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Africa’s infrastructure crisis requires urgent collaboration
Written by Asanda Tsotsi: Head Project & Export Finance: Standard Bank Group CIB
Infrastructure development's positive effect on economic growth and poverty alleviation is well documented. It is a key driver and enabler in sectors such as health care, agriculture, logistics and energy. However, we cannot simply invest in infrastructure projects and expect them to unlock Africa’s potential: it needs to be the right type of infrastructure, and the investment process has to result in tangible impact, for it to have a transformative impact on society as a whole.
According to the African Development Bank, the continent has a $100 billion annual shortfall in infrastructure financing. This gap means that Africans are more likely to go without electricity, clean water, good quality roads or internet connectivity. In 2022 nearly 600 million people in sub-Saharan Africa lacked access to electricity – accounting for over two-thirds of the global population without power – but fewer than one in five African countries aim to reach universal electricity access by 2030, while a further 45% have set targets less ambitious than the goals described under SDG 7.
The infrastructure gap is not only impacting our lives today, but also significantly curtailing our potential for economic, entrepreneurial and developmental progress. Access to energy, like education and internet connectivity, is foundational and transformative. The African Union estimates that inadequate infrastructure has led to the reduction of national economic growth by 2% annually in most African countries and as much as 40% reduction in industrial productivity. Without that infrastructure we are hamstrung. Conversely however, if we close this gap, we unlock the immense potential of infrastructure to drive growth, employment, and poverty reduction.
So, the question remains: if we are in such dire need of infrastructural investment, what is preventing it? There is certainly potential for increased government spending. The African Union has noted that African governments have spent about 3.5% of their GDP on infrastructure development over the last 20 years, compared to China and India, who spend 7.7% and 5.2% of their GDP on infrastructure, respectively.
However, between public, local and international private investors, including developmental aid organisations, there is a tremendous amount of potential funding available. Institutional investors – including insurance companies, pension funds, and sovereign wealth funds – have around $100 trillion in assets under management globally. Availability of capital is not, therefore, the bottleneck. Instead, the primary challenge facing the effective deployment of funds is the bankability of existing infrastructure projects.
For a project to be bankable it must be viable (in that it makes economic sense, is aligned with on-the-ground needs, and creates long-term value); the project team must be experienced and have the requisite skills; and it must be adequately supported by consistent regulatory and political frameworks.
Reforms by governments are critical in catalysing infrastructure development within these parameters. The role of central banks and regulators is outsized in this regard. Current capital regulations for financial institutions do not encourage infrastructure investment, as the capital costs are more onerous for long term infrastructure projects than shorter dated balance sheet lending. The private sector also needs to play a larger role in developing and operating infrastructure assets as sovereign balance sheets are constrained. Regulations that enable public-private partnerships and establish a basis of mutual trust are crucial.
Alongside these considerations is the elephant in the room: climate change and its infrastructural requirements. The impact of climate change on Africa is disproportionately high. Not only does the continent face heightened physical risks due to its geography, but its lack of infrastructure also makes it more vulnerable to the effects of rising temperatures, floods and other climate-related disruptions.
Incorporating climate resilience into infrastructure planning and financing will be crucial, and ESG and climate-linked factors will continue to play an outsized role in the project-financing landscape. Financing models, and the bankability of projects, will need to evolve to incorporate ESG-linked incentives, performance metrics and risk factors. This includes green bonds, sustainability-linked loans, and other innovative structures. Investors will be more discerning and favour projects that demonstrate strong ESG credentials. Initiatives aligned with climate-change mitigation, renewable energy and sustainable development will be prioritised.
The way in which we approach the energy transition is also important. Investors sometimes view it homogeneously, expecting a rapid move away from fossil fuels to renewables. But the reality is different across African countries – some have better renewable resources than others, and social and developmental needs must be balanced with climate-related goals. Investors need to understand the specific resource endowments and transition pathways for each market.
Rather than viewing ESG requirements suspiciously, the continent should focus on the benefits it can bring – mitigating climate change through the energy transition, building climate-resilient infrastructure and leveraging sustainable development opportunities. Embracing ESG principles can help unlock much-needed financing for Africa's infrastructure needs, as well as jobs and economic growth, if done in a collaborative manner between the public and private sectors.
In fact, if there is a single key to unlocking infrastructural progress and Africa’s potential, it is collaboration. We need to share knowledge widely and urgently when we find models that work. We need to create and support thought-leadership forums and platforms that bring affected stakeholders together to navigate challenges and opportunities. We need to make scarce skills available in the private sector to governments, and regulators.
Above all, stakeholders – including financial institutions, local and foreign investors, governments, businesses, development agencies and communities – need to realise the overwhelming mutual benefit that stands to accrue if we can unlock effective infrastructural investment. It may sound trite, but we are constantly meeting people and institutions who believe in Africa and its future. There is a broader mission to drive the continent's development. That’s a consequential place to start if we’re trying to unlock bold, ambitious, transformative visions of infrastructural development.
Given the long-term nature of infrastructure assets, having confidence and comfort in the markets you operate in is essential. It is not just about individual transactions, but the bigger picture of increasing the continent's resilience, creating jobs and reducing poverty. This larger purpose is what will bring stakeholders together in a way that unlocks Africa’s potential.