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New Financiers Narrowing Africa's Infrastructure Deficit

China, India, and a few Middle Eastern Gulf nations are financing a record number of infrastructure projects across Sub-Saharan Africa, says a new World Bank report. Investment commitments in Africa by these emerging financiers jumped from less than US$1 billion per year before 2004 to US$8 billion in 2006 and US$5 billion in 2007, signaling a growing trend in cooperation among developing economies (South-South cooperation).

"Building Bridges: China's Growing Role as Infrastructure Financier for Sub-Saharan Africa" shows how new infrastructure partnerships are emerging, driven by strong economic growth in the region, an improved business-friendly climate, and rising demand for petroleum and other commodities from China and India.

"China's success story in reducing poverty through rapid and sustained growth is remarkable and investment in infrastructure was a key factor. Today, China's growing infrastructure commitments in Africa are helping to address the huge infrastructure deficit of the continent. There are of course challenges which will need to be addressed by African nations and China coupled with the support of development partners," says Obiageli Katryn Ezekwesili, the World Bank's Vice President for the Africa Region. "By working together, we can create win-win partnerships."

Africa faces daunting challenges in improving its infrastructure. Development experts agree that creaking infrastructure is cutting the growth rate of African economies by as much as one percentage point every year. One in four Africans does not have access to electricity. Travel times on African roads and export routes are two to three times higher than in Asia, increasing the prices of traded goods. Power generation capacity is around half the levels achieved in South Asia.

The report notes that the investment commitments being made by emerging financiers are unprecedented, both in scale and the focus on large infrastructure projects. In a changing world, with new actors and financing modalities coming into play, there is a learning process for investors and recipients. This will place new demands on national capacity to negotiate complex and innovative deals, and apply appropriate environmental and social standards needed for the long-term success of such partnerships.

Sub-Saharan Africa's natural resource exports to China have grown exponentially, from just over US$3 billion in 2001 to US$22 billion in 2006. Petroleum dominates, accounting for 80 percent of total exports to China. Nevertheless, the bulk of Africa's oil exports still go to the United States and Europe, which together receive 57 percent of the total, compared with only 14 percent going to China. Other important African export commodities are iron ore and timber, followed by manganese, cobalt, copper and chromium.

"The growing South-South cooperation is driven by strong economic complementarities between China and Africa," said Vivien Foster, a World Bank lead economist and co-author of the report."China's growing demand for natural resources is matched by Africa's significant and often under-developed oil and mineral reserves. Africa's urgent need for infrastructure is matched by China's globally competitive construction industry."

The World Bank is working closely with African countries, China and other development partners in sharing experiences so that the investments have the best development impact.

China is not the only emerging financier playing a major role in Africa. In recent years, India is increasing its investments, committing US$2.6 billion since 2003. The bulk of Indian investments were in Nigeria. Oil-rich Gulf states and Arab donors are also playing a substantial role in African infrastructure, committing on average US$500 million every year over the past seven years.

"While more South-South cooperation backed by strong infrastructure investments marks a positive trend", says Chuan Chen, co-author and a former professor of civil engineering at Tsinghua University, China, "the key challenge is to maintain the momentum for lasting development results."

Detailed findings of the report

• Non-traditional financiers are making sizeable investment commitments in Sub-Saharan Africa's infrastructure, helping to fill annual needs estimated at US$22 billion by the Commission for Africa

• China's financing investments in Africa started from a low base (less than US$1 billion per year before 2004) but rose to over US$7 billion in 2006, and dipped to US$4.5 billion in 2007

• China has committed US$3.3 billion for ten projects which can potentially boost Sub-Saharan Africa's hydropower generation by 30 percent or 6,000 megawatts of installed capacity

• China is financing the rehabilitation of 1,350 kilometers of railway and constructing 1,600 kilometers of new railway lines across the region, an important contribution to the continent's existing 50,000 kilometer rail network

• Nearly 70 percent of Chinese investments are concentrated in Angola, Nigeria, Ethiopia, and Sudan

• Financing terms vary by country but typically involve a grant element of 33 percent, close to the benchmark level for concessional finance

• Some 35 African countries have received Chinese infrastructure finance. Many projects are less than US$50 million each

• There have also been a handful of transactions worth more than US$1 billion, showing China's ability to provide large sums of money for specific infrastructure projects.

This report was funded by the Public-Private Infrastructure Advisory Facility (PPIAF), a multi-donor technical assistance facility focused on improving infrastructure services.

"The PPIAF partnership is committed to helping developing countries improve their capacity to integrate diverse sources of infrastructure finance in their development priorities," says Jyoti Shukla, PPIAF program manager.

(China Development Gateway July 11, 2008)

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