One of the reasons why investment in Africa is considered very risky is the continent’s huge infrastructure deficit. This in turn is a direct function of Africa’s yawning infrastructure investment gap.
Africa’s Infrastructure Investment Gap
Africa today has infrastructure investment requirement of $130-170 billion per year. However, the total annual investment in infrastructure on the continent stands at $62billion. That leaves Africa with an infrastructure investment gap of $68-108 billion per year.
Due to this huge infrastructure gap, businesses are left to fund a lot of externalities. Most of these externalities are infrastructure services, which ruins businesses financially. Overheads for businesses in Africa are quite high. This makes profitability in business very challenging.
It is even more worrisome for small and medium scale businesses on the continent. Without access to public power supply for instance, these businesses rely on generators to power their enterprises. This as we know comes at such a huge and highly unsustainable cost.
It therefore goes without saying that unless Africa’s infrastructure deficit is fixed, entrepreneurship in Africa stands jeopardized.
How do we close Africa’s Infrastructure Investment Gap?
Essentially, the conversation about closing Africa’s infrastructure gap revolves around mobilizing the necessary financial resources to close the continent’s infrastructure investment gap.
In this regard, here are 7 Smart ways we can mobilize the capital needed to close the gap.
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Domestic capital formation through our capital markets to fix our infrastructure deficit can be achieved if we reposition our markets.
Investors in infrastructure projects are most likely to turn to Africa when they are convinced that the continent’s capital markets are buoyant enough to allow them mobilize the investment capital they need.
Therefore, we must aggressively reform our capital markets to make it more attractive to investors. An attractive market will attract a lot of high net worth investors. This will make it robust enough to mobilize the high volume capital needed for infrastructure projects.
2. Redirection of Africa’s Sovereign Wealth Funds and Pension Funds to Africa
It’s very ironical that even when Africa has a lot of capital resources, it still begs for investment. If you take a look at Africa’s Sovereign wealth funds, pension funds and insurance pool of funds, they are roughly about $700 billion. And that, by 2020, will grow to about $1.8-1.9 trillion.
Sadly however, these monies are not invested in Africa. Rather, they are being invested in foreign money market instruments that are yielding negative rate of return in most cases. Ironically too, African governments themselves go back to these foreign markets, post Euro bonds and buy back their moneys at higher interest rates.
This trend must stop. With a total sovereign wealth, pension funds and insurance pool of funds of $1.8 trillion, all we need is less than 5% of that amount to close our infrastructure investment gap. Africa must therefore make a conscious effort to invest its sovereign wealth, pension and insurance pool of funds in closing its infrastructure investment gap.
3. Pro-infrastructure Allocative Decisions On Application of Tax Revenues
Each year, Africa collects taxes totaling anywhere between $500-520 billlion. Less than 20% of this is all we need to close Africa’s infrastructure investment gap. What we therefore need is fiscal discipline and a firm commitment to infrastructure development.
We must therefore find a way of mobilizing the needed political will. Our allocative decisions must be in favour of infrastructure development. We must block leakages and bureaucratic inefficiencies that deplete tax revenues. This way, resources can be freed up for investment in infrastructure.
4. Channeling Some of Our Remittances to Infrastructure Funding
Africa remains one of the regions of the world with the highest volume of remittances from the Diaspora. Sadly however, we haven’t taken advantage of this critical resource. Going forward therefore, we must strengthen institutions to track all remittances.
We must also commit to channeling a certain percentage of all remittances to funding infrastructure development projects in Africa.
5. Better Utilization of Official Development Assistance (ODA)
Africa receives Official Development Assistance in the neighborhood of $47billion annually. This is about half the total amount needed to close our infrastructure investment gap.
Unfortunately however, most of these ODAs end up funding recurrent expenditures (consumption) rather than capital projects. We must stop this. African leaders must prioritize closing Africa’s infrastructure gap and apply ODAs accordingly.
6. Stemming the tide of Illicit Capital Outflow
Today, illicit capital outflow from Africa is anywhere between $60-62 billion annually. This is roughly what’s needed to close our infrastructure investment gap.
A smart way to plug our infrastructure investment gap would therefore be to stem these illicit capital outflows and channel them to infrastructure project financing. This might involve policy and regulatory reforms that curtail capital flight and discourage embezzlement of public funds.
7. Leveraging the Global Capital Markets
By 2020, the Global Capital Markets will have a total investment portfolio of over $111 trillion. These funds are out there in the foreign markets, but the needs are in Africa.
So, we’ve got to get smarter. We must think of how we can position Africa to take advantage of this huge capital that’s looking for where to be invested.
Of course, given that Africa is where the infrastructure gap is, it is expected that the continent will hold the highest return on investment. But, to attract this capital, we must market Africa better.
Governments must provide incentives that will make the continent attractive to investors. Policy and regulatory issues must be fixed. This will reduce the political, market, project and financial risk associated with investing in Africa.
Closing Africa’s Infrastructure Investment Gap Through the Africa Investment Forum
In the light of attracting global capital to Africa, I salute the African Development Bank’s initiative, the Africa Investment Forum. The forum, staged last November in Johannesburg, South Africa, created a platform for the Bank working with other Multilateral Development Institutions to attract, retain, derisk and accelerate investments into Africa.
The Africa Investment Forum (AIF) essentially provided a landing strip that’s well organized to attract global capital to Africa.
AIF generated over $38 billion of investment in bankable infrastructure projects across Africa. While this initiative should be sustained, other innovative approaches to attract global capital to Africa should be explored.
Indeed, we can not expect Africa to grow and industrialize or even sustain business growth if our infrastructure deficit is not fixed.
Therefore, now is indeed the time for us to adopt any or a combination of these smart ways to mobilize the capital needed to close Africa’s infrastructure investment gap.
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