Africa needs innovative finance to bridge its infrastructure gaps

African nations have already begun to tap into global financial markets. Domestic tax and savings also offer solutions.

GENEVA, Switzerland – Power outages and the lack of roads, railways, and ports have long been a frustrating feature of business in Africa, hindering home grown entrepreneur and foreign investor alike.

To become more competitive globally, Africa must close these infrastructure gaps to unlock quality growth for the continent, enabling Africa’s smallholder farmers and rural communities to enjoy the benefits of more equitable economic growth.

As the Financial Times, Ernst and Young, OECD, World Bank and IMF discuss economic and financial issues related to Africa this week in London, Johannesburg, Paris, and Washington, the Africa Progress Panel urges innovative solutions to finance infrastructure for Africa.

Fixing the continent’s infrastructure gaps will cost Africa US$48 billion per year for a decade, according to an estimate in 2009. Economic growth and urbanisation since then mean this gap will almost certainly have widened. As an approximation, Africa must double infrastructure investment.

Africa has already begun to tap into global financial markets, as this year’s Africa Progress Report – Grain, Fish, Money – describes. Domestic tax and savings also offer solutions.

By extending their tax reforms to African countries, G20 and OECD countries can support a clampdown on tax avoidance and evasion, which cost Africa billions of dollars each year.

African governments can boost available infrastructure funds both by reforming their domestic tax systems and by making their banking systems more competitive. In East Asia’s high growth developing countries, higher savings helped finance investment. But with some of the highest spreads in the world, Africa’s interest rates deter both savings and investment.

Outside of Africa, the world has been awash with liquidity since 2008. But in a globally competitive market, Africa must tackle the frequent perceptions that its infrastructure projects are high risk.

The development of insurance markets could help in this respect through the accurate measurement of risk. Meanwhile, the global community can help by scaling up operations of the Multilateral Investment Guarantee Agency, and by using the International Development Association to cover the costs of insurance premiums on infrastructure projects.

Improved regional cooperation also offers solutions through economies of scale for infrastructure. Africa may also wish to tap into its combined foreign exchange reserves – around US$450 billion in 2012 – to finance infrastructure bonds.

Innovation will be key to closing the continent’s infrastructure gap, and Africa has plenty of that.

Photo credit: Jean-Baptiste Dodane

Article credit: Africa progress Panel

Apart from innovative finance, what other ways do you think the African nations can bridge its gaps in infrastructure?