Infrastructure Investment: Part of Africa’s Solution

Antoinette SayehBy Antoinette M. Sayeh

Tremendous efforts are under way to upgrade sub-Saharan Africa’s infrastructure. But the needs on the ground are still immense as evidenced by the frequent electricity blackouts, poor roads, and insufficient access to clean water in many countries.

Infrastructure is one of the key challenges facing policymakers in the region—I experienced it first hand when I was finance minister of Liberia before coming to the IMF. The benefits are fairly clear: with improved infrastructure, new growth opportunities in the manufacturing and services sector can be generated, barriers to intraregional trade can be reduced, and economies will be better positioned to transition from low to higher productivity activities. Without improved infrastructure, I fear the increase in productivity and greater economic diversification necessary to sustain Africa’s current growth momentum will not materialize.

In this spirit, in the latest Regional Economic Outlook: Sub-Saharan Africa economists from the IMF’s African Department looked at progress so far in addressing the infrastructure deficit and discussed policies needed going forward.

Prepare tomorrow’s growth

Their findings are heartening.

  • First, many countries have managed to maintain, or even increase, their 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 also increasingly stepping in to finance infrastructure projects.
  • Things also have been changing for the better on the external financing front. Foreign investors, recognizing the attractiveness of the region as an investment destination, have been increasingly drawn to sub-Saharan Africa. New partners have emerged, most notably China.
  • And with new financing instruments, institutional investors—including pension funds both from inside and outside the continent—could soon be more willing to finance relatively risky, but high-return, projects in the region.

More to be done

That said, much remains to be done. My colleagues’ work underscores the extent to which higher investment has not always translated into better outcomes for the population.

Yes, sub-Saharan Africa has experienced a revolution in access to telecommunications, and mobile phone subscriptions have exploded. Market liberalization and emergence of competition in the sector no doubt have been big drivers of that success.

But, unfortunately, progress has been far more limited elsewhere. The region still lags far behind other developing regions in the world when it comes to supplying electricity and water, as well as to road and railway development.

Way forward

We see three things that need to be done to engender better outcomes going forward.

First, it is not always obvious that lack of financing is the main constraint to better infrastructure outcomes. Instead, in many countries, what needs to be improved, within the existing resource envelope, is the capacity of the public administration to identify, implement and monitor often complex projects.

Bear in mind, this is a hard task for any government. But scaling up the infrastructure effort should go hand in hand with “investing in investment”—that is, developing a clear vision for the whole sector, and planning spending beyond the current budget. One key element of this process would be to have a central agency that prioritizes the projects proposed by the various ministries and conducts cost-benefit analyses.

Involving the private sector

Second, with available public resources always likely to be limited, it will be essential to look beyond purely public investment and involve the private sector whenever possible. True, as has been the case until now, the public sector will remain a critical provider of infrastructure investment. But with public debt sustainability also on policymakers’ minds, the risk is that some valuable projects may be postponed or even abandoned—to the detriment of future growth.

Hence, private companies should be encouraged to get involved as appropriate. The recent telecommunications revolution on the continent should act as a reminder that private companies can invest in infrastructure on their own if the business is sufficiently appealing and the business environment conducive to investment. This model could work in some cases for railway construction or electricity generation.

There is also a middle range where public and private sectors can work together, with the former bringing in some form of insurance, and the latter its expertise executing projects and tapping innovation. Public-private partnerships are such examples, where private companies are typically contracted to build and operate projects before transferring them back to the public sector after an agreed period. Appropriately designed user fees allow companies to recoup their investments, while minimizing recourse to taxpayer money. However, experience had taught us that in such contracts, the role, responsibilities, and potential financial liabilities of the public and private partners need to be clearly defined.

Public enterprises’ environment

Third and finally, companies already active in sectors such as electricity generation and water provision need to operate on a sound footing. In many cases, these are state-owned utility companies operating as monopolies, either lacking proper funding to invest or unable to generate adequate revenue because government agencies set prices at too low a level. Hence, going hand in hand with the steps I highlighted earlier, it will be critical to strengthen the performance of these companies and improve the regulatory environment. This will allow public enterprises to deliver better services, and may even catalyze interest from private investors to support their investment efforts.

The formidable growth momentum of recent years in the region is still on—our latest forecasts do show that sub-Saharan Africa will continue to be the second fastest–growing region in the world, just behind emerging and developing Asia. But this momentum needs to be nurtured to ensure sustained and durable growth. Infrastructure investment is part of the solution, but it needs to be well implemented. It is an opportunity not to be missed, and I strongly believe it can be done.

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