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Implications of Covid-19 on infrastructure finance in Africa

photo of train track subway
(Source: anna-m. w.)
  • November 24
  • Tags Media release, Covid-19, Development finance

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There is a significant infrastructure finance gap in Africa that is likely to widen due to the Covid-19 pandemic unless countries consider alternative financing techniques, says Dr Ashenafi Fanta, senior lecturer in Development Finance at the University of Stellenbosch Business School (USB.

“Infrastructure provides useful economic benefits and we need infrastructural development to achieve economic transformation in Africa. Many African countries are now looking at transforming their economies to reduce poverty and to create jobs.

Infrastructure provides useful economic benefits and we need infrastructural development to achieve economic transformation in Africa.

“We have three major economic sectors, namely the agricultural sector, the service sector, and the industrial sector. When countries develop, the usual path would be a shift from the agricultural sector to the service and industrial sector,” he says.

If we want to grow the industrial sector in Africa, we need to invest in the energy sector, transport infrastructure, ICT infrastructure and other critical infrastructural sectors.

“Structural transformation is very critical and infrastructure provides essential input into structural transformation. If we want to grow the industrial sector in Africa, we need to invest in the energy sector, transport infrastructure, ICT infrastructure and other critical infrastructural sectors.”

Dr Fanta says economic transformation also entails increasing labour productivity in all three sectors and achieving labour productivity can be done through infrastructural development, which is critical for economic transformation and economic recovery in Africa.

Impact of the pandemic on the global economy

Economic growth across global regions has decreased. “Many African countries have been experiencing fast economic growth so for these countries experiencing a decrease of 2, 8% is a big loss. There had been positive developments in poverty reduction across the globe but with the contraction of outputs, it’s going to reverse.

Investment in infrastructure can help in job creation and in boosting private sector activities.

“The health and economic consequences of the pandemic are likely to be worse in countries with widespread informality. This is a big concern for us in Africa because we have a large segment of the economy in the informal sector. The blow is the hardest in countries that rely on global trade, tourism, commodity export, and external financing. Investment in infrastructure can help in job creation and in boosting private sector activities,” he says.

State of infrastructure in Africa

Dr Fanta says the availability of infrastructural services and access of the population to infrastructure services in Africa is very low. Looking at the state of infrastructure for each sector reveals a gloomy picture:

  • In the energy infrastructure sector, a combined power generation capacity of 44 countries of Sub-Sahara Africa with a population of about 800 million is 92,27 GW (in 2012) less than that of Spain with a population of about 45 million, which is 105,27 GW. More than 640 million Africans have no access to energy, giving an electricity access rate of just over 40% for African countries – the world’s lowest.
  • In the transport sector, only 208 kilometres of roads in Africa are available per 1000 square kilometres of land area, compared to the world average of 944 kilometres per 1000 square kilometres.
  • In the water infrastructure sector, only 61% of Africans had access to clean water and 31% to adequate sanitation (in 2010).
  • The ICT sector, which is very critical for economic transformation, only has 19 million broadband internet subscribers in the entire sub-Sahara Africa region – about 6% of the total number of telephone subscribers.

“The financing deficit in Africa is also very large and according to a report by the Africa Development Bank from 2018, Africa’s total infrastructure needs amount to $130-170 billion a year, with a financing gap in the range of $68-108 billion,” says Dr Fanta.

Public finance is the primary source of funding infrastructural development in Africa. “However, there is increased pressure on public finances due to the bigger health expenditure following Covid-19 responses; governments had to make welfare payments to vulnerable households, and there was a loss of tax revenue as governments had to provide help to businesses that are struggling to stand on their own feet during the pandemic.

“Covid-19 had an impact on both the revenue and expenditure side of public finance and money that governments were going to put forward for investment in infrastructure will no longer be available,” he says.

Alternative sources of funding

Dr Fanta says borrowing money is not the answer. “Governments have already reached their borrowing limits. There had been a concern by international financial institutions including the International Monetary Fund (IMF) and the World Bank that many African governments are facing a debt crisis. As a result of Covid-19, many countries had to borrow a massive amount of resources from international as well as local markets and this has pushed the public debt beyond what governments can handle.

Many countries had to borrow a massive amount of resources from international as well as local markets and this has pushed the public debt beyond what governments can handle.

“The IMF already identified about 17 African countries that are in high debt risk. This is a concern because any further accumulation of debt will be detrimental to the countries,” he warns

Dr Fanta suggests the following alternative funding mechanisms to provide funding to infrastructural development that will be useful for economic transformation as well as economic recovery:

  • Infrastructural bonds: This is a debt but they will be linked to specific infrastructural projects and not added to public debt. These bonds are designed to attract funding specifically to a particular infrastructure, for instance in the energy or transportation sector without placing further pressure on public finances.
  • Development impact bonds: These are bonds where private sector entities contribute funding to kick start an infrastructural activity or investment. They will agree to generate return only if a particular development goal is met. If a development goal is met then donors will pay out the private sector entities the principal plus return or principal plus
  • Commodity-backed loans: Private sector entities are invited into infrastructural investments programmes with expectations that in the event the infrastructural asset fails to generate a return, then the commodities can be used in settling.
  • Tapping into pension funds: These funds in Africa are not well-developed except in a few countries including South Africa, Nigeria, and Kenya. Pension funds are very cautious in investing in infrastructure. There are initiatives in Nigeria where credit guarantees are made available to entice pension funds to invest in infrastructural facilities.

 

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USB is a triple-accredited business school and offers a cluster of internationally accredited Development Finance programmes – PGDip, MPhil and PhD – to implement sustainable solutions to develop Africa where it matters. All programmes are offered via its immersive, flexible Blended Learning format from 2021.

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