Despite having 60 percent of the world’s arable land, an abundance of resources and four of the world’s 10 fastest-growing economies, Africa today remains the world’s least developed continent.
Whilst the number of challenges are as diverse as the number of countries Africa hosts, common among them is the lack of critical infrastructure necessary to unlock sustainable growth. It is estimated that due to the infrastructure challenge, as much as 2.1 percent of GDP is lost annually.
Having ridden the commodities super-cycle that delivered above global average GDP growth rates, Africa is now contending with the slowest growth it has seen in two decades, mainly as a result of a fall in commodity prices.
This leaves Africa having to contend with the following challenge: how to deliver infrastructure investment in a slow-growth climate. To answer this, the Africa Finance Corporation and the Boston Consulting Group have produced a report considering the key focus areas for policy-makers and private investors alike.
The first area for consideration in the public sector is the skills and funding shortage. Across the continent, governments are short on human and financial capacity. This leads to inefficiencies, with public institutions unable to fund deals, develop projects and enforce legislation. As a consequence, it can take up to twice as long for investors to get their projects off the ground and many projects never attain bankable status.
Elsewhere, realising the need for private sector investment, governments have at times opted for public-private partnerships. However, too often, policy makers from across the continent think that once a PPP agreement has been signed, their role is finished and they have no further responsibility for its success.
There are ways in which Africa’s public sector can overcome these problems. For example, in the Gulf region, governments often act as project developers, with private investors coming in when the project is ready to be launched. This ensures swift execution, overcoming many of the inefficiency challenges seen in Africa.
Additionally, whilst PPPs are highly useful vehicles for raising finance, a structured management unit, such as Project Management Units, with direct access to decision makers is essential. This ensures that bottlenecks are identified early, and resolved more quickly.
Similarly to the public sector, the private sector also suffers from a technical skills shortage across the engineering, financial, legal and construction sectors. Exacerbating this problem is a long-term tendency to award public infrastructure contracts to non-African companies, limiting the skills and technology transfer. This leads to higher project costs, puts a premium on local talent, and necessitates important expensive immigrant talent.
Once again, international case studies provide excellent examples of how this can be overcome. India for example, when faced with a similar skills gap, established an ambitious programme to provide technical training to tens of millions of people in specific vocational fields, eventually spawning into an entire technical training industry. Similar solutions may help African countries attract infrastructure investment and create additional benefits along the way.
With the notable exceptions of Nigeria and South Africa, African countries are disadvantaged by narrow financial markets and weak underlying currencies, with most commercial banks lacking the financial and institutional muscle to undertake large infrastructure projects.
To overcome the challenge of access to financing, it is worth noting that many Africa financial markets have an excess of private savings that the banking sector isn’t able to transform into productive credits. However, infrastructure bond vehicles with government guarantees can bring large pools of domestic financing for these projects.
Additionally, most of Africa’s 40 currencies are volatile and not exchangeable. Yet most investors provide capital in foreign currency, whilst taking their revenues in local currencies, creating a substantial currency mismatch that often involves a very high risk.
However, hedging mechanisms or guarantees provided by governments seeking to attract foreign investment in infrastructure may eliminate such currency risks by transferring them from the private to the public sector.
Though Africa is outpaced by other parts of the developing world, there are good reasons to remain optimistic about the future of the continent. The ongoing economic challenges should therefore not be seen so much as a cause for concern, but rather an opportunity for much needed innovation and better leadership and management.
Andrew Alli is the president and chief executive of Africa Finance Corporation, and Luis Gravito is the chairman of Boston Consulting Group Nigeria.