Infrastructure has played a significant role in Africa’s recent economic turnaround, and will need to play an even greater role if the continent’s development targets are to be reached.
Simulations suggest that if all African countries were to catch up with Mauritius in infrastructure, per capita economic growth in the region could increase by 2.2 percentage points. Catching up with Korea’s level would increase economic growth per capita by up to 2.6 percent per year. In a number of countries—including Cote d’Ivoire, Democratic Republic of Congo (DRC), and Senegal—the impact would be even larger.
In most African countries, particularly the lower-income countries, infrastructure is a major constraint on doing business, and is found to depress firm productivity by around 40 percent. For most countries, the negative impact of deficient infrastructure is at least as large as that associated with corruption, crime, financial market and red tape constraints.
For an important subset of countries, power emerges as the most limiting factor, being cited by more than half of firms in more than half of African countries as a major business obstacle.
Deficiencies in broader transport infrastructure and infrastructure for information and communication technologies (ICT) are less prevalent, but nonetheless substantial in some case.
Private Investment in Infrastructure in Sub-Saharan Africa, 1990–2015
Africa’s largest infrastructure deficit is to be found in the power sector. Whether measured in terms of generation capacity, electricity consumption, or security of supply. Africa’s power infrastructure delivers only a fraction of the service found elsewhere in the developing world. The 48 countries of Sub-Saharan Africa (with a combined population of 800 million) generate roughly the same amount of power as Spain (with a population of 45 million).
Power consumption, at 124 kilowatt hours per capita per year and falling, is only a tenth of that found elsewhere in the developing world, barely enough to power one 100-watt light bulb per person for three hours a day.
With regard to ICT, Africa is staying closer to developments elsewhere in the world. The percentage of Africa’s population living within range of a GSM signal rose dramatically from five percent in 1999 to 57 percent in 2006. Over the same period, more than 100 million Africans became mobile telephone subscribers. Indeed, in some countries, household access to mobile telephone services now exceeds that of piped water. Internet penetration, however, lags considerably behind, with little more than two million subscribers and a further 12 million estimated to be making use of public access facilities.
Africa’s road density is sparse when viewed against the vastness of the continent. As a result, only one-third of Africans living in rural areas are within two kilometers of an all-season road, compared with two-thirds of the population in other developing regions.
Africa’s water resources are abundant, but owing to an absence of water storage and irrigation infrastructure, they are grossly underutilized. The continent experiences a particularly high level of hydrological variability, with huge swings in precipitation across areas, across seasons, and over time. This variability will only be exacerbated by climate change. As a result, achieving water security—defined as reliable water supplies and acceptable risks from floods and other unpredictable events, including those from climate change—will require a significant expansion of water storage capacity from current levels of 200 cubic meters per capita to levels of at least 750 cubic meters per capita, a level currently found only in South Africa.
In addition to water storage, there is further need to distribute water for agricultural use. At present, only six million hectares, concentrated in a handful of countries, are equipped for irrigation. Though less than five percent of Africa’s cultivated area, the irrigation-equipped area represents 20 percent of the value of agricultural production.
The cost of redressing Africa’s infrastructure deficit is estimated at US$38 billion of investment per year, and a further US$37 billion per year in operations and maintenance; an overall price tag of US$75 billion. The total required spending translates into some 12 percent of Africa’s GDP. There is currently a funding gap of US$35 billion per year.
Africa’s governments recognize the infrastructure problem, but they have neither the financial resources nor the technical ability needed to close the gap by themselves. Private capital and expertise must be mobilized.
International private capital—especially foreign direct investment—has much to gain by broadening its investment in African infrastructure. Successful projects are likely to generate a higher return on investment than similar projects in other regions, but to succeed in Africa, investors must adapt to an environment that presents a number of challenges related to government and financial markets: Private-sector investors in African infrastructure projects need four key attributes:
• A mindset and expectations that reflect the distinctive realities of the African investing environment—in particular, persistence and resilience, a long-term view of project success, and appropriate risk tolerance.
• Deep local knowledge of each target market and each local environment, as well as of local dynamics.
• An entrepreneur/engineer outlook rather than a more hands-off financier-type viewpoint with an integrated end-to-end view of the project and a willingness to acquire in-house capabilities for its different stages.
• Awareness of community engagement as a core priority, not an add-on.
RANGE OF WAYS PRIVATE SECTOR CAN INVEST IN AFRICAN INFRASTRUCTURE
Source: BCG Analysis.
Africa presents a huge market opportunity. It has 52 cities with population of one million or more and has an extremely low current level of intraregional trade. Its urban population is expected to increase by 50% by 2030. The purchasing power of Africa’s middle class is growing. In a decade, the continent will have the largest workforce in the world, along with 60% of the world’s uncultivated arable land and abundant energy resources ranging from hydrocarbons to renewable. The continent is home to four of the world’s ten fastest-growing economies.