4. Introduction
Resource- Rich Continent
Rapidly increasing reservoir of human capital- 2.3 billion
people projected for 2050
30% of the world known reserves of minerals; 10% of oil &
8% of gas resources
Largest cobalt, diamonds, platinum, and uranium
reserves in the world
Mining, oil & gas account for 28% of the continent’s GDP
US$ 24 billion fisheries sector
Home to highest annual rainfall; second largest tropical
forest
Emerging as Global Economic Growth Pole
Registered an average GDP growth of 4.2% p.a. during the
past decade- double the growth achieved by world as a
whole
4
6. 87
309
141
58 62 53
35
68
41 28 35
5252
241
100
30 27
1
EAP* SAR LAC SSA ECA MENA
Requirements
Actual
Gap
Infrastructure Investment Requirement in Emerging Markets and
Developing Economies (2014-20; Annual US$ bn)
Infrastructure Investment Gap
6
Actual,
259
Gap, 452
All Emerging Markets and
Developing Economies (2014-20;
Annual US$ bn)
Note: EAP*: East Asia and Pacific (not including China); SAR: South Asia; LAC: Latin America and the
Caribbean; SSA: Sub-Saharan Africa; ECA: Europe and Central Asia; MENA: Middle East and North
Africa
Source: Ruiz Nunez, Fernanda and Wei, Zichao, Infrastructure Investment Demands in Emerging Markets and Developing Economies (September 17, 2015). World Bank Policy Research
Working Paper No. 7414
In Emerging Markets and Developing Economies (excluding China), US$ 711 billion per year over the period
2014–20 is required to satisfy new infrastructure demand while maintaining service for existing
infrastructure
Annual infrastructure investment gap is US$ 452 billion per year; requires doubling of current spending
Half of the spending needs to be allocated to maintenance of existing assets
7. Infrastructure Deficit in Africa
InfrastructureNeeds(93.3)
Spending
(45.3)
InfrastructureGap(48)
(17.4)
(30.6)
Optimizations
Optimized Gap
Opportunity for PPPsSource: World Bank
Sub-
Saharan
Africa World
Mobile cellular subscriptions (per
100 people), 2013
66.0 93.1
Improved water source (% of
population with access), 2012
64.4 89.3
Energy use (kg of oil equivalent per
capita), 2011
680.6 1890.1
Quality of port infrastructure, WEF
(1=extremely underdeveloped to
7=well developed and efficient by
international standards)
3.5 4.1
Access to electricity (% of
population), 2010
31.8 83.1
Source: World Bank
Only one in three rural Africans have access to an all-season road
Many African countries face chronic power deficit
Ports efficiency can be enhanced significantly
Potential for improvement in healthcare infrastructure and delivery
Transportation costs increase prices of African goods by 75%
Water resources are underutilized
8. 8
Infrastructure Deficit in Africa: Power
Power-generation Potential for Select SSA
countries by Technology
1 Potential from domestic resources only; gas includes all conventional proven/speculative reserves, and
hydro includes all technically exploitable potential. 2 Democratic Republic of the Congo.
Source: McKinsey and Company Research
Africa has 13% of the world’s population, but 48% of the
global population without access to electricity
Only seven countries- Cameroon, Côte d’Ivoire, Gabon,
Ghana, Namibia, Senegal and South Africa- have
electricity access rates exceeding 50%
Rich in potential power-generating capacity. Excluding
solar, there is an estimated 1.2 terawatts of capacity.
Solar can deliver about 11 terawatts
To meet energy demand in Africa by 2040: US$ 43
billion of annual capital investment required [Of that,
US$ 5.4 billion for transmission (regional
interconnectors)]
Current annual investment in Africa energy projects-
less than US$ 5 billion.
Region’s cost-effective energy resources too distant from
major centres of demand
Regional Grids could save US$ 33 billion per year -
roughly (17%) in power generation costs
9. Infrastructure Deficit in Africa: Healthcare
GENERAL GOVERNMENT HEALTH EXPENDITURE AS %
OF GENERAL GOVERNMENT EXPENDITURE, 2012
Source: WHO
Large part of health problem can only be addressed by
effective government actions
Trend in Africa is to increase funds available for private,
pooled healthcare by encouraging health insurance
schemes
Pooled private spending best represented in South
Africa
Addressing medical needs require combining direct
Govt. expenditure with other financing models
Govt. financing the administrative side of
healthcare- leaving some projects to external
donors, and an increasing share of healthcare
delivery to private sector
When funding healthcare, govt. preferring to pay
into health insurance schemes
Expertise of Indian private sector in pharmaceuticals
and healthcare delivery can create win-win outcomes
9
10. 10
Infrastructure Deficit in Africa: Transportation
Only South Africa, Morocco, Malawi & Egypt performed better in trade & transport related infrastructure index
than global avg
It costs US$ 2,930.9 mn per container and 37.6 days to import in Sub-Saharan Africa- the highest among all regions
Port efficiency and performance needs significant improvement through additional investments
Spending needs for the road sector amount to around US$ 9.6 billion a year, skewed towards capital expenditure
Restoring Africa’s aging rail networks to good operating condition requires a one-time rehabilitation efforts of US$3
billion
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Quality of Trade and Transport-related Infrastructure
(1=low to 5=high) World Average : 2.8
12. Infrastructure Financing: Key Characteristics
12
Positive Indirect Externalities to Economies
Such benefits fundamentally difficult to measure
Even if measured, charging for them may not be feasible or desirable
Often Comprises Natural Monopolies
Governments want to retain ultimate control to prevent abuse of
monopoly power
Requires complex legal arrangements to ascertain allocation of pay-
offs and risk-sharing, thereby aligning the incentives of all parties
Purely Private Investment Difficult and Costly
Time profile of cash flows
High initial risks
Illiquidity
Presence of
Externalities
Natural
Monopolies
Pvt. Investment
Difficult
13. 13
Infrastructure Financing : Options
Domestic investors
Public utility
Dedicated government funds
Institutional investors
Foreign investors
Equipment suppliers (in collaboration with
domestic and international developers)
Dedicated infrastructure funds
Other international equity investors
Domestic commercial banks
Domestic term lending institutions
Domestic bond markets
Specialized infrastructure financing
options such as infrastructure debt funds
International commercial banks
Export credit agencies
International bond markets
Multilateral agencies (financing with
development perspectives and in long tenors)
EQUITYDEBT
DOMESTIC SOURCES EXTERNAL SOURCES
14. Infrastructure Financing : Key Issues
14
Infrastructure projects are long gestation, and long term projects
Project exporters may face challenges securing funds from offshore channels to
fund their overseas investments or refinance their offshore debt
Cross border lending for infrastructure projects is in foreign currencies: hedging for
the currency risk comes with a cost and may not be available for long tenors in all
currencies
Several ways of mitigating currency risks: political risk insurance; currency swaps;
offshore reserve accounts
Lending in currency of lenders is an option; however, this may be a challenge for
the borrower (hedging is again difficult)
15. Infrastructure Financing : PPP Models
15
Public budgets have traditionally been the largest contributor of infrastructure finance in the
developing world
However, Governments are increasingly facing challenges in managing their budget.
MDBs finance only about 10% of the developing world’s infra investments or 5% of total
needs
Need for supplementing traditional sources of finance with new sources of equity and debt
finance;
New MDBs like NDB and AIIB likely to play a significant role in infra financing space
Investment fund by ADB and Japan to support “sustainable” infrastructure development in the region
Innovative tools, such as ECA guarantees, to reduce risks, lower cost of sovereign borrowing
Public-Private Partnerships (PPPs) represent one of the many promising instruments to meet
the challenge of crowding in finance in the infrastructure space.
Enables public sector to harness the expertise and efficiencies of the private sector
PPP lowers the risk of the private players as compared to their independent venture in such projects
16. Role of Export Credit Agencies (ECAs) in Infrastructure
Financing
Large scale infrastructure projects in developing countries in the energy, resources and port sectors
continue to look to ECAs to supplement and facilitate finance due to
insufficient liquidity in the local market for commercial banks to fund all of the debt
(covered or uncovered); add o it the asset-liability mismatch
the long lifespan of projects;
potential political or economic risks
ECAs provide financing support that helps restore investor confidence and facilitate investment in
high impact areas like infrastructure development
Given their status as quasi-governmental institutions, the cost of borrowing, capital reserves and
return expectations for most ECAs is lower than that of commercial lenders – meaning that cost
savings are often passed on to borrowers
ECAs can also provide ‘soft support’ through their intra-government relationships, political
knowledge, diplomatic goodwill and reputational strength
ECA support generally entails that materials, machines and sometimes even labour for infrastructure
projects are bought from their home jurisdictions creating win-win outcomes 16
Infrastructure Financing Needs
Africa’s annual infrastructure needs are estimated at USD 93 billion, i.e. 15% of Africa’s GDP.
Actual investments in infrastructure- total USD 45 billion annually, with more than half funded by the public sector.
About a third of the infrastructure gap can be met through operational optimization, reducing the gap to USD 31 billion, i.e. 5% of GDP.
PPPs could theoretically represent 40% of the optimized gap, i.e. USD 12 billion annually (2% of GDP).
Constraints
In the 2013 ICA survey of private sector infrastructure investors in Africa partner-risk appeared to be the main consideration taken into account when deciding whether to invest, followed closely by concerns about the legal, regulatory and political environment.
There is potential for:
about 400 gigawatts of gas-generated power, with Mozambique, Nigeria, and Tanzania alone representing 60 percent of the total capacity;
about 350 gigawatts of hydro, with the Democratic Republic of the Congo (DRC) accounting for 50 percent;
about 300 gigawatts of coal capacity, with Botswana, Mozambique, and South Africa representing 95 percent of this;
and 109 gigawatts of wind capacity, although it is relatively expensive compared with other sources.
The proven geothermal resource potential is only 15 gigawatts, but this is an important technology for Ethiopia and Kenya, which hold 80 percent of it.
Sub-Saharan Africa is well endowed with both hydropower and thermal resources – but only a small fraction of its power generation potential has been developed. Of the 48 sub-Saharan countries, 21 have a generation capacity of less than 200MW, well below the minimum efficiency scale, which means they pay a heavy penalty: costs reach US$0.25 per KW, twice the level in the region’s larger power systems.
One reason is that some of the region’s most cost-effective energy resources are too distant from major centres of demand, in countries too poor to raise the billions of dollars needed to develop them. For example, 61% of the region’s hydropower potential is in just two countries – the Democratic Republic of Congo and Ethiopia.
Regional Power Trading
Pooling energy resources through regional power trade promises to reduce power costs. The Southern, West, East, and Central African Power Pools, created mainly to support power trade efforts, are at varying stages of maturity. If pursued to their full economic potential, regional trade could reduce the annual costs of power system operation and development by US$2 billion per year - about 5% of total power system costs.
The savings would come largely from substituting hydropower for thermal power, substantially reducing operating costs, even though it entails higher up-front investment in capital-intensive hydropower and associated cross-border transmission. The returns to cross-border transmission can be as high as 120% for the Southern African Power Pool and more typically 20% to 30% for the other power pools. By increasing the share of hydropower, regional trade would also save 70 million tons of carbon emissions a year.
Under regional power trade, a handful of large exporting countries would serve a substantial number of power importers. The Democratic Republic of Congo, Ethiopia, and Guinea would emerge as the major hydropower exporters. As many as 16 countries would be better-off (from a purely economic standpoint), importing more than 50% of their power needs through regional trade. Savings range from $0.01 to $0.07 per kilowatt-hour.
The state of healthcare and health indicators in Africa is still far behind the rest of the world, and progress made on addressing the challenges in this sector is not as speedy as one would expect given the continent’s economic growth. The biggest killers are the great epidemics and communicable diseases.
Countries in which private expenditure on healthcare dominates, are of two types: those in which almost all spending is out-of-pocket spending at point of delivery, and those where the private spending is collected on a regular basis and pooled so that provision is made for unexpected health problems.
Future Healthcare Developments
Future healthcare developments in South Africa will be interesting to watch: it is the country in Africa in which the burden of disease transition from communicable to non-communicable diseases is most advanced, and the way in which public and private healthcare providers address this transition will serve as a model for other countries.
Mauritius is interesting for much the same reason: basic healthcare has been achieved, and now the private sector (including insurers) is positioning itself to take advantage of the growing demand for world-class services for the well-off.
Botswana has achieved very decent health indicators (it is ranked 8th in Africa in terms of the human development index, ahead of South Africa) by applying best practice: spending more than 15% of its budget in line with the Abuja commitment, and encouraging the development of a sophisticated health insurance market.
Some of the poorer economies in Africa are also notable for the way in which, despite lower spending levels, governments have been able to make a big difference to healthcare delivery. Rwanda’s progress has been most impressive: spending one tenth as much as Botswana per capita on health, the country has managed to reduce mortality from AIDS, tuberculosis and malaria by 80% in ten years, and has reduced maternal mortality by 60%. These stunning achievements came thanks to thorough planning, the prioritisation of primary healthcare and the central provision of health insurance.
In Ethiopia, a poor country with a large population, improvements to the healthcare bureaucracy to improve primary healthcare in remote areas has made a huge difference to maternal and infant mortality. The methods used with such success in these two countries could be copied in other poor countries on the continent, to very beneficial effect.
Ports
Over the last decade the volume of general and containerized cargo moving through Africa’s ports has trebled, but further growth in container traffic will require additional investments.
Too many ports handle Africa’s maritime trade traffic-few of them large enough to attract major shipping lines.
Many ports are poorly equipped and inefficiently operated, falling well short of international best practice.
Turning port performance around will require institutional reforms.
Roads
The last decade has brought tremendous progress in the establishment of sound institutions to manage and maintain Africa’s trunk road network, but the process remains incomplete.
However good the quality of the roads, road freight will continue to be costly and inefficient until competition in the trucking industry is increased and barriers to trade are lifted.
Better access to roads in rural areas is critical to raising agricultural productivity.
Africa’s rapidly growing cities groan under the mobility problems caused by too few paved roads and inadequate public transportation systems.
Most African countries have improved road conditions and governments have been addressing low density and the poor condition of their road networks. They have also tackled institutional reforms with remarkable consensus in content.
Nonetheless, road maintenance is still inadequate in many countries and the reform agenda is incomplete.
The building and improvement of urban roads lags behind urbanisation rates and rural connectivity is very poor leaving millions disconnected from the road network.
Freight tariffs are high due to the lack of competition in the trucking industry.
The Trans-Africa Highway, which has symbolised modern Africa, has long gaps.
Railroads
The economic significance of Africa’s railroads has declined markedly during the last 30 years following liberalization of rail transport and improvements in highway infrastructure.
Long-distance passenger rail services are in decline and have become a significant financial burden to several rail concessions.
Following economic liberalization and major improvements to the road network, most of the continent’s railways (except for those in South Africa) lost their economic edge. Few still play an integral role in the economy, except to link mining sites to ports. As a result of declining traffic, few railways are able to generate significant revenues to fund investments, the remaining passenger lines fail to recover costs, and freight service tariffs are constrained by road competition.
The standard policy response has been to concession many of Africa’s railways. But while concessions have led to significant service improvements and helped to reverse traffic decline, they have not proved capable of generating enough revenue to finance much-needed track rehabilitation.
Widespread concessioning of railways has generally improved service and boosted revenues, but concessioning alone probably cannot provide sufficient financing to rehabilitate Africa’s railways.
China’s Financing
In the DRC two Chinese state construction companies and the DRC’s state copper company have signed a contract worth more than the DRC’s state budget.
Another, more direct case of China’s interest in Africa’s resources is in Angola, where infrastructure is rapidly expanding as part of an ‘infrastructure for oil’ trade agreement with China. In Angola, China is funding not only transport infrastructure, but also infrastructure for everyday life like the large housing area of the city of Kilamba Kiaxi. Meanwhile, Angola has became China’s top supplier of oil in 2010.
In 2013 Kenya signed a US$5 billion deal with China. The deal includes the construction of a rail link from the Port of Mombasa to adjoining Uganda as well as other projects.
In other African countries, like Tanzania, Ghana, Mozambique and even South Africa, Chinese government entities and companies are also supporting the funding and construction of a whole host of individual infrastructure projects.
By helping improve Africa’s infrastructure, Chinese companies make it easier to operate in Africa. At the same time they position China to take advantage of future growth in African markets.
Even though the direct payoffs to an owner of an infrastructure project may not cover its costs, the indirect externalities can still be hugely beneficial for the economy as a whole. Externalities include large benefits of infrastructure services to a wide range of other sectors. Such benefits are fundamentally difficult to measure. Even if they can be measured, charging for them may not be feasible or desirable.
Infrastructure projects are often complex and involve a large number of parties. Infrastructure often comprises natural monopolies such as highways or water supply, and hence governments want to retain the ultimate control to prevent an abuse of monopoly power. This requires complex legal arrangements to ensure proper distribution of payoffs and risk-sharing to align the incentives of all parties involved. But any measures needed to restrict monopoly power must still ensure that governments respect pre-agreed contracts.
Many infrastructure investments generate cash flows only after many years and the initial phase of an infrastructure project is subject to high risks. In addition, the uniqueness of infrastructure projects in terms of the services they provide makes infrastructure investments less liquid. These three elements – the time profile of cash flows, high initial risks and illiquidity- make purely private investment difficult and costly.
There is potential for:
about 400 gigawatts of gas-generated power, with Mozambique, Nigeria, and Tanzania alone representing 60 percent of the total capacity;
about 350 gigawatts of hydro, with the Democratic Republic of the Congo (DRC) accounting for 50 percent;
about 300 gigawatts of coal capacity, with Botswana, Mozambique, and South Africa representing 95 percent of this;
and 109 gigawatts of wind capacity, although it is relatively expensive compared with other sources.
The proven geothermal resource potential is only 15 gigawatts, but this is an important technology for Ethiopia and Kenya, which hold 80 percent of it.
Sub-Saharan Africa is well endowed with both hydropower and thermal resources – but only a small fraction of its power generation potential has been developed. Of the 48 sub-Saharan countries, 21 have a generation capacity of less than 200MW, well below the minimum efficiency scale, which means they pay a heavy penalty: costs reach US$0.25 per KW, twice the level in the region’s larger power systems.
One reason is that some of the region’s most cost-effective energy resources are too distant from major centres of demand, in countries too poor to raise the billions of dollars needed to develop them. For example, 61% of the region’s hydropower potential is in just two countries – the Democratic Republic of Congo and Ethiopia.
Regional Power Trading
Pooling energy resources through regional power trade promises to reduce power costs. The Southern, West, East, and Central African Power Pools, created mainly to support power trade efforts, are at varying stages of maturity. If pursued to their full economic potential, regional trade could reduce the annual costs of power system operation and development by US$2 billion per year - about 5% of total power system costs.
The savings would come largely from substituting hydropower for thermal power, substantially reducing operating costs, even though it entails higher up-front investment in capital-intensive hydropower and associated cross-border transmission. The returns to cross-border transmission can be as high as 120% for the Southern African Power Pool and more typically 20% to 30% for the other power pools. By increasing the share of hydropower, regional trade would also save 70 million tons of carbon emissions a year.
Under regional power trade, a handful of large exporting countries would serve a substantial number of power importers. The Democratic Republic of Congo, Ethiopia, and Guinea would emerge as the major hydropower exporters. As many as 16 countries would be better-off (from a purely economic standpoint), importing more than 50% of their power needs through regional trade. Savings range from $0.01 to $0.07 per kilowatt-hour.
The state of healthcare and health indicators in Africa is still far behind the rest of the world, and progress made on addressing the challenges in this sector is not as speedy as one would expect given the continent’s economic growth. The biggest killers are the great epidemics and communicable diseases.
Countries in which private expenditure on healthcare dominates, are of two types: those in which almost all spending is out-of-pocket spending at point of delivery, and those where the private spending is collected on a regular basis and pooled so that provision is made for unexpected health problems.
Future Healthcare Developments
Future healthcare developments in South Africa will be interesting to watch: it is the country in Africa in which the burden of disease transition from communicable to non-communicable diseases is most advanced, and the way in which public and private healthcare providers address this transition will serve as a model for other countries.
Mauritius is interesting for much the same reason: basic healthcare has been achieved, and now the private sector (including insurers) is positioning itself to take advantage of the growing demand for world-class services for the well-off.
Botswana has achieved very decent health indicators (it is ranked 8th in Africa in terms of the human development index, ahead of South Africa) by applying best practice: spending more than 15% of its budget in line with the Abuja commitment, and encouraging the development of a sophisticated health insurance market.
Some of the poorer economies in Africa are also notable for the way in which, despite lower spending levels, governments have been able to make a big difference to healthcare delivery. Rwanda’s progress has been most impressive: spending one tenth as much as Botswana per capita on health, the country has managed to reduce mortality from AIDS, tuberculosis and malaria by 80% in ten years, and has reduced maternal mortality by 60%. These stunning achievements came thanks to thorough planning, the prioritisation of primary healthcare and the central provision of health insurance.
In Ethiopia, a poor country with a large population, improvements to the healthcare bureaucracy to improve primary healthcare in remote areas has made a huge difference to maternal and infant mortality. The methods used with such success in these two countries could be copied in other poor countries on the continent, to very beneficial effect.
