Infrastructure, the unsung hero of the modern world is only appreciated when it is absent. Transportation, energy, telecommunication and water sanitation may not be as glamorous as big tech or luxury retail, but they are crucial and form the backbone of any economy. Exhaustive research shows a strong symbiotic relationship between infrastructure development and economic growth, with infrastructure supporting growth and growth promoting infrastructure development. The socio-economic transformational power of infrastructure and the promise of attractive risk-adjusted return make infrastructure a strong tool for promoting economic development in sub-Saharan Africa.
Sub-Saharan Africa (SSA) is the least industrialised region in the world, this is due to a plethora of issues including governance and infrastructure. With unreliable power generation prevalent in most of Africa, businesses are forced to spend a sizeable portion of their revenue producing their own energy using diesel-powered generators. Money spent producing power is money that cannot be spent financing growth and investment. Data shows a clear correlation between infrastructure spend and firm productivity. The impact of unreliable power renders sub-Saharan Africans less productive than their peers in other regions, a McKinsey report revealed that an average household in Mali uses less electricity in a year than a Londoner uses to boil a kettle each day.
In addition to economic development, infrastructure also directly impacts human development as safe-drinking water is fundamental for healthy living. A 2001 study by Doumani and Listorti, found that guinea worm, a waterborne parasite, was responsible for 60% of all school absenteeism in Nigeria. Waterborne diseases are a threat to economic development in Africa with diarrhoea being a leading cause of infant mortality on the continent. Better water infrastructure would eliminate the unproductivity that stems from African women and children travelling long distances to access safe drinking water.
The African Infrastructure deficit can be bridged through public and private sector co-operation
These examples illustrate the crucial need of infrastructure in Africa, according to the World Bank, SSA needs to invest $90 billion annually to plug its infrastructure gap. Demographic trends such as urbanisation and population growth will only add to the demand for infrastructure. The size of the infrastructure market represents a lucrative opportunity for institutional investors seeking enhanced yield, and private sector developers looking to expand their geographical footprint.
To plug the infrastructure deficit, SSA governments will need to spend more than 4.5% of their countries annual GDP on infrastructure. With falling commodity prices and the economic impact of COVID-19, infrastructure spend by national governments is likely to fall further, thus the participation of the private sector, both local and international, will be more critical.
The challenges preventing private-sector infrastructure participation in Africa is surmountable through long-term coordination between Governments, DFIs and the Private sector
Private sector investment in SSA infrastructure has been meagre, only 2.75% of the capital committed for SSA infrastructure in 2017 came from the private sector. The reluctance of the private sector to invest in SSA infrastructure is due to several factors including regulatory barriers for some OECD-based investors, commercial viability, off-taking guarantees, and poor refinancing options. These issues are not specific to Africa but are often perceived as African risks by investors and contractors.
The unspoken reason for private sector reluctance to invest in SSA infrastructure seems to be perceived risk. Many investors overstate the political, currency and regulatory risk. To unlock the value of the private sector, governments and development finance institutions will need to work together to eliminate the perceived risk and manage some of the real challenges associated with infrastructure investment in Africa.
Sub- Saharan Africa is at a crossroad, demographic shifts have created a young population that is demanding a better quality of life than their parents. These Africans are ambitious and entrepreneurial, to unlock their value and meet their demands, governments and the private sector will have to work together to deliver the infrastructure required to support economic growth. With adequate infrastructure, and private-sector involvement this could be Africa’s century.
Kemi Badru (MBA2021) is Co-President of the Infrastructure & Construction Club and Co-President (Finance) of the Private Equity & Venture Capital Club at London Business School. Kemi is an intern for the Wheeler Institute, contributing to the creation of content that amplifies the role of business in improving lives.