Breaking Africa’s infrastructure bottleneck

Compared with other regions, African countries have a low stock of infrastructure, particularly in energy and transportation; the potential for information and communication technologies (ICT) has not been fully harnessed. This pronounced infrastructure deficit, coupled with burdensome trade regulations, has raised the cost of doing business and constrained domestic productivity. It also presents a critical bottleneck to regional integration. Today, African countries are among the least competitive economies in the world.

According to the Africa Competitiveness Report 2013, African economies can begin the process of deep integration if their infrastructure networks are designed in such a way as to link production centres and distribution hubs across the continent. Such infrastructure will enable Africa to compete effectively, tap into regional markets, and benefit from globalization through investment and trade. Achieving this calls for an efficient and secure national and cross-border infrastructure as well as a coherent system of regulation for business transactions.

Considerable investment in infrastructure using innovative sources of funding is needed to address Africa’s low level of competitiveness. Indeed, the Program for Infrastructure Development in Africa (PIDA) estimates that Africa will need to invest up to US$ 93 billion annually until 2020 for both capital investment and maintenance. Governments would do well to create conditions where private-sector engagement is encouraged, particularly through public-private partnerships. The development of infrastructure bonds as a financing vehicle also needs to be encouraged.

Infrastructure and regulatory environment: Current state and challenges

Only 30% of Africa’s population has access to electricity, compared with 70% to 90% in other regions of the world. Furthermore, road access in Africa is limited to about 34% of the population, compared with 50% in other parts of the developing world. Although considerable progress has been made in ICT, as evidenced by the tremendous increase in mobile telephone connections over the past decade, Africa started from a low base and its Internet penetration rate is only about 6%, compared with an average of 40% elsewhere.

The continent’s 15 landlocked countries face particular challenges in exporting and importing goods because of the lack of multimodal infrastructure. And many African ports have serious capacity problems that are accentuated by an ineffective inland transport system. Inefficiencies at African ports lead to slow processing times and result in higher charges than those of comparators.

The continent’s energy deficit is the result of limited generation capacity, largely due to a lack of long-term financing. The lack of large-scale investment is a consequence of the limited participation of private-sector players and the difficulties in mobilizing long-term financing from African financial systems to fund big-ticket items such as infrastructure. Consequently, there is a critical need for innovative investments in the energy sector, including investment from domestically mobilized resources. However, the attractiveness of this investment is undermined by tariffs and subsidies that distort relative prices and profitability. Energy facilities across Africa are in urgent need of new and innovative sources of investment, particularly for generation, transmission lines and distribution.

At the regional level, urgent attention should be given to the development of regional energy infrastructure to achieve economies of scale. In the power sector, only southern Africa has made the transition to a competitive regional power market, and only a few major investments have been made in regional energy infrastructure on the continent, including the Ethiopia–Djibouti and Ethiopia–Kenya connections, as well as the 300 kilovolt (kV) Nigeria–Benin coastal transmission backbone.

Africa’s prolonged underinvestment in transportation has resulted in dilapidated transport infrastructure. African countries invested 15% to 25% of GDP in transport infrastructure over the period 2005-2012, on average, while India and China invested about 32% and 42% of GDP, respectively, in the same period. This underinvestment has resulted in Africa’s considerably higher transport costs (by as much as 100%) than in other low-income developing countries.

Africa has made progress in ICT, particularly with regard to laying out the infrastructure using undersea cables and mobile technologies. In 2011, 19 undersea cables connected Africa to the rest of the world – up from only three in 2005. As a consequence, cumulative capacity increased from 2,900 gigabytes to 102 terabytes over the period. Africa is leapfrogging fixed-line networks and moving directly to mobile technologies. The mobile telephony subsector has been the most vibrant of all, with the share of population receiving mobile signals increasing tenfold in five years. One of the most outstanding innovations in the use of ICT in Africa has been the mobile money sector as evidenced in Kenya.

Although the ICT subsector has been the most vibrant of the infrastructure subsectors, progress in some countries has been limited by government monopoly, which has resulted in excess costs and undermined the access to and quality of ICT services. Consequently, the price of broadband and international calls is excessive, and the absence of competition has a negative impact on both revenue and productivity of public and private firms, thus undermining investment.

How infrastructure development impacts Africa’s competitiveness

Effective modes of transport – quality roads, railroads, air transport and ports – enable entrepreneurs to get their goods and services to market in a secure and timely manner, facilitate the movement of workers to the workplace, and encourage foreign direct investment. Economies also depend on electricity supplies that are free from interruptions and shortages so businesses and factories can work unimpeded. In addition, a solid and extensive telecommunication network allows for a rapid and free flow of information, which increases overall economic efficiency by ensuring that businesses can communicate and make timely decisions, taking into account all available relevant information.

Evidence shows that there is a positive relationship between infrastructure investment and economic growth. This occurs because solid infrastructure accelerates annual growth convergence rates by as much as 13% and also increases per capita annual growth by almost 1%. The strongest impact comes from telecommunications, followed by roads and electricity. It is estimated that investing an additional 1% of GDP in transportation and communications on a sustained basis increases the GDP per capita growth rate by 0.6%. Productivity growth – and therefore competitiveness – is higher in countries with an adequate supply of infrastructure services.

Mthuli Ncube is Chief Economist and Vice-President of the African Development Bank.

Image: A roadside vendor selling mobile phone cards at a road junction in Ouagadougou, Burkina Faso. REUTERS/Darrin Zammit Lupi