Supply meets demand: Chinese infrastructure financing in Africa

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ImageChina 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.


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