Reflex Eco Group – Africa news
by Paul Frimpong (Ghanaian Economist)
Africa has the potential to be the world’s leading destination of investments. Africa has the potential and the capacity to control global trade and attract the largest portion of the world’s investment. But the story has always been thwarted one way or the other and the mystery behind it is very clear like an open book. The challenge has always being the incident of poor infrastructure. Africa has the world’s least sufficient infrastructure capacity and this has made trade in Africa very difficult and expensive.
Despite the world has identifying Africa as the next best destination to do business, there is always the limitation and hindrance due to poor infrastructure. Economic efficiency is not harmonized due to difficulty in accessing Africa’s markets. Therefore, for Africa to realize its full potential, then a fully structured and sustainable infrastructure development is needed. Although the continent has successfully maintained an average growth rate of between 4 % and 6% for the past few years, Africa accounts for 12% of the world’s population but only contributes 1% of global GDP and only 2% of world trade.
Energy, water, sanitation, telecoms and transport have long being identified as a major setback to trade on the continent. Energy supply continues to be Africa’s largest infrastructure challenge with 30 countries experiencing frequent power outages with just over a third of Africa’s population having access to electricity. Poor infrastructure cost each member countries growth to reduce by 2percentage point each year and cut productivity by as much as 40%.
According to the World Bank, about $93 billion is needed annually to be able to fund Africa’s infrastructure for the next 10 years. Which is about 15 percent of the region’s GDP and out this, about $60 billion would go to new projects and the rest would go into the maintenance of the existing ones.
The fast, steady and continuous growth in household demand for infrastructure stemming from Africa’s high population growth and the fast increase in the urbanization rates of these populations contributed to fuel the demand independently of all the changes on the production structure of the economies.
Infrastructure development and management is an aspect in which the efficient developments within a society rely heavily upon, and is the cornerstone for socio-economic development. The availability of infrastructure is of great importance in the realization of sustainable development, which is desperately needed in Africa. Infrastructure development and management has become even more essential for Africa’s economic development and integration now than ever before.
Although investing in infrastructure is paramount, identifying the right type of infrastructure at the right time is just as crucial to the continent’s economic development. Infrastructure plays a pointed, often decisive role in determining the overall productivity and development of a country’s economy, as well as the quality of life of its citizens. Hence, infrastructure is highly essential for sustainable socio-economic development of Africa.
For Africa to achieve the possibility of ensuring efficient trade among countries and for it to run smoothly, viable infrastructures should be in place, such as transportation system and means of communication. Unless viable infrastructure is developed in Africa, Africa will remain underdeveloped and still struggle in the global economy. Infrastructure development supports various kinds of economic activity, including as an input into production and also raises the marginal product of other capital used in the production process. Investments in roads reduce transport costs while ports and other logistics infrastructure reduce the cost associated with trade, all of which improve the competitiveness of firms across the continent.
In fact, high cost of transport, energy and internet access is a major economic growth deflator and is partly associated with Africa’s continued economic marginalization. Therefore, providing the right type of infrastructure at the right time will be an important dimension of Africa’s continued economic development. This requires policymakers to focus on encouraging development of the right type of infrastructure at the right time going forward.
Indeed, the infrastructure challenge facing the African continent is seen manifested in various forms ranging from region to region. According to a development research brief, by the African Development Bank (AfDB), in 2009, than 10% (in 10 countries) and less than 50% (in 33 countries) of roads in Africa are paved, 40% of the population lacks access to safe water; 60% of the population lacks basic sanitation. Only 30% of the rural population in Sub-Saharan Africa has access to all-season roads. Transport costs in Africa are among the highest in the world; only 30% of African population has access to electricity; Africa has the lowest telephone penetration – 14% (the world average is 52%). Africa has the lowest Internet penetration – 3% (the world average is 14%).
There are several plausible reasons why infrastructure investments in Africa are low;
First, some infrastructure investments have the characteristics of public goods (non-exhaustive and non-exclusive in consumption) which give the private sector very little incentive to invest. Furthermore, private sector participation may be limited by the lack of stable long-term finance, high sector-specific risk as well as high macro-risk arising from political instability and poor governance. In addition, fiscal constraints may limit the ability of the public sector to provide infrastructure investment.
Other factors includes; lack of a national infrastructure development framework in many countries, lack of detailed and reliable data to help determine financing gaps for infrastructure investment, rehabilitation and maintenance; lack of resources for upstream project preparation, and lack of clear national ownership of regional projects, making project preparation more challenging.
Financing infrastructure in Africa over the years has been a challenge as it has not been efficient and sufficient enough to meet the estimated $93million needed annually. This is due to the fact that most countries in Africa raise their finance through their domestic markets through taxation. First the structure of their economies, especially as majority are found in the informal sector makes it difficult to raise the needed amount and this again is coupled with inefficient tax systems.
It is therefore of essence that in order for Africa to be able to finance its infrastructure needs to the fullest, external sources must be identified going forward. In the years past, funds from Africa’s development partners have often been channeled towards human development. The trend has to swing a little bit towards financing infrastructure deficit on the continent.
Africa has prioritized increased investment both in maintenance and in new infrastructure, new regulatory frameworks, and the promotion of public-private partnerships (PPPs). Under the PPP arrangement, there is the need to make the lenders more comfortable, thus, by mitigating risk, transferring and sharing of risks. It is also important to note that, under PPP, there is the risk of political regime change, convertibility of currency, ability to remit funds abroad, security to protect the financing around the assets. In this case, every structure in the proposal must be dealt with to make the lender more comfortable than to tackle it till the end of the project. There is a huge need for companies across the continent to react in the right ways to be able to mitigate some of the risks. One of the means is to develop consortia to have more collaboration work done on all infrastructure projects.
Yet another source of financing is through the raising of funds from the world’s capital market. Bonds can be issued to raise funds to finance infrastructure on the continent. Then again more African Pension Funds should be invested in developing Africa’s infrastructure than, investing in US Treasury Bonds etc.
To release the potential of Africa, there is the need to reduce the cost of doing business across borders and this means major investments in infrastructure, including roads, ports, internal container depots, inland water ways and railways are needed as well as increase in energy production capacity. The strides being made by national governments, regional and continental bodies in transforming Africa to a modern and growth-induced economy will be a positive step for global prosperity.
ABOUT THE AUTHOR
Paul Frimpong is an Associate Chartered Economic Policy Analyst (ACCE-Global) who writes on the macroeconomy and global affairs. He is also an African Affairs Analyst
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