Connecting Africa: Role of transport infrastructure

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Connecting Africa: Role of transport infrastructure

Connecting Africa: Role of transport infrastructure
Photo credit: Reuters | Akintunde Akinleye

Africa, the world’s second largest and second most populous continent in the world, with a land area of 30.4 mn sq km, is a market of 1.2 billion people and an estimated GDP of US$ 2 trillion in 2017. According to the African Economic Outlook 2018, real GDP in Africa is estimated to have increased to 3.6 percent in 2017, from 2.2 percent in 2016, reflecting sound macroeconomic policies, and progress in structural reforms.

Africa also has the advantage of a young and growing population and is projected to have the fastest urbanization rate in the world. Africa also has a huge potential to develop a strong manufacturing sector, which could play a significant role in the economic development of the continent, which include creating employment opportunities, catering to domestic demand, and generating exports surplus, among others.

However, Africa is yet to climb the value chain of mineral processing and manufacturing, which would help the region to unlock its full potential of natural resources. One of the major factors that restrict Africa from reaching the global value chain is the huge deficit in infrastructure sector.

Growth, Trade and Infrastructure in Africa

According to the Office of the Special Advisor on Africa, the United Nations, approximately 60 percent of the continent’s population lacks access to modern infrastructure, which isolates communities, prevents access to health care, education and jobs, and impedes economic growth. Inadequate infrastructure is a major deterrent for Africa to achieve its full growth potential. Hence, meeting the demand for key infrastructure, both physical and social is a priority area for the countries in the region.

Various reports indicate that inadequate transport infrastructure adds around 30-40 percent to the costs of goods traded among African countries. Since Africa is home to 16 landlocked countries, poor and underdeveloped transport infrastructure limit accessibility to consumers, hamper intra-regional trade and drive up import and export costs. A better transport and logistics infrastructure provide efficient transport services to other sectors apart from mining and natural resources, resulting in a better standard of living for its citizens by bringing agricultural and manufacturing products to market.

Although African Governments, financial institutions and the private sector have played instrumental role in boosting regional integration, the levels of continental integration have remained relatively low. Intra-regional exports stood at 17.7 percent of the total exports of Africa in 2016, increasing from 11.7 percent in 1996. This is almost insignificant compared to 55.2 percent of intra-regional exports in case of America, 59.4 percent in Asia, and 68.7 percent in Europe. Infrastructure insufficiencies play a major role in hindering Africa from fully reaching its potential – trade and growth.

Transport and Insurance Cost in Africa

According to UNCTAD, low-income economies, landlocked developing countries and small island developing states face relatively higher transport costs than other economic groupings. Average transport costs represent around 21 percent of the value of imports for LDCs, 19 percent for landlocked developing countries and almost 22 percent for small island developing states, against the world average of 15 percent in 2016. According to OECD, there is a strong case for promoting intra-continental trade visà-vis inter-continental trade from cost perspective. Inter-continental trade increases transport and insurance costs by 2-4 percent as compared to comparable intra-continental trade. This supports the role of a better transport infrastructure to facilitate this trade.

Transport Demand in Africa

Total trade of Africa has increased three-fold to US$ 830.9 billion in 2016 from US$ 235.5 billion in 2001, with 2.2 percent share in global exports and 2.9 percent share in global imports. Total international freight demand in Africa is based on its international trade which has grown at a CAGR of 8.2 percent during 2001 to 2016. The increase in global trade depends on smooth, fast, and less costly mode of transportation. The African gateways have grown substantially both for freight and passengers, supported by growing international trade of the region. This requires African transport network to expand to handle the increased traffic growth.

Current Infrastructure Investment Requirements in Africa

Annual infrastructure requirement estimates for Africa by various institutions vary from US$ 93 billion by the World Bank, US$ 100 billion-US$ 150 billion estimates by JICA, US$ 174 billion by G-20 and US$ 130 billion - US$ 170 billion by the African Development Bank. All the estimates suggest that maximum requirement would be in power and transport sectors.

Infrastructure Financing Trends in Africa

During 2016, US$ 62.5 billion new commitments were made to Africa’s infrastructure sector- both at national and regional level, a decline of around 21 percent compared to US$ 78.9 billion committed in 2015. Budget allocations from African national Governments accounted for the bulk of infrastructure financing commitment at US$ 26.3 billion (42.1 percent share) in 2016. External finance commitments witnessed by Africa in 2016 is the lowest since 2010, mainly due to a US$ 14.5 billion reduction in reported Chinese funding and a US$ 4.9 billion fall in private sector investment. The members of Infrastructure Consortium for Africa (ICA) comprising the AfDB, Development Bank of South Africa (DBSA), European Commission (EC), European Investment Bank (EIB), G8 countries, the Republic of South Africa and the World Bank Group accounted for 29.8 percent of the financing in 2016.

Out of the US$ 62.5 billion committed to Africa’s infrastructure in 2016, West Africa received US$ 16.3 billion of commitments, followed by East Africa with US$ 13.1 billion and North Africa with US$ 12.9 billion. Southern (excluding the Republic of South Africa) and Central Africa received US$ 6.5 billion and US$ 6.3 billion, respectively, while the Republic of South Africa received US$ 5.9 billion. Intra-regional and pan-African commitments amounted to US$ 1.4 billion in 2016. In 2016, the largest financial commitments in Africa were in the transport sector (share of 39.1 percent), followed by energy sector (31.9 percent), water (16.8 percent), multi-sector (4.5 percent), and ICT (2.6 percent).

Investment commitments to the transport sector fell sharply in 2016 to US$ 24.5 billion, compared with US$ 32.4 billion and US$ 34.4 billion recorded in 2015 and 2014, respectively. In 2015, transport sector benefitted from strong Chinese support, whereas budget allocations to transport sector from national governments peaked in 2014. African national governments continued to be the prime funders of the transport infrastructure in 2016. Out of the US$ 24.5 billion committed to the sector in 2016, 59.6 percent was provided by national governments, followed by ICA members (20 percent). Chinese funding to the sector fell considerably from 28 percent in 2015 to 4.1 percent in 2016. India’s financing of African transport sector recorded a significant increase in 2016, with a commitment of US$ 513 million, which is roughly 2.1 percent of the total commitments to the sector.

Across the regions, West Africa received the highest level of transport commitments in 2016 (26.9 percent of the total), compared with 2015, when East Africa was the top region for transport with US$ 11.8 billion, or more than one-third of commitments.

Public Private Partnership in Infrastructure Financing

A PPP project involves financing from various sources, in some combination of equity and debt, and the ratios of these different contributions depend on negotiations between the lenders and the shareholders. The main forms of financing include equity contributions, debt contributions, bank guarantees/ letters of credit/ performance guarantees, bond/capital markets financing and mezzanine/subordinated contributions.

According to the World Bank, in 2016, Africa recorded 17 PPP infrastructure projects amounting to US$ 4.2 billion, lower than the US$ 8.0 billion in 2015 for 27 projects. The Sub-Saharan Africa received 14 infrastructure deals totaling US$ 3.9 billion. This include nine projects in energy sector, two in transport sector and three in ICT. Uganda was the most active country with four projects, followed by Ghana with three projects, and Senegal with two projects. Similarly, North Africa recorded 3 PPP projects amounting to US$ 246 million in 2016. Egypt got investment commitment towards two projects in energy sector, with Djibouti getting investment for an ICT project in 2016.

Aid for Trade in Promoting Infrastructure in Africa

Africa remains one of the key recipients of Aid for Trade funds. A major share of disbursements under Africa’s Aid for Trade have been made towards economic infrastructure and productive capacity. In 2015, global Aid for Trade disbursements stood at US$ 39.8 billion and disbursements to African countries reached a record high of US$ 14.1 billion. Given the large infrastructure needs of the continent and the cost-intensive nature of infrastructure projects, economic infrastructure sector dominates Africa’s Aid for Trade Projects. It accounted for 55 percent of total disbursements to Africa, followed by building productive capacities (42 percent) and trade policy and regulations sectors (3 percent). At sub-sectoral level, economic infrastructure funding is almost evenly divided between transport and storage (26 percent of total) and energy (27 percent).

Project Finance for Financing Infrastructure

Project finance is a financing structure that is used by the capital markets to finance large, risky projects or initiatives. Project finance is commonly used to finance long term projects such as infrastructure. Global Project Finance amounted to US$ 230.9 billion from 765 deals in 2016, lower than US$ 277.5 billion from 799 deals recorded in 2015. Africa’s project finance totaled US$ 5.8 billion from 23 deals in 2016, lower than US$ 11.3 billion from 25 deals recorded in 2015. Africa recorded a marginal 2.5 percent share in global project finance in value terms.

Other Modes of Financing

African countries attract new financing into infrastructure sector through various modes including PPPs and local and international capital markets. There are various innovative routes to finance the regional infrastructure in Africa, and the continent has already adopted several of these in its efforts towards infrastructural upgradation. Some of the prominent financing mechanisms are: infrastructure bonds, international bonds, loan guarantees, private equity and investment banks, pension funds, sovereign wealth funds, and financing by regional economic communities. AfDB has suggested other innovative methods of financing in Africa including project puttable bonds, debenture structure, outputbased long-term PPP agreements and managed colending portfolio program.

AfDB‘s Role in Transport Sector Financing

Between 1967 and 2017, AfDB has financed over 450 transport projects amounting to more than US$ 30 billion. Morocco and Tunisia were the countries with the most financing for transport, receiving US$ 2.7 billion and US$ 2 billion, respectively. At the sub-regional level, East Africa received the maximum finance, with more than a billion dollars of transport project financing being provided to Kenya, Tanzania and Ethiopia. It was followed by West Africa, with Côte d'Ivoire receiving the maximum financing with the recent urban transport megaprojects. Among the sub-sectors, maximum number of financing went to road projects, with more than 40,000 km of roads having been paved with the Bank's financing. African ports have also received significant financing for creation, expansion or modernization of ports and for shipyard development.

India’s Role in Africa’s Infrastructure Sector

According to the ICA, India’s commitment to African infrastructure projects more than doubled to US$ 1.2 billion in 2016 from US$ 524 million in 2015. The largest portion of Indian commitments went to transport (US$ 513 million), followed by energy (US$ 422 million) and water (US$ 262 million) projects. The Export-Import Bank of India (Exim India) has been among the principal agents for supporting India’s development partnership with the African continent in the infrastructure sector.

EXIM Bank’s Working Paper Series is an attempt to disseminate the findings of research studies carried out in the Bank. The results of research studies can interest exporters, policy makers, industrialists, export promotion agencies as well as researchers. However, views expressed do not necessarily reflect those of the Bank.