Infrastructure as a catalyst for African growth

In a wide-ranging conversation on the outlook of infrastructure in Africa, Professor Elias Papaioannou, Co-Academic Director of the Wheeler Institute for Business and Development and Professor of Economics at London Business School, moderated a panel of leading industry experts and practitioners to discuss the opportunities, areas of need, and the investment required for progress in a post-COVID environment.

The Panel included Wale Shonibare, Director of Energy Financial Solutions, Policy and Regulations at the AfDB, Linda Munyengeterwa, Regional Industry Director of Infrastructure for the Middle East and Africa at the IFC, Aaron Leopold, the CEO of EnerGrow, and Alex Masu, head of Mergers and Acquisitions for the Vodacom Group.

Setting a baseline of facts

As the first panel of the day for the Africa Business Summit, the conversation was broad, with a continent-wide focus and an emphasis on the various facets of how infrastructure will play a key role for Africa in the decades following the COVID-19 pandemic.

To establish some context for the discussion, Linda Munyengeterwa provides some key facts that emphasized the infrastructure crisis and what it means for growth on the African continent. She begins by highlighting that when the world moved virtual, both for work and education, large parts of Africa were not able to do so. There are 600 million people on the continent who do not have electricity, there are 350 million people who have no consistent access to water, around 500m people live in cities, a number expected to double over the next 25 years, and outside of South Africa, only 5% of people have broadband access. Overall, Africa has 21 of the 25 least connected countries in the world on its continent. This represents a massive infrastructure gap, which is a hindrance not only to social growth and progress but also business investment. She summarizes by highlighting the types of infrastructure that need simultaneous focus: energy, digital, water, and transport. Providing a segue into the next topic of discussion, Munyengeterwa says that if she had to choose one focus, it would be energy. As the bedrock requirement for future modernization, energy can support all other forms of infrastructure development and the eventual industrialization of Africa.

Energy Infrastructure: Lacking demand, not supply

With the context firmly provided, and the urgency of the need for infrastructure investment identified, Prof Papaioannou moves to the more granular topic of energy production, distribution, and usage. Wale Shonibare provides the argument that although there are plans in place to connect some 600 million Africans without electricity, there are understandable challenges. Firstly, the economics are staggering, and extending the grid to all remote communities is simply not feasible. Mini-grids and solar-home kits are a solution here, but they are challenging in their own ways. Because Africa contains a multitude of different languages, currencies, and country borders (often crossing through cultural regions), implementation and organized planning is slow and cumbersome. Additionally, Shonibare mentions that Africa needs to industrialize, and part of that industrialization is finding at-scale solutions; pockets of small, relatively cost-efficient, solar kits are pushing against that ambition. The result, and current situation, has bankrupted national energy companies that are not able to recoup the investments they have made.

Aaron Leopold builds on this idea of the importance of industrialization by highlighting that the bottleneck in energy infrastructure is not generation, but rather low demand. This is a consequence of two factors: poor distribution and the simple fact that most people do not have devices that consume significant electricity. His company, EnerGrow works to solve part of this dilemma by providing low-cost appliances and tools and encourages customers to use them to earn money and consequently consume electricity. He points to this problem being one of the key obstacles to progress, and in his experience, this lack of demand is a market and ecosystems issue. He points to mega-projects in both Tanzania and Ethiopia that will produce tremendous amounts of electricity of which, in both cases, is not usable by the state producing it. The core reason behind this is because a lot of the small, more remote, communities are not economically viable, even for mini-grids. Getting to the point where such investment is attractive and sustainable will be a key step towards securing other infrastructure goals such as digital, water, and transport.

Digital Infrastructure: Financially sustainable growth through smart policy

In conversation with Alex Masu, Papaioannou shifts the conversation to how investments in infrastructure can and should be financed, some of the policy required, and the private sector engagement that will support this transition. To contrast Africa’s current position on digital infrastructure, with where it needs to go, Masu provides the example of mobile money and payment platforms. The initial data he has seen suggests that unsecured loans in Africa have comparable delinquency rates to wholesale banking, at around 2%. This is incredibly impressive and is indicative of cultural attitudes towards loans. Currently, however, the digital infrastructure in many parts of Africa does not exist to support this type of market at scale.

Answering a prior question from Papaioannou, Shonibare mentioned the importance of policy to incentivize capital accumulation (in the form of individual savings) and the usage of national currency. The latter is especially important to strengthen foreign investment and ensure it is not devalued relative to the dollar. The example he provides speaks volumes: in Nigeria, the currency volatility could result in the borrowed amount doubling over 5 years if the loan is taken in US$. Masu picks up this point of smart policy to focus on the importance of digital infrastructure as a method to encourage investment. With the proper infrastructure in place, data becomes more prevalent and accessible, furthering the attractiveness of various markets to international and continental institutional investors, thereby closing the investment gap. This quasi-circular loop of improving infrastructure to increase investment attractiveness, thus increasing infrastructure investment, is widely regarded as the most significant catalyst for investment in Africa.

Tangential consequences of a broad infrastructure plan

After covering both the digital and energy components of infrastructure, Prof Papaioannou pivots back to a broad discussion about some of the tangential benefits and impacts of a comprehensive infrastructure plan. As Linda mentioned earlier in the conversation, the current crisis is not the only one facing the continent and additional context is important to fully understand the incentives facing various stakeholders. Two tangential issues are discussed that are of immense importance to the future of Africa: education and climate change.

Education, a particular focus for Masu, pays dividends in many forms and is well known to be a driver for economic growth. A better-educated country results in health, economic and social benefits. As previously mentioned, many schools in the western world moved to online learning due to the pandemic, but many areas of Africa were unable to do so. Much like energy generation, Masu says the issue is not content (production). The educational material exists through online sources, it is the distribution and application that creates the bottleneck. Assuming the infrastructure is in place, both in terms of energy and digital capabilities, education would be more accessible, pandemic or not. Traditional infrastructure investment requires high fixed cost and low marginal costs, but technology is changing that; education is the most prominent of many tangential social components to be positively influenced by improving infrastructure.

The second contextual consideration is climate change and how the infrastructure crisis in Africa will impact the environmental crisis facing the world. Shonibare is quick to point out that Africa, as it stands, produces less than 3% of global emissions and is rich in natural resources. He quantifies the process Africa must undertake as a ‘just transition’, highlighting that natural gas provides the bedrock of its industrialization as they push for even greener alternatives. African governments are already pushing to reduce their reliance on coal but are understandably cognizant of the perceived trade-off between green energy infrastructure and at the expense of industrial development. Thankfully, such a trade-off is rarely required, as mentioned above, generation is not the primary concern of the infrastructure gap.

Governance: A final bottleneck to large-scale progress

Through various discussions, bottlenecks to infrastructure have come in several forms, but when digging into the reasons it becomes clear that governance is the biggest by far. As Linda swiftly points out, in many cases the funding for infrastructure is available, but the approval, roll-out, construction, and implementation is incredibly slow. An example that Masu brings up is business process outsourcing. This is an area where other developing parts of the world have become quite adept at, including large parts of South East Asia. South Africa has shown promising growth in this area, encouraging investment in both energy and digital infrastructure. Why not Mombasa or other large African metropolises, he asks. The answer is, in large part, issues with political risk and governance. This includes mismatched incentives for project prioritization, policy decisions on what matters and the associated long-term consequences, and the capacity for critical analysis of needs and planning. Linda stresses this is first and foremost the responsibility of government, but the private sector is also accountable for guiding what is required and what should be the focus of the investment. A key example of this is digital capabilities. Such an area should not be driven by governments, it should be put forward by private sector experts and adopted by governments; this method will be faster, more cost-efficient, and will develop crucial continental markets.

A vision for the future of African Infrastructure development

After considering the potential of infrastructure investment and the perils of neglecting it, it is clear the complexities of a continental effort are immense. Opportunities remain attainable, however, both in creating new projects, but also in tightening up existing infrastructure to ensure minimal loss, whether that be in electricity or tangible revenues. One promising solution to spur the development of local projects, mentioned by Shonibare, is the Africa Guarantee Fund, created by the Africa Development Bank, which works to guarantee the loans of local banks to SMEs to encourage investment locally. Small, targeted steps, such as this fund, can provide a blueprint for future investment. This will not only create opportunity for local infrastructure but also hopefully increase the overall attractiveness of investment ultimately inducing a virtuous cycle of both social and economic development.

This panel was part of London Business School’s Africa Business Summit – a student-led initiative by the Africa Club – hosting change-makers, business-builders, and inspiring leaders at the front-line of the African continent’s success. The Wheeler Institute for Business and Development is delighted to collaborate with the students who organise this event every year.

Zachary Day (MBA2021) is the Co-President of the Military in Business club at London Business School. Prior to his studies, he was an officer in the Canadian Armed Forces where he served in various operational and strategic roles from 2015-2019. Zachary is an intern for the Wheeler Institute, contributing to the creation of content that amplifies the role of business in improving lives.

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