Could The US Rival China’s Infrastructural Funding In Africa?

construction equipment on street africans on china
Credit: Medsile via Iwaria

Infrastructure in the developed world is taken for granted because they are more or less always available. In Africa, however, its scarcity is causing tremendous discomfort. Lack of better road infrastructure is causing annoying traffic jams in Ghana’s capital, Accra. Nigeria’s national electricity company, NEPA, has acquired a notorious reputation for its incessant load shedding of power.  Hundreds of millions in Africa’s rural regions make do with sharing their sources of unsafe drinking water with mammals. In addition, those in the urban areas suffer from an erratic supply of tap water,  which when flowing, sometimes is contaminated.  

Infrastructure remains a crucial driver of economic growth. In Africa however, there is an acute infrastructural deficit, presenting a challenge for the continent‘s growth. According to the African Development Bank (AfDB), Africa needs more than US$1 trillion over a ten-year period to close its infrastructural gap. Despite the urgent need for infrastructure, mobilizing the resources has proven an uphill battle.  

Portions of national budgets earmarked for infrastructure in Africa have always been lower than the benchmark. Multilateral financial institutions have increasingly shifted from infrastructural to humanitarian lending. Save China, bilateral lending for Africa has not been substantial. To solve  Africa’s acute infrastructure problem, we need to turn to private capital, for which there is more than abundance. However, the problem is that Africa, as in most Lower-Income Countries (LICs), has relatively been unsuccessful at attracting private investment in infrastructure.  

Trying to fill this void has been Beijing. It saw an opportunity with Africa’s infrastructure and decided to go at it. Whereas China’s lending for Africa is largely financed by the state, the US seeks to rival this by pulling together funding from private sources for Africa’s infrastructure. This article looks at how the US’s approach compares to China’s vis-à-vis African infrastructural financing. More importantly, the article would discuss whether the US’s approach would be enough to break the hard knot that is rapidly forming between Africa and China.  

Opportunities With African Infrastructure Is Not Attracting Private Capital

In its 2018 edition of African Economic Outlook, the African Development Bank (AfDB) estimated that African infrastructure needs amount to US$130 – $170 billion annually. The report further revealed that “institutional investors, such as insurance companies, pension funds, and sovereign wealth funds, have more than $100 trillion in assets under management globally. A small fraction of  the excess global savings and low-yield resources would be enough to plug Africa’s financing gap and  finance productive and profitable infrastructure.” 

Yet, according to data from the World Bank, between 2008 to 2017, only 2% of all private infrastructure financing went to LICs. The remaining 98% went to Middle-Income Countries (MICs). Since the majority of African countries south of the Sahara fall under the category of LICs, it is possible that Africa’s share of private infrastructure funding is lower than 2%.

According to 2018 data from Infrastructure Consortium for Africa (ICA), African governments were the largest source of infrastructure financing, with commitments of $37.5bn (37% of total commitments), followed by China who committed $25.7bn (25%), ICA members ($20.2bn, 20%), the private sector recorded a discouraging ($11.8bn, 12%), and other sources ($5.6bn, 6%).  

This beats conventional imagination. Capital drives to places with the greatest market potential. However, this certainly is not happening in Africa – private capital seems to be dodging what could potentially be the biggest infrastructure market in the world, with obvious benefits. Brookings Institute issued an article in 2019 captioned, “African infrastructure needs are an investment opportunity.” 

Despite the huge strides made by China on the continent in terms of infrastructure funding, ICA estimates show that African countries finance about 37 percent (or US$37.5 billion) of their infrastructure expenditure from their national budgets. However, standing at an average of 4 percent of GDP, infrastructure spending by African governments fall well below the benchmark of 5-6 percent of GDP. Excluding South Africa, which spent US$16 billion on infrastructure in 2018, the percentage would be much lower. For example, oil-rich Nigeria spends less than 1% of its GDP on infrastructure. 

AfDB, Overseas Development Institute (ODI), and Brookings Institution all cite lack of bankable projects as a deterrent for pooling private capital for infrastructure funding in Africa. But much more deterring are the political and macroeconomic risks with Africa’s business climate (more on this later). 

What Is The US Bringing On-board? 

Almost a month ago, one of the United States’ foreign aid agencies, Millennium Challenge Corporation (MCC) signed a Memorandum of Understanding with Africa50 – a special-purpose institution of AfDB – to develop and launch the Millennium Impact for Infrastructure Accelerator(MIIA) development partnership.  

Africa50 website reads, “the new MIIA entity will be a global investment platform designed to spur and attract impact investments in Africa by developing bankable infrastructure deals with measurable social and economic impacts. Investments through MIIA will cover projects across  sectors such as water and sanitation, health, education, transportation, power, and  telecommunications.” 

It is hoped that by making projects bankable or investment-ready, it would be easier to attract private financing.  

What Should We Expect? 

In principle, attracting private capital is Africa’s best way of dealing with acute infrastructure shortages. However, the statistics show private financing, for the most part, has been dodging Africa. In other words, private financiers are not convinced they can get returns after investing in Africa’s infrastructure, therefore have the least commitment in investing on the continent. 

As the World Economic Forum identifies underinvestment infrastructure as one of the biggest challenges facing Africa, any program designed to pool together private funding for infrastructure on the continent is welcome. The MIIA is one. Though MIIA is new, it is not one of a kind. However,  could MIIA be the game-changer? The devil is in the details.  

In 2011, the New Partnership for Africa’s Development (NEPAD) partnered with the African Union to create the Programme for Infrastructure Development in Africa (PIDA) as one of its flagship initiatives to identify and assess key cross-border infrastructure investments over the period 2012- 2040. Just as MIIA, PIDA proposes to finance its projects, among others by attracting private investors. 

In 2005, at the G-8 summit in Gleneagles established the Infrastructure Consortium for Africa (ICA) to promote public and private investment in Africa’s infrastructure. Just as the MIIA, the ICA is also not a funding agency. It works to overcome technical and political challenges to building more infrastructural projects.  

The World Bank in 2014 established the Global Infrastructure Facility (GIF), which is a partnership of governments, multilateral development banks, and private sector financiers, that facilitate private sector investment in complex infrastructure projects in emerging economies. Yet again, just as PIDA, ICA, and MIIA, GIF is also not a funding agency. For instance, to relieve the pressure on Tema port, the government of Ghana decided to build the Boankra Inland Port and Eastern Rail Line. To make such an initiative come to reality, the GIF is helping the government of  Ghana realize private investment between US$300-500 million, for which US$300 million has already been raised.  

Though mobilizing less than one percent of private capital in the world could solve Africa’s acute infrastructure problem, the MIIA would only add to the list of organizations that were set up to do that but have yet to impact African infrastructure in any substantial way.  

As mentioned, barriers to infrastructure financing in Africa goes beyond bankability. Writing for the  Overseas Development Institute (ODI) working paper 536, Judith E. Tyson also identified political and regularity uncertainties as deterrents to investment in developing countries. Africa’s governance has improved but still falls short of the standards desired. Moreover, the fact good governance is a strong requirement in MCC’s country selection process could make the MIIA less impactful in Africa than its sister organizations.  

In West Africa alone, about ten countries are dealing with one or the other governance-related problem. Recently, Nigeria violently cracked down on peaceful End-SARS protestors who were fed up with police brutality. Nigeria’s eastern neighbor, Cameroon, has been led for almost four decades by the despot Paul Biya, for using violence to silence dissidents in the country’s western region, known as Ambazonia. In Togo, the Gnassingbe family behaves as though it is the royal family in a monarchy. President Faure Gnassingbe, succeeded his dictatorial father, Gnassingbe  Eyadema, following his death. He has since been using state apparatuses to suppress the opposition so that he could sustain his position. In 2011, in what became a highly disputed presidential election,  Alhassan Ouattara, then an opposition leader, contested the incumbent, President Laurent Bagbo, who allegedly went contrary to the constitutional two-term limit.  

With the support of the international community, however, Ouattara overpowered Bagbo, leading to his arrest and an eight-year trial, and an eventual acquittal at the International Criminal Court (ICC). Nine years later, Ouattara is committing the same crime for which Bagbo was hanged – only that he remains the President. And the list continues.

With this kind of trend in Africa, benefits under the MIIA would elude many African countries due to MCC’s protocols. However, when this happens, far from hurting the ruling class, it rather worsens the socio-economic conditions of the vast majority of the citizens.  

How Does MIIA Compare With Chinese Lending  

With the exception of Sudan under the deposed Omar Al-Bashir, China does not seem to have shed its traditional disregard for governance before investing in African countries. Whereas private equity and institutional investors would look out for both governance and economic factors before investing, the Chinese on the other hand, only lookout for the latter. Despite coming into Africa’s debt market late and with relatively smaller capital to borrow, China has in two decades managed to reach levels of lending in Africa, surpassing private lenders and comparable to multilateral lenders. 

In as much we want Africa’s governance improved, we cannot also afford to suffocate its citizens in doing so. MCC’s stringent regard for good governance, though intended for good, could derail its resolve to help tackle Africa’s infrastructural deficits and render the MIIA ineffective.

What do you think? Let us know in the comments.

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