China’s role in African infrastructure and capital projects

China’s role in African infrastructure and capital projects

If you want to prosper first build roads

If you want to prosper, first build roads, says a Chinese proverb. This certainly appears to hold true in Africa. The continent should build many roads, railways, ports, and power plants, as large infrastructure gaps remain an obstacle to growth, investment and economic diversification.

The Achilles’ heel for Africa’s economic development

Recent estimates by the African Development Bank (AfDB) put the continent’s minimum infrastructure needs – for countries to sustain the growth of their economies, population, income level and replace ageing infrastructure – at US$130bn to US$170bn per annum. At least half of that requirement is currently unfunded.

Investment in infrastructure and capital projects (I&CP) can be essential to diversify economies and promote private sector activity and industrialisation, ensuring enough jobs are created for the 12 million young people entering Africa’s labour force each year. Infrastructure investment also increases business confidence and draws in investments in other sectors, fosters innovation and productivity and lowers transaction costs, facilitating trade in goods and services and the transfer of talent.

The World Bank estimates that Sub-Saharan Africa’s (SSA) gross domestic product (GDP) per capita growth would increase by 1.7 percentage points per annum if the region were to close the infrastructure gap (in terms of both quantity and quality) relative to the developing world median. This could also make growth in Africa more inclusive, alleviating poverty across the continent.

Funding infrastructure development

Globally, developing countries investing 30 per cent of GDP or more on gross fixed capital formation (i.e. infrastructure and capital equipment) have been among the fastest growing economies. Between 2010 and 2017, the investment ratio for China and India averaged 44 per cent and 31 per cent respectively, and for the East Asia and Pacific countries grouping (excluding high income countries) it was 40.6 per cent.5

In comparison, African countries continue to underspend. Sub Saharan African countries have invested on average only 20 per cent of GDP per annum between 2010 and 2017, and North African countries about 22.8 per cent. The two largest economies, Nigeria and South Africa, have also underperformed, with investment ratios of 15 per cent and 19.6 per cent of GDP respectively over the same period. This is comparable to the investment ratio of major developed markets. For example, the United States and Germany invested 19.1 per cent and 19.7 per cent of GDP respectively over the same period. However, both Algeria and Ethiopia invested more than 30 per cent of GDP since 2010.7

African infrastructure investment has been funded largely by traditional Official Development Assistance (ODA), Organization for Economic Co-operation and Development (OECD) investors, and non-OECD countries, including China, India, and the Gulf states, with China by far the largest national player. Deloitte’s annual Africa Construction Trends report tracks construction projects of US$50m or more that had broken ground by 1 June every year. Of the 482 projects tracked (worth a total US$471bn), the 2018 report finds that African governments continue to fund the largest share of projects (24.5 per cent), with international development finance institutions (DFIs) and African DFIs financing 13.7 per cent and 9.1 per cent, respectively. Other sources of financing have been relatively limited. The weak legal and institutional framework and immature local equity markets also challenge investors.

China – the biggest financier of Africa’s infrastructure

However, one of the megatrends of our times has been the growing presence of China in Africa’s infrastructure sector. Over the past two decades, China has helped to meet some of Africa’s infrastructure financing needs and is now the single largest financier of African infrastructure, financing one in five projects and constructing one in three.

Most funded projects are in the Transport, Shipping and Ports sectors (52.8 per cent), followed by Energy and Power (17.6 per cent), Real Estate (14.3 per cent, including industrial, commercial and residential real estate) and Mining (7.7 per cent). China launched a “new” Africa policy at the turn of the century, culminating in the establishment in October 2000 of the multilateral Forum on China-Africa Co-operation (FOCAC).

Since then China has carefully set out and implemented three-year Africa engagement plans. To date China has participated in over 200 African infrastructure projects. Chinese enterprises have completed and are building projects that are designed to help add to or upgrade about 30,000km of highways, 2,000km of railways, 85 million tonnes per year of port throughput capacity, more than nine million tonnes per day of clean water treatment capacity, about 20,000MW of power generation capacity, and more than 30,000km of transmission and transformation lines.

Chinese banks behind the financing

Chinese financing for infrastructure projects has come mainly from two policy banks: China Exim Bank provided 67 per cent of the total loans between 2000 and 2015, and China Development Bank 13 per cent.12. Infrastructure financing provided by China to Africa averaged US$11.5bn between 2012 and 2016, peaking at US$20.9bn in 2015. This included a number of larger transport and energy deals.

The Belt and Road route to a more connected Africa

China’s emphasis on infrastructure construction increased with the launching of the Belt and Road Initiative (BRI). First announced by President Xi in 2013, the BRI is a transcontinental development project that seeks to improve connectivity between Asia, Europe, and Africa, and ultimately increase trade and connectivity, development and prosperity along economic corridors. It consists of two parts.

The first is the Silk Road Economic Belt, which refers to the land connection through Central Asia to Europe. The second is the 21st Century Maritime Silk Road, a connection through Southeast Asia, South Asia, Africa, and, finally, Europe. So far 105 countries and international associations have signed 123 documents under the auspices of the BRI. This includes 37 African countries and the AU, which in September 2018, at the seventh FOCAC meeting, signed BRI-related memoranda of understanding (MOUs).

Over the past five years to June 2018, the trade volume between China and BRI countries has grown to over US$5 trillion. Chinese FDI through the BRI has amounted to US$70bn and over US$500bn worth of Engineering, Procurement and Construction (EPC) contracts were signed. More than 82 trade cooperation zones have been established, which in turn have created 244,000 jobs for host countries. China’s domestic economic growth model is in transition and its industry shifting to a higher position in the value chain.

Chinese construction firms and state-owned enterprises (SOEs) are moving their excess capacity offshore, having accumulated knowledge and an experienced workforce building infrastructure in the domestic market. In a document released in August 2017, China’s State Council announced that overseas investments in sectors such as consumer, telecom, transportation, and energy resources infrastructure are key for outbound activities.

Linking to East Africa – and further

The Eastern African coastal region is being brought into China’s expanding sphere of commercial influence through it connecting to the so-called Maritime Silk Route. Deloitte  Africa Construction Trends report shows the concentration of activity by Chinese financiers and builders in East Africa, specifically in the Transport, Shipping & Ports sectors. Although countries in East and also North Africa have been the largest recipients of Chinese investment to date, West and Southern African countries have also signed cooperation agreements under the BRI.

What the BRI could mean for Africa

Beyond financing and construction support, the anticipated benefits of BRI projects include:

  • Improved connectivity and logistics
  • Greater investment in BRI and non-BRI countries
  • Raising the profile of specific countries for investment
  • Promoting intra-regional and global trade
  • Technology and skills transfers and spill-over
  • Fast-tracking infrastructure development

BRI projects and initiatives are an extension of the BRI goals and the African Union’s Agenda 2063 and Programme for Infrastructure Development in Africa (PIDA), which push for greater regional integration within the continent.

Conclusions

There are concerns about China’s interests in Africa, with criticisms often ranging from China’s self-interest to the nature of the financing relationship and increasing indebtedness of African economies. But abundant Chinese funds at a time when African countries are looking for alternative sources of development finance, and the global appetite and capacity of Chinese construction firms, could be a win-win combination for China and Africa. In addition, the Belt and Road Initiative, benefiting from Chinese firms’ access to preferential financing for overseas investments and exports, is making African economies more connected to one another and to the outside world, boosting economic diversification and growth. This is likely to strengthen China’s activity in Africa’s I&CP sector.

 

Source: Deloitte Insights

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