Like other countries, Africa needs critical infrastructure like electricity, road and rail transportation, and water infrastructure.
The article from McKinsey & Company says that Africa is facing a serious infrastructure gap. Six hundred million in the Sub-Saharan do not have access to electricity, and power demand will increase four times until 2040.
There has been a steady rise in investment in the last 15 years, as international investors have the appetite to invest across Africa. However, this is impeded by Africa’s poor record to close the projects. Eighty percent of the infrastructure projects fail to move from feasibility and business-plan stage.
Such is the African paradox – there is a need and availability of funding, together with a large pipeline of potential projects, but not enough money is being spent.
The article examined the root causes of this infrastructure gap and present solutions to unlock the flow of investment to help build the critical infrastructure that Africa needs.
A report by the Infrastructure Consortium for Africa (ICA) in 2018 says that between 2013 and 2017, the annual infrastructure funding in Africa was $77 billion – twice as much from the first six years of 2000. The majority of the spending happened in West and East Africa for the transport and energy infrastructure investment.
Africa also needs to increase its infrastructure spending in proportion to its GDP. Since 2000 Africa spends 3.5% of its GDP on its infrastructure, which has to rise to 4.5%. By contrast, India allocates 5.2% of its GDP on infrastructure and China at 7.7%.
One of the constraints to investment spending in Africa is the rising debt-to-GDP ratio, up to 50% in some countries. Nevertheless, there is no shortage of international investors willing to fund projects in Africa, which according to the article, could be as much as $500 billion in assets under management from government agencies, private-sector pension funds, and investment companies.
Many of them are already exploring new infrastructure projects in the next decade. McKinsey estimates the current pipeline of infrastructure projects amounts to $2.5 trillion to be completed by 2025. But not all of these projects will push through. Half of them are still in the feasibility study stages.
Research shows that 80% of these pipeline projects will fail, and less than 10% will reach a financial close – which is considered a milestone. The low success rate presents a significant financial burden to infrastructure development, with the cost rising to billions of dollars spent during the feasibility-study phase alone.
So, what are these root causes why Africa cannot close their infrastructure gap and the apparent failure for proposed projects to move from the concept phase to financial close?
According to the article:
“There are several reasons for the high failure rate. Many governments and developers lack the capabilities, as well as the budgets, to design and implement infrastructure projects with commercial potential. In addition, short political cycles may challenge commitments to long-term infrastructure projects. As a result, investors lack bankable project pipelines: only a few projects meet investors’ risk-return expectations and reach financial close. Indeed, reaching financial close can be extremely challenging even for projects in asset classes that have delivered high returns in the past (such as power generation), and for projects that have secured revenues and guarantees.”
The first step is to improve the flow of private-sector financing into commercially viable infrastructure sectors like energy to remedy the problem. To do this, the government and their institutional partners need to improve the project’s commercial viability by mitigating associated risks like political, currency, and regulatory risks.
In the words of a fund manager of Africa infrastructure investment fund, “I look at 8 things before investing: the sponsor, the project, how the project was awarded, the country, the documentation required, the currency risk, the environment and political risks, the presence of DFIs and exit opportunities”.
Africa needs more infrastructure than anywhere else globally, sufficient funding is available, and a pipeline of infrastructure projects is waiting to be built.
Both the government and private sectors will need to step up if they want to see high-quality projects built, ensure that money is spent well, and constructed on time and budget.