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Supply meets demand: Chinese infrastructure financing in Africa

David Dollar's picture

China is emerging as a major financer of infrastructure projects in Africa, as documented in Building Bridges, a report released this week by the World Bank.  This is a very welcome development because Africa has an infrastructure deficit and China has both the financial resources and the construction industry capacity to help meet the demands.

Sub-Saharan Africa lags behind other developing regions on most standard indicators of infrastructure development, prompting African leaders to call for greater international support in this sphere. By far the largest gaps arise in the power sector, with generation capacity and household access in Africa at around half the levels observed in South Asia and about a third of the levels observed in East Asia and Pacific. Unreliable power supply leads to losses in industrial production valued at 6 percent of turnover. In China’s coastal cities, similar losses are typically less than 1 percent. The result of poor infrastructure is that many business services are much costlier than those available in other regions. For example, road freight costs in Africa are two to four times as high per kilometer as those in the United States, and travel times along key export corridors are two to three times as high as those in Asia.

Western donors have by and large gotten out of hard infrastructure sectors.  They channel their assistance overwhelmingly to social sectors or to infrastructure sectors such as water supply and sanitation that have direct effects on household health.  One reason Western donors got out of hard infrastructure is that they thought the private sector could fill this void.  Private investment has in fact met much of the demand in telecom, a sector that is very amenable to private delivery.  However, in power, expressways, and rail, it has proved harder to attract private finance.  The returns are very long term, and political and economic uncertainties in poor countries mean that private investors demand a very high return to compensate risks.  The result is the current hard infrastructure deficit in Africa.

China has a long history of aid to Africa, including in sectors such as rail.  What is new is the rapid scale-up to levels of investment that have a measureable effect on African growth.  Building Bridges estimates that Chinese financing commitments in infrastructure increased from less than $1 billion per year in 2001-2003, to about $6 billion per year in 2006-2007.  Chinese finance is concentrated in power and rail.  Much of the financing is on concessional terms that would meet the Western definition of official development assistance. 

So, external finance for infrastructure at the moment takes a form that is quite attractive for Africa: China provides about $6 billion per year to the power and rail sectors; private investment provides about $6 billion per year, mostly to telecom; and Western donors provide about $6 billion per year, mostly to water, sanitation, and roads. 

While all of this financing is potentially helpful, it is important to note that overall economic policies and policies within the infrastructure sectors are critical if infrastructure is to have its expected effect on growth.  Many African countries have improved their overall policies and are growing well for now, making this infrastructure welcome and productive.  I noted in an earlier post that one of the key lessons from China is that in general infrastructure services are priced at cost-recovery.  These prices seem high to many households and firms, but the result is that infrastructure is sustainable.  It will be interesting to see if African countries take up this lesson from China.  With proper pricing, infrastructure investments become self-sustaining: the income from toll roads or power stations finances the expansion of the system.  On the other hand, if prices are set too low to make everyone happy today, they generate no financing for expansion tomorrow. 

For now, China infrastructure finance coincides with a period of relatively rapid growth for the continent and is probably one factor causing that growth.  But this investment in infrastructure also raises a host of questions about environmental and fiscal sustainability.  It will be interesting to hear different perspectives on these issues.

Comments

I congratulate the authors of the Report "Building Bridges: China's Growing Role as Infrastructure Financier" for their assiduousness in collecting and evaluating information on the infrastructure projects carried out by Chinese state-owned companies in Africa. However, I question myself whether they have also endeavoured to assess the impact of China's activities in terms of comliance with international/World Bank (social, environmental, corproate & ethical) standards, in terms of employment of the local workforce and, last but not least, in terms of long-term sustainability. The sheer size of activities, in my view, is not very meaningfull, unless the Report also establishes that projects executed are good quality, are not conducive to corruption and involve participation of local workers, suppliers, etc. I would very much appreciate more information on these details.

Submitted by D. Dollar on
I agree that collecting the information on the size of Chinese infrastructure investment in Africa along with its sectoral and country distribution is just a first step in analyzing this interesting new development. Building Bridges focuses on commitments for new projects, so that many of these are at an early stage of development. It is probably too soon to do much research on the impact of Chinese infrastructure investment. Going forward this will be an important area of study, and a good issue for collaborative study between African and Chinese researchers. While things are at an early stage, I do have some initial thoughts on your questions. Much of the Chinese investment is financed by the EXIM Bank, with which the World Bank has a memorandum of understanding to cooperate in Africa and elsewhere. EXIM policy is to follow the environmental policies of the country in which the investment occurs, which in my view is a reasonable approach. Many developing countries, however, have weak capacity to implement their own regulations. There are already a number of cases in which African countries have turned to their traditional donors for support to strengthen their capacity to manage environmental risks associated with large infrastructure projects financed by China and others. At the same time the World Bank office in Beijing has provided a number of training courses to EXIM staff on our approach to environmental and social safeguards. I am cautiously optimistic that a good partnership will develop in this area. On the employment of African nationals in projects, I read a good DFID study on this issue that found that Chinese contractors in fact were successfully making an effort to use local labor. Finally, on the long-term sustainability, there are several issues. One that I highlight in http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2008/02/25/000158349_20080225161200/Rendered/PDF/wps4531.pdf my own paper on lessons from China for Africa (pdf) is that China in general priced infrastructure services at a high enough level to achieve cost recovery and to make these investments pay for themselves. Without sensible pricing infrastructure is likely to be poorly maintained and not able to expand on a sustainable basis.

Submitted by Saul on
I think that one reason Western nations got out of big infrastructure in Africa is that it is so very easy for money to get misdirected and when that happens it is not just a waste or a "cost of doing business" but actually supports and possibly expands the corruption many of these nations are struggling with. Another problem is that between the poorly functioning government systems and a seeming lack of prestige in acts of preventative maintenance (building something or fixing a problem has more prestige than doing something that was not immediately needed) they have seen infrastructure from both colonial and post colonial development work decay. I am very much in favor of the Iraq and Afghanistan reconstruction efforts but they - especially Iraq - have shown what the attitude of "just keep it running or else" can do to infrastructure over decades of time. I understand that the system of intra-African highway connections is not even finished and it is already seeing poor upkeep due to the nations having more local priorities. When I first heard about how the Chinese were bringing so many of their own people to do the work I understood the resentment of many Africans but then I heard about how local contractors would skimp on building materials for roads so as to pocket the extra cash and the roads fall apart in a year. It is hard to blame people for how they act when their is little in the way of quality assurance and legal standards. They have lots of bureaucracy which keeps people from prospering but little of the systems which protect consumers and taxpayers. Maybe the Chinese and Indian investment projects will be able to instill the philosophy and social infrastructure needed to maintain the hard infrastructure or maybe they will just be able to build things to last long enough for the next group of sponsors to rebuild it with even more modern technology and larger levels of wealth. But I can hardly blame Western development organizations from feeling that what they did in the past was somewhat futile - especially after the recent power crises in South Africa, Central African Republic and such. Optimism may be a renewable resource but it can be over-exploited.

Saul: I agree with you that some of the Western aid to Africa (and elsewhere)in the past was wasted because the recipient government had poor economic governance (distorted macro policies, excessive bureaucracy, high levels of corruption). In my view the quantity of aid to different governments should be tailored to the quality of their economic governance. But I think that is true for infrastructure finance as well as support to other sectors. Sectors such as health and education are not insulated from poor governance -- aid to these sectors can be largely wasted as well. So my implicit criticism of the Western donors is that they shifted most of their aid to the soft sectors, which are important but not the only foundation of development. Corruption is not a good justification for this shift: if a country is too corrupt to execute infrastructure projects, then aid to social sectors is likely to be wasted there as well. To be fair to the Western donors, there has been some renewed recognition in recent years about the importance of infrastructure. And I also want to note that in quite a few African countries there has been singificant improvement in governance so that aid resources can be well utilized. A final point: the stories about Chinese contractors bringing all their labor with them is somewhat of a myth. Here is the url for a DFID study of Angola, Sierra Leone, Tanzania, and Zambia that finds that Chinese contractors mostly hire local labor: http://www.dfid.gov.uk/pubs/files/chinese-investment-africa-full.pdf

Submitted by Anonymous on
That's a good point about the equal vulnerability of "soft" programs. I saw an old article from last year about the "report card" of South African infrastructure and the article noted that in that nation the number of engineers was half that of doctors whereas in developed nations it is an almost equal ratio. The also noted that: "In particular, a recent Saice survey indicates that more than a third of all 231 local municipalities do not have a single civil engineer, technologist or technician." (http://www.engineeringnews.co.za/article.php?a_id=100462) I can't help feel a little pessimistic about the possibility that the investment in infrastructure may out pace the ability of some of these nations to maintain it. I do know that China and India are becoming popular destinations for African students who are able to study engineering abroad and Africa is not without universities but are the African nations able to produce enough potential engineers and keep them from leaving for other nations when they obtain their skills? P.S. Thanks for the interesting link.

Submitted by nakliyat on
Very good article thank you...nakliyat

Submitted by Mjibha on
I agree that corruption is not enough reason to shift funding allocations of aid. If governance systems are not working in one sector or region of the same country, pretty much corruption will be a factor everywhere in other similar areas. The point though is not really what China and Western donors are doing. It is the reaction of African leaders. China is in Africa because it still has a real need to be here in Africa. Western donors's reasons are wholly different as they don't really depend on Africa for the sustenance of their economies. In China, self-interest is defaulted by some altruism, whereas for the Westerners it is a case historically conditioned altruism if you like. Why this? because the real problem is not so much that there is not enough finance into African infrastructure building, but the lack of visionary leaders who know what ten or twenty years down the line they want to achieve. The word "vision" is not what economists would use, but countries (Korea, Indonesia, etc) have developed and developing (China, India) on the back of corrupt systems. That is where the pressure should be, not on China and the West to deliver more aid and comply: This is an input-oriented approach to development. It needs to be turned around to ask what outcomes the African leaders can show with the aid already being received now? Our African leaders must be held accountable not to the use of aid only, but the results thereof. Then we will see some progress, hopefully.

Submitted by Mjibha on
I agree that corruption is not enough reason to shift funding allocations of aid. If governance systems are not working in one sector or region of the same country, pretty much corruption will be a factor everywhere in other similar areas. The point though is not really what China and Western donors are doing. It is the reaction of African leaders. China is in Africa because it still has a real need to be here in Africa. Western donors's reasons are wholly different as they don't really depend on Africa for the sustenance of their economies. In China, self-interest is defaulted by some altruism, whereas for the Westerners it is a case of historically conditioned altruism if you like. Why this? because the real problem is not so much that there is not enough finance into African infrastructure building, but the lack of visionary leaders who know what ten or twenty years down the line they want to achieve. The word "vision" is not what economists would use, but countries (Korea, Indonesia, etc) have developed and developing (China, India) on the back of corrupt systems. That is where the pressure should be, not on China and the West to deliver more aid and comply: This is an input-oriented approach to development. It needs to be turned around to ask what outcomes the African leaders can show with the aid already being received now? Our African leaders must be held accountable not to the use of aid only, but the results thereof. Then we will see some progress, hopefully.

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