Unlocking Africa’s economic growth through infrastructure investment
Upgrading Africa’s infrastructure could boost intra-regional trade and allow the continent to use its abundance of resources to drive economic growth.
African resources are critical to many supply chains, but because they are mainly exported in their raw form, the continent misses out on more value-added trade opportunities. Africa’s exports of goods and services account for less than 3% of all global trade, while the continent supports 18% of the world’s population.
Africa’s dependence on commodity and raw material exports also creates vulnerability. When commodity prices crash, many African countries’ currencies go into freefall, inflation soars and unemployment rises.
The continent’s best hope of rectifying this is to drive industrialization by cultivating intra-regional trade. Just 15% of Africa’s trade is intra-regional, compared to 60% of Asian trade and 70% of European trade. But one important obstacle stands in the way of boosting Africa’s intra-regional trade: inadequate infrastructure, which adds 30-40% to the cost of intra-regional trade.
Lamido Yuguda, a former Director General of Nigeria’s Securities & Exchange Commission and former Director at the Central Bank of Nigeria, observed: “In many cases, the infrastructure that was available at the time of colonial independence — especially in areas like rail transportation, which has been crucial for industry — was far better than it is now.”
Fixing this will require infrastructure spending of up to USD170 billion per year: the current financing gap is estimated at up to USD108 billion. That calls for a new approach to infrastructure development, cultivating new sources of investment and developing more forward-thinking and integrated infrastructure plans.
The potential of partnerships
Because recent private infrastructure investment in Africa has mainly come from foreign direct investment, it has tended to serve the resource procurement needs of the countries making the investments, according to Dinao Lerutla, an independent infrastructure investment professional who also serves as a non-executive director at the Development Bank of Southern Africa.
“A lot of the investment tends to be rail-to-port, rather than primary production, beneficiation, and trade to port, leaving out the localization and industrialization required to make infrastructure investment more effective as an enabler of building sustainable African economies” said Lerutla.
Those same commodities come back into the region after having been processed and used in manufacturing elsewhere, “leaving a huge gap in human development in the continent,” she added.
That is why Africa needs to take its infrastructure destiny into its own hands. Local efforts are still largely led by underfunded governments, who need to be “more catalytic,” according to Okechukwu Enelamah, who co-founded African Capital Alliance, one of Africa’s leading private equity firms, in 1998. “For every dollar they put in, they should have a goal to attract four or five more in private investment,” he explained.
Yuguda echoed that view: "You really need a massive investment in infrastructure in Africa, and because of the way government finances have been stretched in most African countries, it is not possible for governments alone to provide that kind of investment. We need public-private partnerships.”
One area in which these PPPs have succeeded across the continent is telecoms, said Yuguda. “Twenty years ago, telecoms was in really bad shape in most African countries. But [then they] adopted frameworks that allowed for private participation. Today very few governments have stakes in telecoms operators across Africa, and the sector has been growing tremendously.”
In the wake of telecoms liberalization across Africa in the 1990s, the continent leapfrogged fixed-line technology and went straight to mobile, with penetration in many of its large economies now on a par with or even ahead of the global average. Yuguda added that telecoms services have improved, while profits and tax revenues have gone up.
Paving the way
There are similar examples in roads. In 2021, Nigeria launched the Highway Development Management Initiative, aimed at attracting private sector participation in the building and rehabilitation of the nation’s roads by allowing investors to charge tolls to recoup their investment.
South Africa and Morocco already have toll highways, while Zambia has rolled out a similar policy. “It is working well and needs to be scaled up to reach more communities within Africa,” said Yuguda.
But for PPPs to take off, Enelamah stressed that governments need to ensure the ‘soft infrastructure’ is in place, including strong legal systems and property rights.
Lerutla added that a credible pipeline of infrastructure and industrialization projects needed to be packaged together – and African countries would be better off leading such initiatives themselves. “It's one thing to say industrialization is needed, but if there are no projects that have been prepared that a finance institution or a foreign investor can look at, the vision to realize sustainable economic growth in Africa through infrastructure investment will remain an ideal,” she said.
Policymakers can help by spelling out where the industrial opportunities are, how commodities and products can be moved between countries, and how to create markets for the products through offtake agreements, for example.
By bolstering Africa’s transport and power infrastructure, Enelamah sees potential to hasten the development of labor-intensive light industries. “The labor and productivity gains can be tremendous in sectors such as agro-processing, food manufacturing and packaging, light automobile assembly, as well as tourism and hospitality.”
A recent report from the African Export-Import Bank identifies products with the greatest intra-African export potential, ranging from machinery and motor vehicles to fertilizers and food products. Southern African nations could well prosper most from the growth of intra-regional trade, while Central African countries struggle to reap the benefits.
Clean energy potential
Africa’s critical minerals can be harnessed to produce everything from solar panels, batteries, and electric vehicles (EVs), to smartphones, computers, and other digital equipment.
In particular, the African Development Bank (AfDB) and other development finance institutions are looking at ways to channel investment into producing batteries, EVs and clean energy equipment in places like Congo, Zambia and Angola.
Some of that equipment could be used to drive the continent’s energy transition. Africa has 60% of the world’s best solar resources, yet accounts for only 1% of installed capacity.
Renewable energy is already playing an important role in supporting existing industries across Africa by supplementing inadequate power generation and erratic grids.
On 13 October 2024, Eskom, the largest producer of energy in South Africa and across the continent, marked 200 days without scheduled power outages, or “loadsheddding” as it’s locally known. The company claimed this new era of improved power reliability could boost GDP growth by as much as two percentage points.
“This is a welcomed reprieve after the country experienced 335 days of scheduled power outages during 2023, where some days you wouldn’t have electricity for up to 10 hours,” said Zaahid Ganey, an Investment Principal at African Infrastructure Investment Managers (AIIM).
“The private sector investing into new renewable energy generation and deregulation has certainly assisted in getting the country back on track. We have seen energy intensive users contracting power through private power purchase agreements and wheeling power across the grid to ensure energy security and lower costs,” added Ganey.
Renewables have made great strides elsewhere on the continent. In Kenya, more than 80% of electricity comes from low-carbon geothermal, hydro, wind and solar. By 2030, Morocco wants renewables to account for 52% of power generation and Egypt could be gearing to raise its own target to 60%.
Policy certainty
Because these initiatives depend heavily on government will, they also highlight the risk that infrastructure investors face from policy uncertainty. “But that’s not just an Africa problem, it’s a global problem,” said Ganey, pointing out how Donald Trump promptly pulled out of the Paris Agreement when he was first elected as US President in 2016.
It is also a reminder of how local interests can stall wider goals intended to bring about better outcomes for all, as evidenced by the slow progress on the African Continental Free Trade Area (AfCFTA), which envisions turning the continent into a single, liberalized market for trade in goods and services with a view to fostering investment and industrialization.
“I suspect a lot of this has to do with awareness and education and people trying to defend their ‘turf’ and national interest, rather than taking a more regional approach to making society better,” said Enelamah. “There’s a lot of work to do in that area.”