Infrastructure spending in developing countries needs to double

Spending on infrastructure in developing countries needs to double, says Trafigura, one of the world’s biggest independent commodity trading and logistics houses. In a in a white paper discussion launched at the Gordon Institute of Business Science (Gibs) on the 17th of April, the group emphasized that mitigation of financial risk is key to managing infrastructure projects.

The Foundations for Growth: Infrastructure Investment in Emerging Markets paper written by London-based independent economists Llewellyn Consulting said the World needs infrastructure worth about 3.5% of global gross domestic product (GDP) annually to 2030.

“In Africa, where existing infrastructure networks are particularly sparse and underdeveloped, the deficit exceeds USD 90bn per year over the coming decade, or 15% of the region’s GDP per year,” report co-author Russell Jones, a partner at Llewellyn consulting, said at Gibs on Friday, 17 April. “In some of the more fragile states, the infrastructure gap amounts to an even more startling 25% of GDP per year,” he said.

The report cited deficits in all major infrastructure — energy, water and sanitation, telecommunications, and transport. It said infrastructure needed in emerging markets was “an absolute requirement for developing countries’ future competitiveness”.

The report highlighted a need to “negotiate tensions” between construction and operation. It also raised questions over whether to implement major, prestige, “or arguably” more high-impact minor projects; new infrastructure versus maintaining existing assets; and public versus private funding. “But these obstacles could be overcome with an enlightened approach on all sides and the potential rates of return are high for all concerned,” it said. “Guarantees have to ultimately come from development banks,” Mr Jones said.

In Africa, these include the African Development Bank (AfDB), the Development Bank of Southern Africa, and numerous foreign funding institutions.

The report cites the AfDB as saying that the low quality of African infrastructure constrains economic growth on the continent by about two percentage points every year, and reduces business productivity by up to 40%. It states that “many African countries have also systematically underinvested in repair and maintenance in recent decades, leading to poorly performing, inadequate infrastructure assets”.

Fiscal policy in Africa had been “terribly pro-cyclical and therefore damaging”, Mr Jones said. This had left Africans paying dearly for infrastructure development during booming commodity cycles, and not taking advantage of much lower price inputs during busts.

Risk is also a constant factor in Africa. Labour problems have plagued Eskom’s unfinished Medupi power station, while Sasol has repatriated hundreds of workers from Mozambique fearing anger over xenophobic violence in SA. In developing Africa’s infrastructure there needed to be “more trust” between multinational companies and governments. “Governments have to accept their expertise,” he said.

Significant infrastructure projects are currently underway across the continent and consistent with our theme that companies linked to infrastructure spend are poised to benefit from Africa’s growing infrastructure development. Notably in Tanzania, Ethiopia, and Kenya we have seen projects expedited on the back of strong government support and the above mentioned challenges are being addressed internally.