This report is a joint effort of The Boston Consulting Group (BCG) and the Africa Finance Corporation, focusing on the climate for infrastructure investment in Sub-Saharan Africa.

The key chapters of the report cover the logistical, financial, and sociopolitical challenges of infrastructure investment in the region; key considerations and strategies for governments to take into account in pursuing such investments; and corresponding considerations and strategies for private investors to weigh in doing the same. The remaining material in the report consists of ten case studies of major infrastructure projects in the region, and appendixes containing lists of resources and projects for reference.

Executive summary

The World Bank estimates a global investment gap of $1 trillion annually in infrastructure development, and Africa faces especially sharp challenges in this area. For example, statistics reveal that two-thirds of Africans have no access to power, and the road access rate in Africa is only 34%, compared with 50% in other parts of the developing world. Overall, the nations of Sub-Saharan Africa lose as much as 2.1% of GDP annually to inadequate infrastructure – a circumstance that is at once daunting and correctable through appropriate investment and collaborative action.

Estimates of Sub-Saharan Africa’s annual infrastructure gap put it at around $100 billion. Every dollar of that gap represents a drag on Africa’s development and a diminution of its potential. Unless and until it acquires the modern transport systems, power generation capacity, and other basic infrastructure that it needs, it will lag behind not only the developed world but other emerging regions as well. Yet 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.

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, too – and that is the focus of this report. Collaboratively developed by the Africa Finance Corporation (AFC) and The Boston Consulting Group (BCG), the report draws on the experience and best-practice advice of experts from both the private sector and the public sector.

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:

• Government: Complications include limited public-sector capabilities to develop strategic foresight and planning, insufficient political will, policy uncertainty, weak regulatory environments and law enforcement, and a shortage of people who have the needed technical skills.

• Financial markets: Narrow financial markets, higher actual and provisional risks, longer project durations, significant cost overruns, and currency mismatches make financing issues more complex.

In addition, Africa often fails to attract first-tier international private investors in infrastructure projects, and a number of the second- and third-tier investors that tend to be more active in the continent lack some capabilities themselves.

Financial systems, too, need upgrading. Only the banking sectors of South Africa and (to a lesser extent) Nigeria currently offer financial markets sound enough to be tapped for infrastructure projects – although, in a similar vein, Kenya has developed a framework for infrastructure bonds.

That money is not flowing freely into Africa in pursuit of higher expected returns reflects these challenges, which must be addressed if the infrastructure gap is to close. Indeed, these challenges have resulted in relatively few projects’ reaching a bankable stage.

African governments are attempting to address these deficiencies. Of the 49 Sub-Saharan countries, 42 now have enacted legislation to provide a regulatory framework for private investment in infrastructure. South Africa, Rwanda, Botswana, and Mauritius offer good examples of advanced and robust regulatory contexts.

But this is merely a start. Most African countries’ regulatory frameworks remain limited, piecemeal, and untested. Going forward, governments on the continent should take several steps to improve the situation.

Private investors, too, have much to learn. They must understand the challenges that are distinct to infrastructural investment in Africa, and they must develop the patience, resilience, and risk appetite that the environment demands. They should also recognize that the most successful investors possess an entrepreneur and engineer mentality and engage fully with projects on the ground – from concept to bankable project and throughout execution. Engaging with and earning the confidence of host communities is another requirement.

Many projects that include private investors run into severe challenges because of an initial lack of fairness and balance between the parties to the contract An infrastructure project that involves both public and private sectors should be crafted in a way that it is not skewed toward either party, and it should include built-in revision clauses in case the context changes in an unforeseen way.

In this respect, certain institutions such as AFC, with its shareholder profile of 58% private investors and 42% public investors, can be of great help in mediating fair contractual balances. Moreover, the dynamism and flexibility of this type of organization structure is more in line with private sector trends than with traditional (and typically more bureaucratic) development financial institutions.

There is also a pan-African aspect to this endeavor. An all-African association could assist in the exchange of experience and strategies in infrastructure investment, favoring know-how building, best practices, and templates. Meanwhile, regional and cross-border projects could be of particular value to nations handicapped by small size or geographical disadvantages, such as Africa’s 15 landlocked countries’ lack of coastal territory.

The challenge is huge, but so are the opportunities – a winning proposition for those who get it right. For private investors, there is money to be made; for governments, the possibility of transformative social and economic development. And the biggest winners will be the almost one billion citizens of Sub-Saharan Africa, whose life prospects stand to change for the better.

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