Chinese Experience on Infrastructure: Is it Relevant to Africa?

1. Chinese Experience on Infrastructure: Is it Relevant to Africa? By Dr. Joseph Onjala Research Fellow Institute for Development Studies University of Nairobi jonjala@uonbi.ac.ke

2. Outline • The Role of Infrastructure in Development • Diagnostic of Infrastructure Development in Africa • Chinese Infrastructure in Africa • Towards a more relevant Infrastructure Experience for Africa

3. The Role of Infrastructure in Development • Recent body of research confirms the importance of infrastructure to the promotion of sustainable development. • The World Bank landmark study on infrastructure highlighted the critical role of infrastructure in the development process. • (World Development Report, 1994)

4. Infrastructure & Development • The evidence in the World Bank report on the vital role of infrastructure in growth has been reinforced by subsequent research, for example on Africa’s economic performance. • Not only does development of infrastructure services contribute: • to growth, • but growth also contributes to infrastructure development, in a virtuous circle (Jerome and Ariyo, 2004).

5. Channels of Links Ariyo and Jerome (2004): • Reducing transaction costs and facilitating trade flows within and across borders; • Enabling economic actors – individuals, firms, governments – to respond to new types of demand in different places; • Lowering the costs of inputs for entrepreneurs, or making existing businesses more profitable; • Creating employment, including in public works (both as social protection and as a counter-cyclical policy in times of recession);

6. Links: • Enhancing human capital, for example by improving access to schools and health centres; and • Improving environmental conditions, which link to improved livelihoods, better health and reduced vulnerability of the poor.

7. Correlation - Infrastructure & Development (DFID, 2006): • There is generally a good correlation between infrastructure investment : • national economic growth. • investment climate – reducing the cost of doing business and enabling people to access markets; • advances in agriculture; • trade and integration – helping to offset the impact of geographical dislocation; • fundamental to human development – including the delivery of health and education services; and • Poverty reduction.

8. Infrastructure, Africa • Infrastructure has been responsible for more than half of Africa’s recent improved growth performance and has the potential to contribute even more in the future.

9. Diagnostic of Infrastructure Development in Africa

11. Diagnostic of Infrastructure in Africa • Based on a recent study (2009)– conducted by: • a partnership of institutions including the • African Union Commission, • African Development Bank, • Development Bank of Southern Africa, • Infrastructure Consortium for Africa, the • New Partnership for Africa’s Development, and the • World Bank – is one of the most detailed ever undertaken on the African continent.

12. Recent Study, World Bank et al (2010) • Surveys were conducted among: • 16 rail operators, • 20 road entities, • 30 power utilities, 30 ports, 60 airports, 80 water utilities, and over 100 ICT operators, as well as the relevant ministries in 24 countries. • The results were derived from • detailed analysis of spending needs (based on country-level microeconomic models), fiscal costs (which involved collecting and analysis of new data) and sector performance benchmarks (covering operational and financial aspects as well as the country’s institutional framework).

13. Recent Findings: • Infrastructure accounts for a large share of Africa’s recent growth performance, and could contribute much more. • But Africa's basic infrastructure lags far behind that of other developing regions. • Infrastructure services are twice as expensive in Africa as elsewhere. • Inadequate infrastructure suppresses Africa’s per capita growth rate by as much as two percentage points each year.

14. Critical Needs: • The largest investment needs are in: • the transport sector (US$9.5 billion or 43 percent of the total), • Only 40 percent of rural Africans live within two kilometers of an all-season road, compared to some 65 percent in other developing regions. • Improving road accessibility in rural areas is critical to raising agricultural productivity across Africa.

15. Needs - Electricity: • Electricity (US$5.2 billion or 23 percent of the total), • Inadequate access to energy is the single largest impediment to economic growth. • No country in the world has developed its economy without abundant energy supplies. Chronic power shortages affect 30 Africa countries; • the entire installed generation capacity of 48 Sub Saharan African countries is 68 gigawatts, no more than Spain’s, and 25 percent of that capacity is unavailable because of aging plants and poor maintenance. • At US$0.18 per kilowatt-hour on average, Africa’s power is expensive to produce by global standards, yet regional trade could significantly lower costs.

16. Needs- Water and Sanitation • Water and Sanitation (US$4.3 billion or 20 percent of the total). • Less than 60 percent of Africa’s population has access to drinking water and only a handful of countries are on track to reach the Millennium Development Goals.

17. Challenges to Infrastructure Development in Africa • Funding Requirements: • To raise Africa's infrastructure endowment to a reasonable level within the next decade, will cost $93 billion a year, split two to one between investment and maintenance. • Africa already spends $45 billion, half the required amount. Efficiency gains could raise an additional $17 billion from within the existing envelope. • Even then, an annual funding gap of $31 billion would remain. • The power sector accounts for 40% of the required spending, while transport and water account for an additional 20% each.

18. Institutional Challenges • The quantity and quality of infrastructure services are affected by many institutional factors, such as • the political will of policy makers, • the capacity of planning agencies, • the expertise of regulators and technicians and • the quality of corporate governance. • Despite extensive efforts, institutional reform is only half-way along in Africa.

19. Isolated Economies • Africa is home to many small, isolated economies, an economic geography that presents severe handicaps. • Regional integration can break that isolation, providing larger and more competitive markets, lowering prices for food, power, industrial inputs; and harmonizing customs and other administrative procedures that presently raise the costs of traded goods. • Integrating physical infrastructure is an essential precursor for deeper integration.

20. The challenges of regional Integration • Require building political consensus, • establishing effective regional institutions, • prioritizing regional investments, and • facilitating cross-border finance.

21. The Experience of Chinese Infrastructural Projects in Africa

22. Geographic Distribution of Chinese Infrastructure Support • Chinese infrastructure support has been highly concentrated, with about 70 percent of financing going to just four countries (Foster et al, 2008): • Nigeria, • Angola, • Sudan, and • Ethiopia. • The financing of other African countries has been rather modest.

23. Sector Distribution of Chinese Infrastructure Support • A large share of the Chinese support is allocated to general, multi-sector infrastructure projects (Foster et al, 2008). • The two largest beneficiary sectors are • power (mainly hydropower) and • transport (mainly railroads).

24. The Number of Projects • The number of projects has been close to 30 per year in the last few years compared to less than 10 per year in the early 2000s. • The number of projects reported in the press has tended to be about 50 percent higher on average. • This reflects the existence of a large tail of small projects that could not be readily verified through official sources (Foster et al, 2008).

25. The Size of Projects • The size distribution of the identified infrastructure projects with Chinese finance is skewed toward a large number of relatively small projects of less than US$50 million in value. • Nevertheless, there are some half a dozen megaprojects of more than US$1 billion in value, demonstrating the ability of Chinese financing sources to raise very large contributions to individual projects (Foster et al, 2008).

27. Financing • Infrastructure projects undertaken by Chinese companies are often financed by soft loans from the Chinese government, on the condition that they are carried out by Chinese companies. • This is in line with the “go out” strategy — driven by the Chinese government to promote the internationalization of Chinese companies (Corkin et al, 2008)

28. Quality and Standards of Projects • The quality of work by Chinese construction companies is widely perceived to be inferior. • There are many instances in which Chinese companies have clearly proved themselves capable of achieving extremely high quality work. • In some African countries the government authorities lack the capacity or political will to enforce building codes, standard quality and effectively enforce the law (Corkin et al, 2008).

29. Relevance to Country Needs • While Chinese supports diverse infrastructure projects, there is a predominance of relatively grandiose and prestigious buildings (Olu Ajakaiye et al, 2009): • presidential palaces, • police headquarters, • political party offices, and • football stadiums, which • Few traditional donors would be willing to support these under the argument that, they are “unproductive” investments.

30. Relevance - • African leaders highly appreciate the highly visible projects for their own political reasons (Olu Ajakaiye et al, 2009).

31. Relevance 2 • The infrastructures sometimes bear the risks of developing white elephants that do not add value to the local economy since many of these projects are not an integral part of a strategic development programme, and • The interventions are limited to the execution of these grandiose projects without any transfer of technology and capacity building as part of the deal (Olu Ajakaiye et al, 2009).

32. Relevance • Learning experience among African governments on some infrastructure development.

33. Labour Practices • The general perception is that Chinese companies not only bring in their own labour but underpay the local labour. • While predominantly employed as unskilled casual laborers, there were many instances of locals employed in administration and managerial positions (Corkin et al, 2008).

34. Is Chinese Experience Relevant to Africa? • Infrastructure accounts for a large share of Africa’s recent growth performance, and could contribute much more. • Africa's basic infrastructure lags far behind others. • Chinese infrastructure investment will help raise Africa's infrastructure endowment to a reasonable level within the next decade. • Support Regional Integration

35. Towards a more relevant Infrastructure Experience for Africa • Addressing the Efficiency Gaps • Meeting Development Priorities • Regional Approach • Infrastructure is both a precursor and an enabler for deeper economic integration • Could reduce costs/prices • Inter-continental fiber-optic • Regional power pool • Recognize economic geography of Africa • Link land locked regions by road, rail

36. Differences in Economic and Physical Geography • Economic community of Central African states • East Africa Community • Economic Community of West African States • Southern Africa • Land locked, • Resource endowments i.e. minerals, forests, Economic Physical

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