Sustainable Infrastructure and Inclusive Growth: The Case of Sub Saharan Africa

Infrastructure is a key pillar of development for Sub-Saharan Africa (SSA) countries to achieve inclusive growth that facilitates sustainable poverty reduction. SSA countries need functioning infrastructure to address many long-term challenges, including universal access to electricity, water, and energy, logistics costs, a growing demand for energy, increasing urbanization, vulnerability to natural disasters, climate change, regional and global integration, and food security. However, presently, SSA countries lack adequate infrastructure to support even short-term economic growth. SSA needs far more infrastructure than its governments can afford to finance through taxation or development assistance and aid. Addressing these challenges and closing SSA’s infrastructure gap requires a multi-track approach that increases both public and private investments and utilizes many other financial instruments. Even when compared to low- and middle-income countries in other developing regions, SSA is the least infrastructure-endowed region of the world. Infrastructure, therefore, is a major investment expenditure in SSA, equivalent to roughly 3 to 6 percent of GDP per year (one-third to one-half of total public investment). Yet infrastructure services in SSA countries cost twice as much as in other developing regions due to lack of economies of scale and limited competition, and are of poor quality when delivered. The World Bank estimates that infrastructure expenditure reduces SSA economic growth by two percent and business productivity by as much as forty percent every year. Persistent under-investment in infrastructure negatively impacts living standards, private sector development, and economic growth. The World Economic Forum estimates, however, that every dollar spent on a capital project generates an economic return between 5 percent and 25 percent per annum. Improving Kenya’s infrastructure to the level of middle-income countries, for instance, would boost annual growth by more than three percent and increase annual real GDP growth in Nigeria by around four percent.

Beside the lack of infrastructure itself, private sector investments in SSA infrastructure are extremely low, under four percent of total financing and significantly less than in other low and middle income countries. Most SSA countries have been unable to attract significant private investment outside the telecommunications and power sectors due to their small country sizes, low average incomes, weak institutions, underdeveloped domestic capital markets, and relatively poor business environments, which make infrastructure services unaffordable and leave SSA countries without locally-denominated long term capital. A significant private sector investment, discipline, and efficient management and financing, though, will  positively impact infrastructure service delivery for SSA’s populations.

However, promoting this growth requires substantially larger, more diversified investment than present funding. Estimates vary, but a broad consensus indicates that to maintain current levels, SSA’s infrastructure spending will cost around US$93 billion per year over a decade. This is about double the current spending levels, leaving a US$48 billion per year financing gap. World Bank estimates show that SSA countries can meet about one-third of the infrastructure gap through operational optimization, thus narrowing the gap to US$31 billion (5 percent of the region’s GDP). Public-private partnerships could then potentially fund 40 percent of this optimized gap.

However, simply increasing infrastructure funding is not sufficient for growth. Infrastructure services play a crucial role in social inclusion, poverty reduction, and quality of life of SSA populations. SSA countries must therefore meet their populations’ demands for efficient infrastructure service delivery. Access to basic infrastructure services will enable small and medium-sized enterprises, the main source of   jobs in SSA, to increase their productivity by integrating lagging regions into the larger economy. Additionally, infrastructure services provided at the household level often directly correlate to inclusive growth and poverty reduction. Evidence shows that access to improved water and sanitation supports health improvements and frees women’s time from daily chores. Similarly, connecting health clinics to electricity improves healthcare delivery, and linking roads to schools improves school attendance. Therefore, by reducing the proportion of people without reliable access to safe drinking water and basic sanitation, and by making housing and shelter more accessible, infrastructure can greatly contribute to the achievement of the Sustainable Development Goals (SDGs).

To successfully implement these measures and attract infrastructure investment, SSA countries must use a multi-track approach, focusing on the quality of services provided by the infrastructure and planning, building, and maintaining infrastructure to promote inclusive growth. They must start with policy reforms to improve their financial and business environments; develop institutional capacity; and improve their populations’ technical skills so SSA citizens can prepare and manage bankable infrastructure projects.

Fortunately, new foreign, local, and regional investors and funds are now developing on the continent. Domestic revenue sources are also slowly broadening. According to the IMF, from 2006 to 2014, 13 SSA countries issued $15 billion in international sovereign bonds, intending to use the proceeds to finance infrastructure. SSA pension funds have about $380 billion in assets under management, which SSA governments can tap to invest in infrastructure. In Cabo Verde, Kenya, South Africa, Swaziland, Tanzania, and Uganda, governments have already used pension funds to invest in infrastructure projects, succeeding in improving service deliveries to the poor and increasing infrastructure financing sources.

SSA governments must do more, however, to leverage these new investors and funds and create a friendlier investment climate. Using more SSA pension funds to finance infrastructure is one way to enlist private sector investors’ support to increase infrastructure service delivery. SSA must also effectively use the broader business climate to realize its growth potential. Beyond affordable and efficient infrastructure, issues such as access to credit, integrity of property rights, permit and land requirements, trade regulations and logistics, open procurement policies, and costs of starting a business are among the important investment climate indicators that can attract or deter investors in SSA, especially in infrastructure projects. SSA countries can spur investor confidence by increasing social accountability to citizens and building transparent systems of procurement and public financial management. Improvements in the rule of law, institutional accountability, and access to information will determine SSA’s growth trajectory and sustainability.

SSA countries have infrastructure gaps, which threaten their growth and the achievement of social and other development goals. Addressing this shortfall is key to laying the foundation for development for the next generation.