Also from GAN

Infrastructure projects: Where is the funding?
Tue, 24 Nov 2009 16:20

Sub-Saharan Africa’s growth performance has improved substantially during the last decade and the World Bank attributes activity in the infrastructure sector as having played a significant role in achieving the growth. Though Africa's infrastructure still remains grossly inadequate, the upside is private investment in projects is increasing - particularly in transport, telecommunications and water.

Centre for Science and Industrial Research (CSIR) 
senior researcher James Chakwizira writes on how to fast track Africa’s infrastructure development, and suggests likely sources of project funding; and also why the private sector should be taking a second look at public-private partnerships.

Trade costs constitute a high percentage of import and export costs in Africa (they are an estimated 30% to 40% higher than in other developing regions), seriously undermining Africa’s investment, growth and development potential. In South Africa logistics costs have averaged approximately 15% over the past few years, which is almost double the cost of logistics in Europe.

A practical way of reducing trade barriers and lowering logistics costs is to improve road, rail and water transportation networks in Africa. A transportation infrastructure development perspective is one way of tackling the issue.

Infrastructure development critics bemoan that African infrastructure development agenda suffers from an over-reliance on donor funding and international finance. But the culprit behind the African infrastructure investment and development deficit is the fragmentation challenge in the continent. Despite the existence of regional economic integration blocs, the 48 countries in sub-Saharan Africa remain deeply economically fragmented.

This raises the question as to what options can Africa adopt to facilitate catching up with the rest of the World. The starting point is realising the vast wealth and enormous resources in terms of raw materials, minerals and human capital that the continent possesses. Achieving growth and development thus can be approached from employing infrastructure as a catalyst and platform for creating socio-economic development.

In 2008, the World Bank’s Development Research Group estimated that Sub-Saharan Africa could gain in the region of US$20 billion annually or US$203 billion over 10 years as a result of trade-related infrastructure upgrading projects, to which the Southern African Development Community (SADC) would be a major contributor. 

The World Bank Transport Sector Business Strategy Report indicates that more than 85% of Sub-Saharan roads are unpaved, despite decades of considerable infrastructure investment in Africa. Increasingly, both at the continental (through NEPAD) and national governments level, institutions are taking a multi-modal approach to transportation infrastructure investment and development - for example, through conceptualising links between different modes, encouraging collaborative planning, development of corridors and bankable projects in business zones.

Some projects in the pipeline

The Department of International Development (DFID) in Britain has recently created the TradeMark Southern Africa (TMSA) Programme. TMSA will engage closely with TradeMark East Africa (TMEA) to support trade and infrastructure design; and construction and implementation activities of the COMESA-EAC-SADC Tripartite process.

In North Africa for example, four routes connect to sub-Saharan Africa and there are prospects for future project upgrading. These are Egypt-Sudan, Algeria-Mali, Morocco-Mauritania, with a bridge to Spain as a future prospect. Libya is planning a project to build the new trans-Sahara international highway (the Gaddafi road) which will connect the Mediterranean ports with sub-Saharan Africa via Niger. Proposed future transcontinental transportation corridors projects include the construction of the Trans-African highway projects to connect Beira in Mozambique to Lobito in Angola, Dakar in Senegal to Lagos in Nigeria, and Lagos to Mombasa in Kenya.

The North-South Corridor, that is from the Copperbelt of southern Democratic Republic of Congo and northern Zambia to the port of Dar es Salaam in the north-east and the southern ports in South Africa is one regional project destined to take off in a strong manner. Approximately US$1.2 billion of funding has already been committed by development partners for upgrading road, rail, ports and energy infrastructure in East and Southern Africa (through tolling and weigh in motion overloading management technology infrastructure investment in countries such as Zambia, Zimbabwe, Tanzania, Cameroon, Benin and South Africa.)

Africa’s regional ports are experiencing congestion. Dar es Salaam in Tanzania is the prime N-S port, whilst Durban is South Africa’s major port, with some traffic going through other ports such as Walvis Bay, Maputo and Beira. However, most regional ports in Africa come short regarding the depth of the port and quays, making them insufficient to handle larger vessels, an area for future projects.

Getting around the challenges of Public Private Partnerships

One challenge that Africa faces regarding infrastructure investment and development is inadequate funding and lack of finance. The private sector seems reluctant to engage in partnership with the public sector perhaps owing to integrity issues, inappropriate profit-sharing and financing formulas, and governance challenges.

Private sector participation is required to address the huge demand for the provision of basic infrastructure across Africa. Governments must quicken the formulation of clear regulations regarding public private partnerships, and have the political will to implement strict infrastructure projects governance systems and procedures that weed out corruption, mistrust and misappropriation of projects funds. This can take the form of civil society infrastructure reporting cards, toll gate expenditure breakdown billboards and infrastructure tender project implementation barometer billboards.

Funding for infrastructure projects

Scaling-up project investment and implementation funding through private sector initiatives and public-private partnerships can be institutionalised through the medium of Special Purpose Vehicles (SPVs) that drive the processes. The SPVs allow private sector investors to channel funds into specific investments that will bear a positive return on capital. The three financing options available include:

• Grant Funds and Concessionary Loans – For example a section of road that is vital for the functioning of the overall corridor but which does not have a high enough rate of return can be financed through a public-private-partnership (PPP) or the private sector alone, for instance the Cape-Cairo railway and road infrastructure project. Sections of this project can be financed either through a SPV or contributions from the National Road Fund.

• Public-Private-Partnership – A SPV is created to finance a bridge on a build operate-transfer (BOT) basis, for example, the US$130 million Kazungula rail/road bridge in Botswana and Zambia. A private sector company can finance the building of the bridge, operate under a concession (tolling the bridge) for an agreed period, make use of an agreed exit strategy, such as handing it over to government. The company would raise money on the capital markets in the normal way, providing opportunities for a number of investors in the SPV.

• Private Investment – An example is a SPV created to finance a power generating plant such as Mozambique’s US$30 million Mavuzi and Chicamba project and DRC’s YS$20 million Zongo project. A private sector company arranges finance to build the generating plant and sell electricity to the national and regional grids at the market price on a build-operate-own (BOO) basis. Public sector intervention is required to ensure that regulations do not preclude this type of investment and perhaps to provide assistance in establishing the SPV.

Additional funding to meet Africa’s infrastructure deficit will be needed, and the prospects for getting it are better today, with the apparent strong growth in various sources of external funding. Fast-tracking African infrastructure investment requires a mixture of policy actions and infrastructure programmes including focused political leadership which can serve to attract private investments into the sector. Governments alone cannot solve the problem; they need the assistance of the private sector and non-state sectors.

James Chakwizira is a senior researcher at the Council for Scientific and Industrial research (CSIR).