Infrastructure Investment: Part of Africa’s Solution

IMF Blog, October 28, 2014

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Author: Antoinette M. Sayeh.
Date: October 28, 2014.
Purpose: Summarize progress, challenges, and policy actions for addressing sub-Saharan Africa’s infrastructure deficit, drawing on work in the Regional Economic Outlook: Sub-Saharan Africa.

Tremendous efforts are under way to upgrade sub-Saharan Africa’s infrastructure, yet needs remain immense, evidenced by frequent electricity blackouts, poor roads, and insufficient access to clean water in many countries.
Infrastructure is a key challenge for policymakers; improved infrastructure can generate new growth opportunities in manufacturing and services, reduce barriers to intraregional trade, and help economies transition to higher productivity activities.
Without improved infrastructure, the increase in productivity and greater economic diversification necessary to sustain Africa’s current growth momentum may not materialize.
The region has experienced a revolution in access to telecommunications, with mobile phone subscriptions exploding due to market liberalization and competition.
Progress has been far more limited in supplying electricity and water, and in road and railway development; the region still lags far behind other developing regions.

Many countries have maintained, or even increased, public investment in infrastructure over the last decade.
The lion’s share of infrastructure projects are still financed domestically, either from increased tax revenues or local investors buying domestic public debt.
African banks are increasingly stepping in to finance infrastructure projects.
External financing has improved: foreign investors have been increasingly drawn to sub-Saharan Africa and new partners, most notably China, have emerged.
New financing instruments could make institutional investors—including pension funds both from inside and outside the continent—more willing to finance relatively risky, but high-return, projects.

Higher investment has not always translated into better outcomes for the population.
Telecommunications is a clear success story; other sectors—electricity, water, roads, railways—show limited progress despite increased investment.

Overall principle: Scale up infrastructure effort together with “investing in investment” — develop a clear vision for the whole sector and plan spending beyond the current budget.

Strengthen public investment management:
- Improve public administration capacity to identify, implement, and monitor complex projects within the existing resource envelope.
- Create a central agency to prioritize projects proposed by various ministries and conduct cost-benefit analyses.

Mobilize and structure private sector involvement:
- Look beyond purely public investment; encourage private companies where the business case and business environment are conducive (example: telecommunications; potentially railways or electricity generation).
- Use public-private partnerships where appropriate, with public sector providing some insurance and the private sector providing execution expertise and innovation.
- Ensure user fees are appropriately designed to allow companies to recoup investments while minimizing recourse to taxpayer money.
- Clearly define roles, responsibilities, and potential financial liabilities of public and private partners in such contracts.

Improve public enterprises and the regulatory environment:
- Strengthen performance of state-owned utilities that often operate as monopolies, lack proper funding, or cannot generate adequate revenue because prices are set too low by government agencies.
- Improve regulation to allow public enterprises to deliver better services and to catalyze interest from private investors.

The region’s formidable growth momentum of recent years is still on; IMF forecasts show sub-Saharan Africa will continue to be the second fastest–growing region in the world, just behind emerging and developing Asia.
Infrastructure investment is part of the solution, but must be well implemented to ensure sustained and durable growth; it is an opportunity not to be missed and can be done.

Antoinette M. Sayeh, October 28, 2014 — Infrastructure Investment: Part of Africa’s Solution