.3 14.3 5.4 13.9 1.8

Ethiopia 2011 33.2 22.9 0.1 2.7 0.4 0.1 5.2 12.2 1.8 0.4 0.1 4.5 7.1 7.0 2.2

Kenya 2007 13.5 1.7 3.2 9.6 0.1 11.5 0.8 11.9 0.1 0.1 4.4 12.0 1.7 21.7 7.7

Kenya 2013 9.7 4.7 2.7 12.5 0.4 4.2 4.6 9.9 1.6 1.2 9.6 24.1 2.9 9.0 2.9

Madagascar 2009 13.3 1.8 0.5 2.5 0.6 13.9 3.1 18.6 2.0 0.2 12.6 15.4 3.3 8.8 3.4

Rwanda 2006 13.6 6.4 1.4 0.8 0.0 0.0 1.1 32.9 3.3 0.0 0.9 1.6 4.2 27.4 6.5

Rwanda 2011 23.0 5.4 1.6 0.5 1.1 2.7 4.6 0.6 4.6 0.3 1.3 16.1 9.3 21.0 8.0

Tanzania 2006 9.8 2.6 0.5 0.5 0.0 1.9 0.3 73.4 1.4 0.0 0.5 1.2 0.7 4.0 3.2

Tanzania 2013 38.7 5.2 3.2 2.5 0.0 2.0 3.1 23.0 1.8 1.3 1.1 6.5 1.4 8.3 2.0

Uganda 2006 6.7 0.8 1.1 2.5 0.1 0.2 0.8 63.6 0.4 0.0 0.3 8.5 0.9 11.3 2.8

Uganda 2013 12.4 6.6 7.8 2.5 0.0 0.7 1.7 23.2 0.4 0.4 1.6 19.8 1.3 18.1 3.5Congo, Dem. Rep. 2006 14.9 1.1 2.0 0.5 0.6 1.9 2.0 46.5 1.0 0.0 5.4 7.6 1.7 9.6 5.4Congo, Dem. Rep. 2010 54.0 0.6 0.3 2.3 0.0 1.2 3.0 9.3 0.2 1.0 8.1 8.6 6.0 4.0 1.5

Overall • Reliability and efficiency: A serious concern• Cost: The world’s highest, which affects the continent’s

competitiveness• Deteriorating physical infrastructure network and stock• Deficient interoperability of infrastructure systems• Missing links and lack of competition• Inadequate safety and security• Local capital base poor to maintain and/or expand stocks• Inadequate number of bankable infrastructure projects• Many natural resources exploited as enclaves• Capacity to plan (including spatial planning), execute,

monitor projects weak

SO: Africa will not be competitive if it does not fix its infrastructure challenges

• Infrastructure : Key to unlock Africa’s potential (as a direct input to the production function, by improving total factor productivity, or by encouraging private investment)

• The relevant question: is no longer whether governments should promote infrastructure investment to underpin development ,but rather how the projects are selected and designed and more importantly how are they financed and executed in an environment with poor tax base, a large informal sector, low savings rate, insufficient domestic resource mobilisation, volatile export revenue and illicit financial flows

• A balance development strategy is needed: Beyond the Rosenstein-Rodan“Big push” or the ILO “Basic needs” approach

But, not everything is so gloomy• We have a framework: PIDA (to coordinate infrastructure

provision)• We have interesting initiatives : The Presidential

Infrastructure Championing Initiative (PICI) under President Zuma, the AfDB Africa50, the US$4.5 trillion Brics development bank (with a focus on infrastructure)

• Good recommendations and consistent messages emphasizing the importance of domestic resource mobilisation: CoM 2009 on “Enhancing the Effectiveness of Fiscal Policy in Domestic Resources Mobilistaion”; African Regional Forum 2011 on “Financing for Development: Mobilizing Resources for Economic Transformation in Africa”; and World Bank Finance for Development Post2015 Report (2013)

But, not everything is so gloomy (2)• African Common Position on the post 2015 DA: Recognised that

Africa’s structural transformation requires “The development of adequate policy space and productive capacities, notably through infrastructure development”

• Growth of pension and mutual funds: It is important to raise their interest for infrastructure projects

• Bond financing, Diaspora bonds and remittance-backed bonds: Annual savings of US$400 billion/year should finance more than Africa’s consumption habits

• We have case studies to learn from: Kenya’s Infrastructure bond (US$228 million) was oversubscribed by two

But, not everything is so gloomy (3)

• AfDB Africa50 Infrastructure Fund: Putting in place a regional financial architecture to leverage infrastructure financing resources from African Central Bank reserves, pension funds, sovereign wealth funds, the African Diaspora, and high net worth individuals on the continent is a step in the right direction

• Africa50 focus on project development (in addition to project finance) is very much welcome: Bankable projects are key to infrastructure development and improving the quality of project pipelines with sufficient project preparation, including economic, financial, technical and environmental feasibility studies, is critical to clearing the way for private sector participation

But, not everything is so gloomy (4)

• There is more competition for infrastructure provision which can generate efficiency gains and exercise downward pressure on unit costs: China (the “big game changer)

• R4I deals: A potential to explore further• Increased recognition of the importance of the

nexus NR vs Infrastructure): Resource corridors/SDI (Vale in Mozambique, Rio Tinto in Guinea):

The case of resource corridors and SDIs

• Linking natural resources development to infrastructure development (SDIs) can make infrastructure projects more bankable

• NR rents strengthen business fundamentals of infrastructure projects

• Natural resources rents can bridge the gap, but improving their governance and management, as well as investing the rents smartly (including in infrastructure), are key pre-requisites to lasting development

The case of resource corridors and SDIs (2)

• Mining as a long-term business is compatible with the long-term nature of infrastructure investments

• Facilitating factor flows in a regional space is important for infrastructure development: An effort needs to be made to accelerate the harmonisation and alignment of policies, laws, regulations, practices, codes and standards

Maghreb Coastal

Red Sea - Nile

Djibouti

Mombasa

Madagascar Bas Congo

Libreville Lomie

Niger: Dakar –Port Harcourt

ConakryBuchanan

Gulf of GuineaCoastal

SekondiOugadougou

Douala

NEPAD indicative Spatial Development Program First Pass!

Current SDIsRSDIP

NEPAD SDP: 1st Pass

However: More needs to be done• Operationalise recommendations: From visions to action• Better mobilisation of domestic savings: Pivotal• Central Banks should be the first Africa50 equity investors

(US$10 billion is needed)• Support the establishment of national Reconstruction and

Infrastructure Development Banks: The financial market space is saturated with commercial banks

• Promote the financialisation of Mutual and Pension Funds• We need the right combination of risks and return :Low

levels of private sector involvement in infrastructure projects in Africa reflects perceptions of high risks and the underdeveloped nature of local capital markets

However: More needs (2) to be done

• CBs should act to lower risk and reduce market and investor uncertainty as well as strengthen the confidence of investors over a long-term horizon

• It is fundamental to establish risk guarantee mechanisms as well as well functioning capital markets (CBs can be part of the solution)

My last words on infrastructure projects: A couple of things to avoid

• Infrastructure “over reach”: Development is not all about physical capital

• Don’t copy the 60s and 70s: Overdependence on foreign lenders rendered many infrastructure projects unsustainable once appetite for investing in developing countries subsided

• Planning without facts: Reliable economic statistics should underpin project assessment and feasibility studies

• Cost escalation, poor project execution, inadequate provision for recurrent and maintenance costs, and unrealistic pricing: Our nightmare

• Dependent development: Weak endowments of human capital and excessive dependence on foreign expertise; African firms are generally notable for their absence and there is no “learning by doing” (R4I?)

Many Thanks!