There is need and available funding, together with a large pipeline of potential projects—but not enough money is being spent.
Most of Africa lags the rest of the world in coverage of key infrastructure classes, including energy, road and rail transportation, and water infrastructure. Taking electricity as an example, entire communities across large swathes of Africa lack any connection to the grid. For households and businesses alike, work-arounds are expensive—in 2015, our colleagues found that that by some measures, generator-based power in sub-Saharan Africa costs three to six times what grid consumers pay across the world. Even those who do have electricity generally use very little of it: in Mali, for example, the average person uses less electricity in a year overall than a Londoner uses just to power their tea kettle.
Closing this infrastructure gap matters greatly for the continent’s economic development, for the quality of life of its people, and for the growth of its business sector. The good news is that infrastructure investment in Africa has been increasing steadily over the past 15 years, and that international investors have both the appetite and the funds to spend much more across the continent. The challenge, however, is that Africa’s track record in moving projects to financial close is poor: 80 percent of infrastructure projects fail at the feasibility and business-plan stage. This is Africa’s infrastructure paradox—there is need and availability of funding, together with a large pipeline of potential projects, but not enough money is being spent.
In this article, we examine the context for this paradox, and its root causes, based on extensive quantitative research and interviews with more than 30 experts and investors across the continent. We then put forward a set of solutions that could address the paradox and unlock the flow of investment that is so badly needed.
Closing Africa’s infrastructure gaps
Africa faces serious infrastructure gaps. For example, nearly 600 million people in sub-Saharan Africa lack access to grid electricity—accounting for over two-thirds of the global population without power (Exhibit 1). While significant progress is being made to close this gap, Africa still lags behind; for example India connected 100 million people to electricity in 2018, compared to just 20 million achieved in Africa. This has led to electricity consumption per person in Ethiopia, Kenya, and Nigeria being less than one-tenth that of the BRICs (Brazil, Russia, India, and China). Furthermore, the unmet demand looks likely to increase: McKinsey forecasts that Africa’s demand for electricity will quadruple between 2010 and 2040. The continent also trails the BRIC countries in other key measures, including rail density and road density.
Yet there is also no shortage of effort to close Africa’s infrastructure gaps. A 2018 report by the Infrastructure Consortium for Africa (ICA) found that between 2013 and 2017, the average annual funding for infrastructure development in Africa was $77 billion—double the annual average in the first six years of this century. Nearly half of the recent activity was in West and East Africa, with 27 and 19 percent of the total respectively. The transport and energy sectors together accounted for nearly three-quarters of the total investment.
The rising spend has come principally from African governments, which accounted for 42 percent of total funding in 2017. Chinese investment in particular has grown steadily: According to the same ICA report, Chinese infrastructure commitments grew at an average annual rate of 10 percent from 2013 to 2017 and have supported many of Africa’s most ambitious infrastructure developments in recent years. For example, China’s EXIM Bank financed more than 90 percent of the $3.6 billion Mombasa-Nairobi Standard Gauge Railway in Kenya. Opened in 2017, the railway cut travel time between the cities in half.
However, many more projects are needed. As a share of GDP, infrastructure investment in Africa has remained at around 3.5 percent per year since 2000—but the McKinsey Global Institute estimated in 2016 that this will need to rise to 4.5 percent if the continent is to close its infrastructure gaps. By way of comparison, China spends about 7.7 percent of GDP on infrastructure, and India 5.2 percent. In absolute terms, this would mean a doubling of annual investment in African infrastructure between 2015 and 2025, to $150 billion by 2025.
What are the prospects of unlocking such a step-change in infrastructure investment? On the one hand, many African governments face rising debt-to-GDP ratios, which will constrain their infrastructure spending in the years ahead. In sub-Saharan Africa, for example, the median debt-to-GDP ratio exceeds 50 percent—up from 31 percent in 2012. On the other hand, international investors have considerable appetite for African infrastructure projects. By our estimate, such investors could have as much as $550 billion in assets under management. They include government agencies, private-sector pension funds, and investment companies. Investors from the United States account for 38 percent of this potential funding, with significant funding also available from the United Arab Emirates, China, the United Kingdom, and France (Exhibit 2).
These investors are not sitting on their hands. Together with African governments, many of them are already exploring—or have committed to—major new infrastructure projects over the next decade. McKinsey analysis indicates that Africa’s current pipeline of infrastructure projects includes $2.5 trillion worth of projects estimated to be completed by 2025, across all asset classes. Not all of these projects will eventually succeed, as over 50 percent of them are still in feasibility stages; nonetheless, this represents an impressive source of future infrastructure activity. We should note that nearly half of the projects in the study phase (by value) are in six countries, led by Nigeria (17 percent).
Why so few African projects get funding
Will a critical mass of this project pipeline move from feasibility to completion? The answer will determine whether Africa makes the necessary progress in closing its infrastructure gap. Unfortunately, our research shows that most infrastructure projects in Africa fail to reach financial close: less than 10 percent of projects achieve this milestone, and 80 of projects fail at the feasibility and business-plan stage (Exhibit 3).
This low success rate represents a significant financial burden for infrastructure developers. For the six largest infrastructure markets in Africa, we estimate that the development costs of just the projects in the feasibility-study phase amounted to $30 billion.
There are several reasons for the high failure rate. Many governments and developers lack the capabilities, as well as the budgets, to design and implement infrastructure projects with commercial potential. In addition, short political cycles may challenge commitments to long-term infrastructure projects. As a result, investors lack bankable project pipelines: only a few projects meet investors’ risk-return expectations and reach financial close. Indeed, reaching financial close can be extremely challenging even for projects in asset classes that have delivered high returns in the past (such as power generation), and for projects that have secured revenues and guarantees.
The causes of Africa’s infrastructure paradox
We term this situation “Africa’s infrastructure paradox”: there is funding, a large pipeline, and a need for spending, but not enough money is being spent. To better understand the root causes of this paradox—and how they might be tackled—we investigated a number of case studies spanning important projects across Africa that have been significantly delayed or cancelled.
In one example, a proposed power project rushed the feasibility study with the aim of accelerating the development lifecycle; but this move had the opposite effect, leading to significant delays in breaking ground. The project had to be relocated because logistical challenges made it impossible to transport equipment to the original site. In another example, start of construction of a large port facility was delayed because of ongoing negotiations between the national government and investors, despite an initial agreement having been signed years earlier.
Based on the emerging themes from these case studies, we believe that this infrastructure paradox is not a structural problem, but the result of six discrete and critical market failures at the early stages of project development—that is, from concept phase to financial close. These failures, and their root causes, include:
- Limited deal pipeline or selection of low-impact projects, often due to the lack of a long-term master plan that can bridge political cycles. A shorter-term focus may result in the unwillingness to develop larger, more impactful projects, as well as inadequate infrastructure-policy frameworks leading to poor prioritization of infrastructure projects.
- Weak feasibility study and business plan. Developers and governments often lack the crucial capabilities and resources, including the capacity to assess key technical and financial risks associated with large-scale infrastructure projects. “Private sector players generally do not invest sufficient time and effort in developing a strong feasibility study,” said one public-private partnership expert at an African finance ministry.
- Delays in obtaining licenses, approvals, and permits. These issues may include a lack of capacity and motivation by government agencies to get projects off the ground; a lack of coordination between responsible agencies; and community resistance to some projects.
- Inability to agree on risk allocations. This is a result of skill gaps in quantifying and correctly allocating risks to their natural owners—a challenge that persists in even the most sophisticated public agencies worldwide. Another common problem is an excessive focus on risk avoidance as opposed to risk management and mitigation.
- Inability to secure offtake agreements and guarantees. A primary cause is governments that are unable to provide sovereign guarantees, as a result of weak balance sheets.
- Poor program delivery. This is the result of insufficient capabilities in planning (including technical design), managing, and execution of large projects.