What’s hindering Africa's infrastructure boom?
Any debate regarding the role of infrastructure development in driving economic growth is now settled. Policymakers from across the political spectrum accept that, when done properly, it will provide a short term economic stimulus and drive growth in the long term.
The McKinsey Global Institute recently estimated the rate of return at around 20 cents for every dollar spent on infrastructure, which provides a healthy base for GDP growth over the life of the asset. It is also widely recognized that the world’s leading economies are struggling to find growth and are increasingly looking to emerging markets to become stronger trading partners and increase their contribution to the global economy.
Despite infrastructure’s positive impact on economic growth there is a well-documented global deficit - Africa alone is estimated to require a minimum spend of circa $100bn per annum over the next 30 years in order to fill the infrastructure gap. This annual requirement could be met almost entirely from Foreign Direct Investment (FDI) sources, as in 2014 they accounted for $87bn of investment into Africa. Additionally, the methods to deliver infrastructure projects are well established, both in terms of legal and financial frameworks, as well as engineering.
What is preventing infrastructure development?
At a recent Africa Forum held at Hogan Lovells in London, a panel of experts questioned why infrastructure is not happening as quickly as we’d like despite the overwhelming need and the ample needs available. The broad conclusion was that a solid idea in the field may not be sufficient to overcome underlying political currents and their interplay with markets. Whilst this may seem obvious, political currents are often overlooked either because they are not adequately visible or, even when identified, difficult to discuss openly. The result is that they are ignored only to assert themselves in unexpected, and often costly ways.
Take Brexit into consideration. In hindsight, European economic collaboration may not have been put at risk had there been an open debate over the merits of a federal Europe, and how London might reach a new settlement with the rest of the country from which it has become so detached. Instead the debate was dominated by fear of remaining (immigration and loss of control) and leaving (economic and political annihilation), neither of which were pertinent to the real issue at hand.
Democratic processes in Africa can often disrupt infrastructure investment as it brings about a change in government every four years. In practice, new governments come in and apply themselves energetically to infrastructure development policy, only to discover after three years that despite enormous progress, they only have a year to run the procurement process and award the contract. This causes private sector partners to look beyond the promises given by the new government on arrival, and seek to understand and support their capability to deliver.
Many African nations find simple “government to government” agreements attractive as they can be closed relatively quickly – usually well within four years - and don’t require costly advisers; this is where China has achieved a leading role in delivering infrastructure in Africa. However, haste when handling infrastructure can be counterproductive, causing a government to overlook necessary steps to ensure their domestic market can take advantage of the investment. China’s solution to such difficulties include providing labor and purchasing materials produced by the infrastructure.
Despite addressing the immediate problem, the solution deprives the African domestic economy of the short term stimulus, and of downstream market opportunities provided by the infrastructure.
Solutions to overcome disruptions
In the short term, potential investors should seek advice and support on the political climate in Africa, and on how to develop a proposal that palliates the effects of the election cycle. It is highly likely that the relevant government will engage on strategy and policy discussions to ensure the project will boost the domestic economy.
In the medium term, policymakers outside of Africa should work collectively to tackle the problem of political currents in Africa. Mass migration flowing through nations like Libya has been become an existential problem for Europe, and requires heavy investment in the affected nations’ infrastructures to assist with recovery and economic growth. Efforts from both sides of the Mediterranean are needed to achieve stability and reduce the economic pull factors driving migration.
It is becoming a priority, not just for those countries but for Europe as a whole that the economic gap is reduced, in order to achieve stability and reduce the economic pull factors driving migration. In essence, a form of coordinated Marshal Plan may be necessary to align the immediate need for infrastructure with long term political and economic objectives.
Policymakers may wish to align their long term infrastructure planning with trade and industrial development policies. Where possible, governments should build strong trading relationships with regional partners to create and stimulate markets which the infrastructure will support, rather than relying on infrastructure as the main stimulus. Building these trading relationships will also encourage the contributors to invest in the common market, benefiting their partner to become economically stronger, and thereby increasing their own value as a trading partner.
Finally, African nations are now considering themselves as a hand-up, not a hand-out; a positive shift that will undoubtedly influence key decision makers surrounding infrastructure investment.