Infrastructure in Africa

In our previous post: PPPs – critical to harnessing private investment we discussed the role of public-private partnerships in infrastructure project financing. Here we take a look at the risks associated with PPPs and, more broadly, the subject on infrastructure in Africa.

A word of caution on PPPs

As Hugh Boylan points out, in his analysis of Infrastructure-related PPPs in Africa,

Large infrastructure investments geared towards extractive industries tend to benefit large export partners and foreign investors, not the local economy”.

The centralisation of policy decisions in most African countries adds to this, leaving local municipalities out of the loop despite the impact of mega-infrastructure in their area. More comprehensive national development plans will be needed to ensure that the people on the ground enjoy the benefits of economic growth as they were envisaged in the AMV. Boylan suggests tying small business investment to PPP development to promote projects and encourage local participation.

Another risk associated with investment in PPPs is that costs are often passed on to the consumer. The Lekki Toll Road Concession project in Nigeria is a good example, where the recuperation of private investment costs through road user fees that attracted violent protest by locals. (Having said that, South Africa is experiencing a similar reaction to its new, non-PPP tolling scheme in Gauteng.)

Other obstacles to PPPs include widespread inadequacy of African legal frameworks to properly govern PPPs, corruption, neo-patrimonialism and a lack of transparency in concession awards. A greater spread of risk between partners and debt and equity finance in such projects can help mitigate potential losses in the event of project collapse.

Foreign government investment in local infrastructure

Investment in local infrastructure by foreign governments can also be a mixed blessing. In Angola the government is seeking to diversify its mining interests and promote investment in its diamond sector. The current lack of road infrastructure between Luanda and the mineral-rich region is a major obstacle to the area’s development. Having a strong interest in the region’s diamond mining, South Africa has got involved by loaning funds through the South African-owned Development Bank of Southern Africa for the construction of new roads that will facilitate the operation of a more efficient supply chain network.

Denine Walters cautions that while Angola has much to gain by allowing South Africa to increase its presence in its diamond industry, the latter could end up exerting such dominant influence over the diamond-producing areas that Luanda would get bypassed in the future mining-to-market supply chain. Because of Angola’s concern, South African companies, which have much expertise in mining engineering and operations, have not yet been able to establish a strong stake in the country’s diamond sector.

China in Africa

Can the same be said of Chinese influence in Angola? In June 2011 Sonangol acquired an 18% stake in Catoca Mine, one the country’s three major mines, becoming the first Chinese company to own part of an Angolan diamond mine. It has since been discovered that despite protestations to the contrary, Sonangol’s corporate structure has links to the Chinese Government and its related agencies. The investment is part of a strategy by China to diversify its interests in the countries in which it has a presence and, many claim, to win political influence there.

China’s growing presence in Africa is linked directly to its need for resources for its own growing market economy. According to Denine Walters, one of its strategies to gain mining licences is to undertake to build (or rebuild) desperately needed infrastructure – which helps reconstruct target countries’ infrastructure and boost their growth, ideally also employing local labour. Where it cannot obtain mining licences, it forms joint ventures with state-owned firms or buys stakes in already existing mines to feed its resource needs. What the long-term consequences of this will be remain to be seen.

Toward sustained and beneficial growth

The average economic growth rate for African countries over the next 30 years will be around 6% per annum, driven largely by a rapidly growing population, rising levels of education, and improving technology absorption. This will further inflate the demand for infrastructure, so fast action is vital.  But not at the expense of a proper developmental plan that ensures that Africans on the ground ultimately benefit from the negotiations going on over their heads.

David Okwara

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