Infrastructure remains a top priority for economic and social development for Africa.
The Africa Infrastructure Development Index (AIDI), which tracks the progress of infrastructure development across the continent, shows that sub-Saharan Africa has the lowest stock and poorest quality of infrastructure.
Therefore, there is a compelling need to accelerate infrastructure development in this region, says Bahati Sanga, a University of Stellenbosch Business School graduate of the MPhil in Development Finance programme.
“Africa’s poor infrastructure is a hindrance to inclusive growth, poverty alleviation, job creation, industrialisation, intra-regional trade and regional integration. Poor maintenance of existing infrastructure in Africa is also discouraging new investments,” he says. “A key constraint to Africa’s infrastructure development is the lack of reliable and sustainable funding.”
In his research for his Master’s, Sanga explores factors that influence private participation in infrastructure in sub-Saharan Africa, which comprises 48 countries. He says understanding the factors and progress made in the past three decades will help to expand the infrastructure financing ecosystem through crowding in domestic and international private capital to close the infrastructure financing gap and to accelerate infrastructure development which has multiplier effects on these countries economy.
“The financing gap has led to low infrastructure stock and quality in sub-Saharan African countries compared to other regions. Moreover, there is a shortage of infrastructure services to the growing population and rapid urbanisation of these countries.
“Private participation in infrastructure is increasingly becoming one of the ways to accelerate infrastructure development in developing countries by either fully or partly financing infrastructure projects with public partnership,” he says.
“If well-structured, private investments in infrastructure can offer many benefits to these countries: lessen public fiscal deficiencies due to increasing cost and demand of infrastructure development; transfer project risks to the private sector; improve quality, stock and efficiency of infrastructure services; accelerate delivery and innovation, and obtain value for money by offering reliable infrastructure services.”
Sanga adds that multilateral development banks (MDBs) and international financial institutions (IFIs) are now pioneering efforts to mobilise funds from private and institutional investors to accelerate infrastructure developments in developing countries. “The availability of assets under management in Africa and globally has changed the narrative from resource scarcity to finding factors that attract private and institutional investors to channel their savings to infrastructure development in sub-Saharan Africa.”
He offers the following five policy recommendations on crowding-in private and institutional investments to accelerate infrastructure development in sub-Saharan Africa:
* Sub-Saharan African countries should develop sustainable policies on the provision of government’s support to private and institutional investors in financial and non-financial terms. Government financial support mitigates the infrastructure post-implementation risks, especially on long-term revenue streams. Financial support includes direct finance, guarantees, tax incentives and subsidies.
* Sub-Saharan African countries should establish policies that uphold market conditions and competitiveness such as dissemination of information and approving tariffs for infrastructure services at a cost-covering ratio rather than distorting the market with a surge of subsidies.
* Sub-Saharan African countries should put in place policies that encourage engagement of MDBs to increase transparency and reassure both the general public and the private sector on the soundness, viability and potential benefits of infrastructure projects.
* Sub-Saharan African countries should develop a comprehensive pipeline of bankable and strategic projects to increase the participation of private and institutional investors in infrastructure development.
* Policymakers should maintain stable macroeconomic conditions and monitor the volatility of variables such as inflation and exchange rates.
Sanga says the question remains whether the Covid-19 pandemic will disrupt the private participation in infrastructure development similar to the global financial crisis in 2008 and 2009 with a downward trend on infrastructure investments. “The pandemic has further strained sovereign funding, thus crowding-in private capital will complement public finances to continue developing infrastructure and consequently accelerate economic recovery in sub-Saharan Africa.”