Poor infrastructure continues to hinder economic growth in sub-Saharan Africa. Moreover, according to a recent publication by McKinsey and Company, the region’s attempts to address these gaps have often resulted in infrastructure projects that never move beyond the planning stages. More specifically, the McKinsey report finds that, although international investors have sufficient appetite and capital to fund African infrastructure projects, “80 percent of infrastructure projects fail at the feasibility and business-planning stage.” The authors describe this phenomenon as “Africa’s infrastructure paradox,” where, in the midst of high demand for projects, sufficient supply of capital and investors, and voluminous potential projects, there is insufficient investment in infrastructure projects within the region.
One of the biggest gaps for sub-Saharan Africa is in access to reliable electricity—a more pressing problem than ever due to growing reliance on technology for remote work and learning in the face of the COVID-19 pandemic. In fact, McKinsey finds that more than two-thirds of the global population without electricity is in sub-Saharan Africa (Figure 1)—though there is significant heterogeneity within the region, with countries in the south and west better connected than those in central Africa and Somalia. Notably, sub-Saharan Africa is not only behind in access itself, but is also falling behind in closing that gap: For example, despite having roughly similar population sizes, India expanded access to electricity to an additional 100 million people in 2018. In contrast, sub-Saharan Africa only expanded access to 20 million people. Given McKinsey also forecasts that African demand for electricity will quadruple from 2010 to 2040, the need for improved electricity infrastructure will only grow in the coming years.
In order to close Africa’s infrastructure gap, the authors predict that infrastructure investment as a share of GDP must rise to 4.5 percent from the approximately 3.5 percent that has persisted since 2000. To achieve this goal, the authors write, annual investment in infrastructure must double between 2015 and 2025, manifesting in $150 billion in 2025. Though rising debt-to-GDP ratios for African governments may limit sovereign spending on infrastructure, the authors note that the appetite of international investors for African infrastructure projects remains promising.
While a significant share of current investment in African infrastructure is dominated by China, Figure 2, which shows McKinsey’s estimate of the composition of potential international investors by location and type, implies that other players look to be getting into the game. The United States comprises the lion’s share of the appetite for African investment, accounting for 38 percent of the investment potential’s country of origin. Trailing by a wide margin is the United Arab Emirates, China, and the United Kingdom. The types of international investors are more evenly split between government agencies, private and public pensions, investment companies, and banks. The McKinsey analysis estimates that these international investors could unlock $550 billion in assets under management for African infrastructure projects.
Chris Heitzig, Research Analyst – Africa Growth Initiative