Infrastructure Solutions in Africa

By  Ellen Grieg Andersen

The African Continental Free Area (AfCTFTA), launched in January this year, opens up for many new possibilities in the African market and is likely to attract more Foreign Direct Investment (FDI). The new trade agreement has only been running for a few months, so it remains to be seen the full effect of the agreement. But if the fundamentals of improving good governance, the roads, rails, payment systems, and connectivity are in place the impact could be significant.

The AfCTFTA agreement will connect 55 countries, impacting 1.3 billion people with a total GDP value of $3.4 trillion, making it the largest free trade area in the world. This agreement is seen as a crucial driver for economic growth, industrialization and sustainable development and will boost trade throughout Africa as it allows for the continent to develop its own value chains. The World Bank estimates that the agreement could lift around 30 million people out of extreme poverty and 68 million people out of moderate poverty and make African countries more competitive.

Wealth of opportunities for fintech companies and tech-enabled logistic

The Free Trade Agreement is also likely to attract more FDI, which also would generate startup funding in Africa. This will create a wealth of opportunities for fintech companies and tech-enabled logistics and distributions platforms to name a few. Cross-border payments platforms already exists in Africa, such as fintech company M-Pesa owned by Vodacom and Safaricom, so going forward investments that keep building on this existing infrastructure will be important to make the payments between African countries more efficient.

Infrastructure remains as an obstacle

Africa is one of the fastest growing economic hubs, and with a growing population the companies with an established presence in Africa will be better positioned to sell into this growing market, but poor infrastructure still remains as a major obstacle. According to the African Development Bank (AfDB), the market share for rail transport in most African countries amounts to less then 20 percent of total volume of goods transported.

Infrastructure and connectivity supporting the transition to a net-zero economy

Moreover, in many developing countries, with majority in Africa, lack access to electricity and the provision of large amounts of infrastructure is needed in order to support the transition to a net-zero economy. Developing countries have the majority of population growth and Africa alone is estimated to increase by more than 1.1 billion between 2020 and 2050.¹ Scatec is one example of a company that operates in several African countries to ensure access to clean and reliable energy to their growing population. In order to reach net-zero by 2050 it is imperative to have international co-operation. The new IEA report states: "For many developing countries, the pathway to net-zero without international assistance is not clear. Technical and financial support is needed to ensure deployment of key technologies and infrastructure."¹

Lastly, internet connectivity remains a challenge, which is needed to effectively conduct cross-border payments and creating digital identities. Thus, both physical and soft infrastructure connecting countries in Africa are still facing issues. Today, it is easier to ship by sea, so improvements in roads and rail system is imperative for a more effective trading system as rails are an efficient way of moving goods across long distances.

Investments in infrastructure in several African countries are already taking place. Last year it was announced that several companies, including Facebook, Orange, Vodafone and Alcatel Submarine Networks (a wholly owned Nokia company), will be building a 37,000km long cable around Africa and connect to Europe and the Middle-East. The cable will connect 21 landings in 16 countries and will be an important enabler for future growth of 4G, 5G and fixed broadband access for hundreds of millions of people.

China a major player in Africa

Furthermore, Chinese investments in Africa has grown rapidly during the last decade. And China is a major player in African infrastructure investments, which is why the country is expected to play a key role in the projects that would support African industrialization.5 However, these investments are seen as controversial as the investments under the One Belt One Road (OBOR) initiative are worsening the already high debt burden in Africa, which is why European policymakers claim that their policies are better than Beijing's. However, commentators point out that Europe could learn from Beijing as China have been working with Africa as true equals and put significant resources towards the building of economic infrastructure in partner countries in Africa and at the same time focusing on training and education.

The Guardian wrote "Even though the Covid 19 pandemic has slowed the dynamic growth rates, the continent's youthful population, economic potential and trade agreement will intensify international rivalry and competition, especially between Europe and China".4 The discussion around the difference between Chinese and Western investments in Africa have long been debated and several argue that despite its controversies Chinese investments have created a greater impact on economic development than that of Europe. The relationship between Africa and Europe have for many years been an imbalanced donor/recipient relationship. African governments have been looking for access to EU trade and aid preferences, but the European leaders have ignored the needs of Africa's younger generation and rather focused on privileged ties with African elites. Moreover, Europe's focus on keeping African migrants out has added to the mistrust, the Guardian writes.

Is Europe missing out by not seeing the full potential of this growing economy

Traditionally, the western view of Africa has been as one homogenous bloc. In order to take full potential of the continent's opportunities it demands detailed research to understand the nuances and unique opportunities of each region and individual country. The trade agreement further enhanced the several investment opportunities in Africa. Investment in both physical and soft infrastructure is also important to reach the UN Sustainable Development Goals. Even though the debt issue needs to be resolved, there is no doubt that Chinese investment at the continent have been influential and impactful. It remains to be seen whether European companies are potentially missing out by not seeing the full potential of this growing economy.

¹ International Energy Agency, Net Zero by 2050 A Roadmap for the Global Energy Sector, May 2021

Historical returns are no guarantee of future returns. Future returns will depend, among other things, on market developments, the manager's skills, the fund's risk profile and management fees. The returns can be negative as a result of price losses. There is risk associated with investments in the fund due to market movements, developments in currency, interest rates, economic conditions, industry- and company-specific conditions. Before investing, customers are advised to familiarize themselves with the fund's key information and prospectus, which contains further information about the fund's characteristics and costs.