The Issue Of Efficient

Published Date: 02 Nov 2017

Chapter 2

Defining concepts

Infrastructure

According to the Handbook for Infrastructure (2011) "infrastructure is defined to include all the main networks that support economic and social activity, including those associated with transport (including roads, railways, maritime, and air), water, and sanitation, power, and information and communication technologies". For the purposes of this paper such a broad definition is important especially within the framework of PIDA. However, as mentioned above, the paper largely restricts itself to transport and energy infrastructure.

Efficiency

According to Heyne (2008)

"Efficiency is a relationship between ends and means. When we call a situation inefficient, we are claiming that we could achieve the desired ends with less means, or that the means employed could produce more of the ends desired. "Less" and "more" in this context necessarily refer to less and more value. Thus, economic efficiency is measured not by the relationship between the physical quantities of ends and means, but by the relationship between the value of the ends and the value of the means. …Economic efficiency makes use of monetary evaluations. It refers to the relationship between the monetary value of ends and the monetary value of means. The valuations that count are, consequently, the valuations of those who are willing and able to support their preferences by offering money"

Does African infrastructure suffer from the "tragedy of the commons"? This is a key question when addressing the issue of efficient use of infrastructure in Africa. Infrastructure, in most cases, has the same characteristics with those of public goods or common property, that is, it cannot easily exclude others from using and non-rivalry, that is, use by one will not necessarily diminish access by the next person. Like the commons, it is now known that infrastructure diminishes if not well utilised and maintained. Measures taken to protect from abuse in commons include state ownership and private ownership. In infrastructure, public ownership is currently the norm, but has not necessarily brought desired results. Private ownership has increasingly been seen as more efficient, especially when taking the economic efficiency into account. Private ownership, however, needs concrete regulatory frameworks to ensure access by all (reduce excludability) while at the same time guaranteeing sustainability (non-rivalry). Policy options towards such a balance are the crux of this paper.

Heyne (2008) asserted that "Critics of economic efficiency contend that it is a poor guide to public policy because it ignores important values other than money. They point out, for example, that the wealthy dowager who bids scarce milk away from the mother of an undernourished infant in order to wash her diamonds is promoting economic efficiency". This example, although far-fetched gives an insight into the definition of economic efficiency where infrastructure is concerned.

Economic efficiency has the deficiency that resources will flow to where their value is highest, that is, where the beneficiary bids to pay most. When willingness to pay is highest and exceeding total costs of the provider, economic efficiency is attained. This ensures that when it comes to infrastructure services, they will be delivered where they are paid for most. However, this does not necessarily equate to where they are required most. If delivered without proper economic efficiency analysis, there is risk of free rider crisis and consequently a "tragedy of the commons" problem arises.

The International Transport Forum (2008) defined two types of efficiency; allocative and productive efficiency. The former has two dimensions; "first, it must be ensured that new infrastructure is added when, and only when, necessary. Secondly, it is important to make sure that existing infrastructure is efficiently used; to this end, prices for using this infrastructure should be appropriately set." Allocative efficiency thus requires that all infrastructure investments must have a positive Net Present Value (NPV), in order to be built. This however has a negative side in that it effectively means that projects costing more than the benefits must not be built, no matter how necessary they might be socially. Essentially, not all benefits can be economically valued. While, social Cost benefit Analysis can now be done in Western societies, it remains highly difficult to measure social value of some modern infrastructure projects in rural Sub-Saharan Africa.

Productive Efficiency refers to production of goods and services using the optimal combination of inputs and producing maximum output.

Literature Review

Several articles reviewed (Njoh 2008, Earsterly et al 2002, Hulten 1996, Chang 1999, Muzenda 2009 , Ranganathan and Forster 2011, Jerome 2011, Barka 2012, Fedderke and Garlick 2008, Caldoren 2004) point to the fact that Africa (in particular Sub- Saharan Africa) suffers from critical infrastructure deficits and that these have caused it to lag behind in efforts to eradicate poverty. Most, advocate for increased investment in African infrastructure as a panacea to development shortcomings. Differences emerge only in whether private or public investment is easier to unlock. Few of the articles (Hulten 1996, Barka 2012) focus on the inefficiency associated with infrastructure use in Africa, if so, only in passing.

Njoh (2008) analysed Africa’s transportation systems and how they lead to development in the era of globalisation. His paper seeks to establish the relationship between transport systems and economic development. It does so from the perspective that infrastructure development in Africa during the colonial era was biased on transport systems and modelled in such a way as to extract resources. Consequently, the present systems have limitations in facilitating intra- African trade, local mobility and economic development. Njoh states unequivocally that this is the central theme of his paper "Africa lacks the quality and quantity of transport infrastructure necessary to connect it to the global arteries of commerce and industry" He further contends that; "Apart from the problem of inadequate and ill maintained transport infrastructure, the continent is saddled with institutional hurdles, including but not limited to, costly, antiquated and cumbersome administrative and custom procedures, corrupt officials and staff, and a litany of other deficiencies"

Njoh then analyses the importance of transport to economic development in the globalisation era by quoting former transport secretary to Bill Clinton, Rodney Slater who argues that many emerging economies "are not connected to the great global arteries of commerce—the roads, the seaports, the railroads and the airports that move the world’s resources that sustain growth." This however seems not to auger well with the notion that the transport infrastructure was aimed at extraction. In a globalizing world, one assumes that typical extractive infrastructure can suffice and the intra and regional mobility is the one that continues to suffer. Therefore, it will be important to dig further into the relationship between extractive inclined infrastructure, globalisation and intra- African trade. Njoh concludes by proposing recommendations that "African countries must seek to link their transport networks. In other words, policymakers in these countries must view their transportation systems in an international, rather than simply in a national context."

In Infrastructure, economic growth and poverty reduction in Africa (2011), Jerome begins by highlighting the dearth of infrastructure in Sub-Saharan Africa and concludes that "taken as a whole, these infrastructure constraints erode Africa’s competitiveness and make bringing African goods and services to the world marketplace a challenge." This therefore contributes negatively to poverty reduction and economic growth. Jerome stated that the fact that African products are impeded from entering the global market because of an infrastructure deficit requires further study. Further, is it that there is no infrastructure to transport products to the world market, or that there are no products due to poor infrastructure?

Jerome addressed the issue of subsidised provision of infrastructure arguing that it "is often proposed as a means of redistributing resources from higher income households to the poor. Yet its effectiveness depends on whether subsidies actually reach the poor. Arguments for the removal of subsidies typically draw on surveys illustrating the ways in which the poor are currently paying several times more for services than those connected to the formal system." This paper however contends that, it is the system of subsidization of scarce infrastructure resources such as energy and transport, which cost maintenance and undervalues importance of infrastructure, thereby making its use negligible. Instead, this paper will argue that, the gradual removal of subsidies will make the public appreciate and give importance to infrastructure, thereby reducing negligent use and inefficient production modes.

A chapter in the fourth edition of the UN’s Assessing regional Integration in Africa deals specifically with how intra African trade can be enhanced via infrastructure development. The chapter begins by asserting that "a symbiosis exists between infrastructure and economic growth." Infrastructure leads to economic growth and economic growth leads to more need for infrastructure. It argues that according to some estimates, a 1 percent increase in infrastructure stock adds 1 per cent to a nation’s GDP growth. This goes a long way in confirming the relationship between the two variables.

The chapter states that transport costs are a big hindrance to increased trade and these are largely as a result of poor infrastructure. It argues that the cost of doing business is a fundamental measure of efficiency and effectiveness in business and hence should be awarded critical attention. Transport costs in Africa are recorded to be the highest in the world. This is particularly so in east and southern Africa. However, given that southern Africa is one of the most developed in transport infrastructure, it is important to further research why it still has higher costs of transport compared to Central or West Africa. More importantly, whether high transport costs are indicative of inefficiency or ineffectiveness as opposed to inefficiency and ineffectiveness causing cost increases needs further analysis. As shall be shown at a later stage through case studies, inefficiencies tend to be major inputs into the high costs associated with transportation in sub-Saharan Africa.

The author of the UN Chapter further blames the lack of increased regional integration and trade liberalization to poor infrastructure. One however wonders if it cannot also be argued the other way round, that poor infrastructure is a result of no or slow regional integration and trade liberalization. The chapter goes on to give a sector by sector account and analysis of the state of infrastructure across Africa. The overall conclusion is that there is need for further investment in rehabilitation and construction of infrastructure in different sectors, the most needy being the energy sector.

A more recent article by, Barka (2012), of the African Development Bank on Border posts, Checkpoints and Intra African trade assesses the state of intra African trade in light of the many challenges it faces in particular border post controls. The paper argues for a more efficient system of border controls which in turn facilitates increased intra-African trade and increased revenues for governments involved. An example of the bottlenecks encountered in South and East Africa states that; "for instance, traders/trucks have to negotiate 47 roadblocks and weigh stations between Kigali (Rwanda) and Mombasa (Kenya); and they have to wait about 36 hours at the South Africa–Zimbabwe border post (Beitbridge). In Southern Africa and EAC countries, customs delays cost the two sub-regions about US$ 48 million and US$ 8 million respectively per annum."

Barka also takes the case of Chirundu One-Stop Border Post as an initiative that could be replicated across Africa as it has led to smoother and efficient traffic flow. He further argues that the governments involved have realised increased revenue as a result. The case of Chirundu Border Post shall be studied further in this paper, allowing for empirical analysis with a view to assess if efficiency has been increased and consequently intra-trade between Zimbabwe and Zambia. It is certainly one thing to have improvement from the previous bottlenecks, but another to have increased trade and efficient use.

The issue of efficient use of infrastructure was discussed very early on by Hulten in 1996. His main hypothesis was that how well infrastructure is used may be more important than how much of it you have. Hulten posits that more attention is given to capital formation and investment at the expense of its effective and efficient use. In the event of the latter therefore, additional investment in the former constitutes a waste of resources and maybe of little help in stimulating economic growth. He cites the World Development Report of 1994 suggesting that a timely $12billion intervention in road maintenance in Africa over a decade, would have avoided the need of an additional $45billion in reconstruction and rehabilitation. Essentially, Hulten argues that 40% of the differences in economic growth between Asia and Africa are due the inefficiency effect. The inefficiency effect refers to a situation when infrastructure is not used to its full capacity. This underutilisation is therefore cited as one of the reasons for low economic growth in Africa. His paper therefore builds on the knowledge that there is ineffective use of available infrastructure but with a focus to establish how this affects economic growth.

Using a growth model developed by Mankiw, Romer and Weil (1992), it is found that a one percent increase in the infrastructure effectiveness parameter has an impact on growth that is seven times larger than the impact of the same percentage increase in the rate of public investment. Consequently, those countries inefficiently using infrastructure pay a growth penalty in the form of a smaller benefit from new infrastructure investments. Hulten further argues that infrastructure ineffectiveness is actually a proxy for productive inefficiency (total factor productivity) and that the inefficiency is the one with a direct effect to GDP growth.

Hulten concluded that the relative level of the total factor productivity is an important correlate of growth and that indeed it has played a role in the growth of Asian economies while those in Africa have faced decline. He cautions that international aid aimed at infrastructure construction may therefore have a limited impact on economic growth and may actually have a perverse effect if they divert scarce domestic resources away from the maintenance and operation of existing infrastructure stock.

More controversial was the input of Easterly, Devarajan and Pack (2002), who argued that limited investment was not the constraint to African development. The paper argues that both public and private investments have not been empirically proven to contribute to growth and development. In earlier papers, the authors, (Easterly and Rebelo 1994) find a positive relationship across all countries between public infrastructure investment and growth, but no effect of total public investment on growth, whereas Devarajan et al. (1997) find that the share of public spending devoted to capital expenditure has a negative association with long-run growth. They sample a number of studies showing positive correlation between both private and public investments and growth (Oshikoya 1992, Khan and Reinhart 1990 and 1997, Calamitsis et al. 1999,). The paper quickly notes the inclusion of Botswana in most of the studies except the Oshikoya Kenya study. This affirms their earlier assertion that there is no positive correlation except where Botswana is taken into account.

Rather, like Hulten 1996, Easterly et al argue that Total Factor Productivity (TFP) has a higher impact on growth than factor accumulation. There is therefore a decline in TFP for countries that have invested more. To assert their argument Easterly et al, resort to Rostow, stating; "one of the most famous predictions in development economics, dating back to Sir Arthur Lewis and Walt Rostow, is that increases in investment ratios lead to growth accelerations. ...shows this prediction fails to hold in Africa: there is no association between increases in investment in Africa and changes in growth from 1960-79 to 1980-99." Easterly et al further show that there is no evidence of a positive correlation between foreign aid with increased growth and investment through increased liquidity, a point also raised by Hulten.

Essentially, the results show that public investment is unproductive in Africa. Rather, it is the composition, and not the level of investment that matters. Easterly et al further argue that had "African governments invested in health, education and infrastructure, for instance, the effects on per capita GDP growth would have been favourable." The paper concludes that "our results suggest that there is no single key to unlocking investment and GDP growth in Africa. Just as a combination of factors contributed to investment's low productivity in the past, the solution lies in addressing this set of factors simultaneously."

The Study on the Programme for Infrastructure Development in Africa (PIDA), 2011, Corridors of Growth: The Regional Infrastructure that Africa needs through 2040 is very important to the background and focus of the paper. It gives the perspective of the African Development Bank and the PIDA. The study begins with providing a rational for PIDA. It begins by arguing that deficient infrastructure in today’s Africa has been found to sap growth by as much as 2% a year (Calderón 2008). The study goes further to state the infrastructure shot-comings, that is, "that the road access rate is only 34%, compared with 50% in other parts of the developing world, and transport costs are higher by up to 100%. Only 30% of the population has access to electricity, compared to 70–90% in other parts of the developing world. Water resources are underused. Current levels of water withdrawal are low, with only 3.8% of water resources developed for water supply, irrigation and hydropower use, and with only about 18% of the continent’s irrigation potential being exploited. The Internet penetration rate is only about 6%, compared to an average of 40% elsewhere in the developing world."

The PIDA study gives an optimistic analysis of how infrastructure is the key to unlocking the corridors to economic growth and poverty reduction. Africa’s potential for growth is indeed quite high. Using a methodology based on the Augmented Solow Growth Model, the PIDA consultant "estimates that the average growth rate for 53 African countries (GDP-weighted and expressed in U.S. dollars PPP) will be 6.2% per year between 2010 and 2040."

The study gives prescriptions on action plans based on growth predictions. For example on road infrastructure and border networks, the study posits that, "four corridors face demand of more than 15,000 vehicles per day by 2030, which will require the construction of modern four-lane motorways. They are the Trans-Maghreb, Abidjan-Lagos, Lagos-Douala, and Maputo corridors". The same is done for the energy sector, ICT and trans-boundary water resources. The Maputo development corridor will receive further analysis as a case study at a later stage of this paper.

Muzenda (2009), in an article titled Increasing Private Investment in African Energy Infrastructure, made the case for increased private involvement in energy sector. The paper mainly tackles impediments to energy infrastructure private investment in Africa. It identifies three typical impediments as financial, regulatory and capacity impediments. Financial impediments include high costs in the energy sector due to heavy reliance on imported gas and oil and limited access to funding (loans and FDI). Regulatory impediments include weak procurement laws, one-off power purchase agreements, poor tendering systems, poor contract laws and high tariffs. Capacity impediments include shortage of technical skills in relevant fields to manage Public Private Partnerships (PPPs), poor judicial capacities for complex contract negotiations and disputes, and un-harmonised regional regulatory frameworks.

The Muzenda study proposes an increased role for the private sector in the energy infrastructure sector as a way of improving the situation. This can be done in several ways which are summarised as; management and lease contracts; concession agreements; divestiture and Independent Power Producer (IPP). However, private sector has not been keen to be engaged in rural electrification projects due to low investment returns. Moreover, the private sector is not to be interested in hydro power stations, rather preferring thermal stations and this has not been agreed to by many African governments. In such situations, therefore, collaboration is the solution. Muzenda takes the Mmamabula Energy project in Botswana as an example of the interplay of challenges that private investors often face.

Returns to energy investments in Africa are low and do not motivate further investment. Muzenda cites the case of Malawi, stating; revenues may not be high enough because many consumers in African countries are from low-income backgrounds and their demand for electricity is quite elastic. In Malawi, for example, a 25% increase in electricity prices led to a record use of charcoal, even though its production was illegal (Bayliss, McKinley 2007). The International Transport Forum (2008) also addressed the issue of user fees and cost recovery, stating with relation to transport infrastructure, "In theory, the most efficient use of infrastructure would be achieved by charging users for the marginal costs they impose. However, where user fees are applied to new infrastructure, this may result in under-usage and more traffic on adjacent, toll-free routes, especially when the rest of the system is not subject to the same user charges." It further argued that, "marginal cost pricing can result in insufficient revenues to cover the full costs of building new infrastructure. The alternative is to have government subsidise the project using tax revenues, which also has efficiency implications." This alternative, as offered to European governments in this case, is hard to implement in Africa as tax revenues are so little and increasing them always has potential of triggering political instability and also potential reduce the brad basket of most families.

Fedderke and Garlick (2008) focussed on infrastructure development and economic growth in South Africa. They used several economic model analyses to establish a relationship between infrastructure and economic growth. They begin by analysing definitions of infrastructure. They contend that "Infrastructure spending was historically defined as consumption expenditure by either government or the private sector but is now near-universally defined as capital expenditure, as infrastructure has been recognised as a capital good (Gramlich, 1994)". Moreover, they argue that infrastructure has facets of a public good in that it is difficult to exclude others from use and may have positive externalities accruing to users. Infrastructure can be divided into two categories, economic and social with former referring largely to transport, energy and communications while the latter refers to education and health.

Fedderke and Garlick find five linkages between infrastructure and economic growth and these can be summarised as; infrastructure as a factor of production; infrastructure as a complement to other factors; infrastructure as a stimulus to factor accumulation; infrastructure as a stimulus to aggregate demand; and infrastructure as a tool of industrial policy. There are limitations associated with indicators of linkages between infrastructure and economic growth. Furthermore, these limitations are compounded by data asymmetries associated with infrastructure. Fedderke and Garlick posit that "Infrastructure data, whether physical or financial, typically incorporates many quantity indicators and few, if any, quality of usefulness indicators. Even if, for example, the total length of roads or number of classrooms in South Africa is perfectly measured, this provides no information about the quality of those roads or classrooms."

There is therefore great difficulty when comparison between the growth impact of investment in new infrastructure and that of investment in infrastructure maintenance is done. "If investigators cannot quantify the quality of infrastructure, they cannot compare the growth impact of new infrastructure to that of old, potentially decaying infrastructure." Moreover, data on infrastructure usage is seldom available, which might provide a measure of the usefulness of infrastructure or the actual service provided. Some infrastructure may not be economically viable or useful.

Ajakaiye & Ncube (2010) gave an overview of the links and relationship between infrastructure and economic development. Ajakaiye and Ncube begin their paper with an analysis of Caldoren and Serven’s paper. Calderon and Serven observed that the link between spending, accumulation of infrastructure stocks and delivery of infrastructure services is weakened by inadequate project selection, inefficient procurement practices and outright corruption.

Ranganathan & Foster (2011)’s paper, The SADC’s Infrastructure; a regional Perspective, streamlines the Africa Diagonistic (AICD) World Bank report to focus on SADC, thus enabling it to focus on gaps and opportunities for further growth. They argue that the SADC’s infrastructure ranks consistently above the other Sub-Saharan African regions on all aggregate infrastructure indicators. They further posit that infrastructure contributed approximately 1.2 percentage points to growth in southern Africa between 2003 and 2007. Of this, 1 percentage point was due to the growth of mobile telephony, as was the case in all other regions.

Ranganathan and Forster further state that "simulations suggest that if southern Africa’s infrastructure could be upgraded to the level of the best-performing country in Africa (Mauritius), the impact on per capita economic growth would be of the order of 3 percent. While all areas of infrastructure; ICT, power, and transport; need to be upgraded, improvements in power can impact growth by over 1.5 percent. In essence, SADC needs to give more attention to the energy (power) sector if it’s to experience sustainable growth. The paper calls for increased regional integration as the only sure way of ensuring sustained economic growth and a more robust regional infrastructure network. This resonates with PIDA which also suggests regional integration as one way to ensure faster infrastructure growth. Ranganathan and Forster state that surface transport of goods in Africa is much slower and costlier than elsewhere in the developing world.

Another African Development Bank researcher, Chang (1999) analyses the commercialisation of infrastructure in Africa. The paper looks at reforms in the infrastructure sector from being wholly State owned to commercialisation. It distinguishes commercialisation from privatisation with the former being more market oriented and largely or wholly removing the government from control of former public entities. Essentially, it begins by noting the reluctance of African governments to commercialise infrastructure mainly because it was seen as key to economic growth and survival. Chang notes that the trend began in the developed world in the early 1980s but only began to find a bit of favour among African countries in the mid-1990s, albeit slowly.

Ownership management relationship is pivotal to efficiency of the infrastructure provider. Four types of relationships are singled out as public provision, private provision with regulation, market economies and centrally planned economies. Chang noted with respect to Africa; "whilst the standard prescriptions for reform in terms of resource allocation and enterprise efficiency are to let the market be the primary determinant and address issues of income redistribution through the tax system, the issue is not as clear cut where affordability is significantly impaired by extremely low GNP per capita."

The Chang paper notes that public investments in the face of poverty are hard choices for African governments, but should however be pursued as they attract private investment, lowering production costs and increasing productivity. He backs this argument with the WB 1991 report with case studies of South Korea and Egypt. Inefficient provision of services is also cited by Chang as result of absence of economic pricing and cost recovery mechanisms.

The literature review is unanimous on the infrastructure deficiency in Africa. It is also unanimous on the link between economic growth and infrastructure development. There are differences on specifics of causation between infrastructure and economic growth; the link to Total Factor productivity (TFP) and to what extent private or public investment in infrastructure is viable. Most papers reviewed point to poor rehabilitation and effectiveness of infrastructure but few interrogate the issue. Hulten (1996) set a foundation for further inquiry, but little has been done. The issues raised in this literature review, will be used later in this paper but with a view of analysing the efficiency gap visa-vis the linkages and shortcomings raised above.

Chapter 3

PIDA: addressing the effective and efficient use of infrastructure or perpetuating aid driven development?

A recurring issue in the literature review was one of the links between infrastructure development and economic growth. Little, if anything, on efficiency and effective use of infrastructure in Africa is specifically addressed save for a few. The paper by Hulten (1996) did well to show the extent to which inefficiency and ineffectiveness in the use of infrastructure was hampering economic growth in sub-Saharan Africa. Hulten further warned that international aid aimed at infrastructure construction may have limited impact on economic growth, if issues of effectiveness and efficiency are neglected. In analysing how PIDA fares with respect to this warning, this section of the paper will do a brief background discussion on the African approach to infrastructure investments in the past two decades. This will enable us to see and judge if PIDA provides a paradigm shift from previous programs and initiative. If yes, to what extent does it contribute to increased efficiency and effective use of infrastructure in Africa?

PIDA’s main objective is infrastructure development through regional integration. This is a continental initiative, based on regional projects and programmes, and is expected to help address the infrastructure deficit that hinders Africa’s competitiveness in the global market. It relies heavily on political will, leadership and ownership. While this is pre-requisite, it is overrated to the extent of undermining the importance and buy-in of other relevant stakeholders such as the private sector and civil society. These sectors’ input is fundamental in ensuring support of the service users who in most cases only see infrastructure built but have little idea on how to use it or hardly see its importance.

The PIDA initiative seems to anchor its hope on regional integration as the only way infrastructure can be improved. Through pooling resources, having coordinated regional infrastructure policies and common user charges, Africa‘s regions have a better chance of catching up with other continents, infrastructure wise. Additionally, not only do African countries not have coordinated infrastructure policies, but whenever they do, these policies are poorly translated into national laws and policies. Ranganathan and Foster (2011), concur with reference to the SADC region, stating that "regional integration is the only likely way to overcome existing handicaps and to allow the SADC member states to participate in the global economy. Sharing infrastructure addresses problems of small scale and adverse location. Joint provision increases the scale of infrastructure construction, operation, and maintenance. Economies of scale are particularly important in the power and ICT sectors. Big hydropower projects that would not be economically viable for a single country make sense when neighbours share their benefits." PIDA builds on regional master plans and seeks to enhance and capacitate towards increased infrastructure formation. In southern Africa, the southern Africa Power Pool is one such integration plan seeking to integrate energy supply and production in the region through coordinated research and planning.

PIDA, like most of the African action plans, seems geared to fail at the implementation stage. The Africa infrastructure outlook 2040 study on PIDA posits that, "At bottom, continental and regional policies approved by ministerial committees or conferences of heads of state are no more than declarations of intent—intent to improve the delivery of common goods through continental integration; intent to facilitate trade and connectivity through harmonised standards and regulations; intent to cooperate on planning and delivering essential parts of regional networks that all agree are desirable." Essentially, there is need for commitment and coherent policies at the national level translating to the regional level, and not the other way round. It is important to note that regional policies should be shared infrastructure vision with practical propositions of how to achieve and not "declarations of intent". The different levels of development among sub-Saharan African countries mean that they have different infrastructure needs at different times. PIDA, while acknowledging the different infrastructure development levels, falls short in addressing how this disparity can be addressed through regional integration.

Inefficiencies associated with infrastructure use are acknowledged within the PIDA framework, but mostly in passing. While acknowledging that "The total cost of inefficiencies in (African Regional Transport Infrastructure Network) ARTIN operations and lack of maintenance is estimated at close to $175 billion in 2009, with about half made up of increased annual costs to shippers and half in the value of suppressed demand", the PIDA study does not seem to offer much solutions to how to curb them outside more infrastructure formation.

PIDA’s reliance on foreign funding for infrastructure formation is not sustainable. More so, reliance on foreign donors cannot be a reliable source as the developed world is also facing their own fiscal problems and thus calling for austerity measures and cutting official development assistance. This view has been echoed by Hulten (1996) among other scholars reviewed above. However, African capacity to pool local resources for infrastructure development has been dismal if history is anything to go by. Essentially, this leaves PIDA, with little, if any other choice but to look outside. According to the World Bank AICD report (2008), "most governments in Sub-Saharan Africa spend about 6-12 per-cent of their GDP each year on infrastructure." In real terms, the figures in dollars are not anything to go by, amounting to roughly $30-$50 per person. This means that very little is contributed towards infrastructure. Therefore, pooling of resources requires increased political will, increased GDPs and further integration. Other policy choices to comprehend governments efforts must however be exploited and that is the objective of this paper.

Private investment has been looked upon as the solution to African infrastructure deficit. However, in his focus on private investment in the energy sector in Africa, Muzenda (2009) noted that private investment is hampered by poor returns to investment on large scale energy infrastructure. He gave the example of attempted private electricity in Malawi which was snubbed by the citizens in preference of fire wood. This was mainly influenced by un-affordability but also by the fact that electricity was not as important to the citizens as had been assumed. The point brought about by Muzenda (2009) needs further scrutiny and analysis. If returns to infrastructure investments are not so lucrative, how does PIDA hope to attract more investment? Does a collaborative PPP approach to investment cover for this shortfall and how best can this be done?

Fedderke and Garlick (2008) point to five linkages between infrastructure and growth. While these linkages are not exclusive, governments need to analyse how an infrastructure development project can impact growth before construction. It is important to note that infrastructure development in Africa is not always linked to economic growth and when done by government it can be purely a public good with very little link to economic growth. Provision of public infrastructure is therefore not necessarily linked to demand, but rather supply. When infrastructure is provided for political gains and social well-being without having a direct link to economic growth and demand, it is difficult to efficiently maintain and utilise it.

Luiz (2010) gave three reasons for poor infrastructure performance in developing countries. First, "the delivery of infrastructure services usually occurs within a market structure where competition is absent – often by centrally managed bureaucratic government departments – and hence the lack of competitive pressure pushing efficiencies." This has led to increased calls for privatisation and a greater role for private sector in infrastructure development and management. The PIDA analysis gives little attention to how competition can be fostered within the infrastructure sector.

Second, "the agencies charged with responsibility for delivering infrastructure are seldom given the managerial and financial autonomy they need to perform – they are often an employer of last resort and political patronage, compelled to deliver services below cost, have unspecified performance measures, and have inefficiencies that are often perversely rewarded with budgetary appropriations." The emergency of Public Private Partnerships (PPPs) is contributing to reducing this poor performance, in particular PPPs whereby the private sector has a say in operating the infrastructure for a stipulated period.

Lastly, "the actual users of the infrastructure are not positioned to make their demands felt because below-cost prices are not reliable indicators that services should be expanded and investment decisions are often made on the basis of extrapolations of past consumption rather than a true assessment of effective demand and affordability."

Arvis et al (2007) much of the cost supported by LLDCs may not be exogenous, as primary sources of cost are associated with poor performance of transit logistics resulting from a combination of (i) bad design or implementation of transit regimes, and (ii) unfavourable political economy of transit and particularly its vulnerability to rent seeking activities. Francois and Manchin (2007) cite Lim˜ao and Venables (2001)’s study which shows "that infrastructure is quantitatively important in determining transport costs. They estimate that poor infrastructure accounts for 40 percent of predicted transport costs for coastal countries and up to 60 percent for landlocked countries."

Inefficiency is exacerbated by poor remuneration accorded to the people responsible for operating infrastructure services. This leads to lack of motivation during work, coupled with the "natural" bureaucratic characteristic of public processes. This becomes a breeding ground for corruption, poor regulation and artificial queues which are a catalyst for corrupt tendencies.

The Corruption point raised by Caldoren and Serven finds backing in UNIDO, Module 4, the reform of the energy sector in Africa "large-scale, capital-intensive IPP (Independent Power Producers) developments invariably attract the politically connected rent-seeking class. The controversial IPP projects in Zimbabwe involving YTL (a Malaysian company); in the United Republic of Tanzania involving IPTL (another Malaysian company) and Kenya are classic examples of the disarray that the rent-seeking class can cause"

According to UNIDO, "It is, however, imperative to note that none of the reform efforts in the sector were specifically aimed at the increased use of renewable energy and energy efficiency options nor did they explicitly mention improving access to electricity—especially among the poor, which is a major concern."

Most energy sector providers in Africa have undergone reform which can largely be called unbundling. This has been encouraged as a first step towards increasing efficiency through reducing bureaucracy. Such a step is expected to be followed by further actions in the usual form of corporatization (sometimes referred to as or equated to commercialisation), unbundling and privatization. Corporatization is "the transformation of a state-owned utility from one that depends on state funding for its operation to one that operates on commercial principles, thereby ensuring that its revenue fully covers its costs. This process is, in most cases, taken further to transform the state-owned utility into a corporate entity—a process referred to as corporatization." It has been implemented but has not necessarily led to efficiency. This is mainly because government remains the main or only shareholder. This makes it difficult to adhere to market fundamentals of demand and supply especially where social values and political interests are concerned. According to Chang (1999) "An effective economic-pricing regime promotes efficient use of resources and internal efficiency of the enterprise. The exceptions to "full cost-covering tariffs" are pricing policies which support notions of redistribution (for example universal service) and are enforced by regulation."

Chang (1999) cites the World Bank "The WB recently estimated the potential savings from increase efficiency in the provision of infrastructure service in developing countries to be US$30.0 billion in power from transmission, distribution and generation losses; US$4.0 billion from water leakages; and US$6.0 billion from over-staffing and other inefficiencies in the railways sector. It further estimates potential revenue enhancement from better pricing to be US$ 90.0 billion in power; US$13.0 billion from under-pricing in water plus US$5.0 billion from illegal connections; and US$15.0 billion in railways"

Commercialisation, where government not only cedes performance controls and standards but part ownership has had better results in telecommunications, according to Chang. The commercialisation of telecommunications in sub-Saharan Africa has seen it being the major driver of economic growth in recent years.

Furthermore, the nature of investment in infrastructure needs further analysis. First, it is important to note the dominance of Chinese investments in Africa and make a link to how this affects efficiency. While it is appreciable that FDI is flowing particularly from the Chinese, their conditions of employing Chinese construction companies and technical and general labour leaves a lot to be desired. It has a huge impact on the continued rehabilitation, efficient and effective use of the infrastructure after the construction has been completed. Know how, maintenance and proper use is not being properly transferred.

Making their contribution on the effect of development assistance on economic growth and investment Easterly, Devarajan and Pack 2002, stated that "the results of regressing, investment/GDP on overseas development assistance/GDP country by country, for the period 1960-95. No country in Africa had a one for one pass-through of aid into investment, as would have been expected from the liquidity constraint idea. 8 out of 34 African countries had a significant and positive relationship between aid and investment; more (12) had a negative and significant relationship. There is no evidence from the aid-investment relationship of high returns to investment frustrated by lack of liquidity"

Chapter 4

Policy choices for infrastructure development in Africa

A major policy dilemma in Africa when it comes to infrastructure provision has to do with whether it should be publicly provided by the state or private provision. The role of the state in infrastructure provision; deregulation and reform is a fundamental discourse that has received much attention theoretically but little practically. Fundamentally, who provides infrastructure has a major effect on efficient use, effectiveness and affordability. As noted above, Easterly et al (2002), find no compelling reasons to advocate for either private or public investment, in relation to economic growth. While public investments were found to have an effect on growth, such evidence was not established when total factor investment was considered. In Fosu et al, (2011), Devarajan et al. (2001, 2003) argue that most African countries already have public over-investment. This is probably the result of creating rent-seeking opportunities, they argue. Fosu et al, further argue that "the reason is that public capital can have a negative as well as a positive effect on the economy. Even though an adequate and efficient supply of public capital promotes output and growth, the burden resulting from financing it may have an adverse effect as well, such as crowding-out of private capital." Essentially, according to Fosu et al "public investment is believed to have both complementary and crowding-out effects on private investment." This implies that the dilemma associated with whether infrastructure is publicly or privately provided should not be over emphasised. Rather, an appreciation of the complementary nature of the two is fundamental in policy making, such that both can be considered and lead to efficient provision of infrastructure.

A second fundamental dilemma is that infrastructure projects are guided by the availability of supply, the needs of those willing to supply infrastructure as opposed to demand driven infrastructure. While on the other hand they are guided by short term demand, which is in line with needs of suppliers. This has seen infrastructure being built for short term event requirements. The world cup in South Africa 2010, the All Africa games in Zimbabwe 1996 are just but a few examples. Presently (2012), Zimbabwe and Zambia are preparing to host the World Tourism summit and infrastructure is being built or rehabilitated for the purposes of this event. Using the efficiency criterion established above, neither the net present value nor social cost benefit analysis is used to build infrastructure. Once infrastructure is built to cater for major events, it’s hardly used afterwards with the same profit margins. Furthermore, the maintenance expenses become exorbitant for governments to carry beyond the events these are built.

Wodon et al (2009) stated that,

"If the main obstacle is a lack of demand due for example to a lack of affordability, utilities or governments may consider implementing special tariffs or subsidies for the poor, whether this is done for reducing the cost of the consumption of households once they are connected, or for reducing the cost of connecting itself. If the main problem is a lack of supply, the first line of answer lies in finding the necessary resources in order to expand the network to those who do not have access. Given that the policy options for dealing with demand as opposed to supply-side issues are fairly different, it is important to try to measure the contributions of both demand and supply-side obstacles to better coverage of infrastructure services."

Woden et al’s results obtained with the statistical method suggest that for Africa as a whole, demand-side problems are prominent on average. However, "the results obtained from the sounder econometric method suggest that for piped water, lack of supply appears to be the main issue, and for electricity, supply-side problems loom as large as demand-side problems. At the country level, whether one is confronted mostly with demand- or supply-side problems depend in large part on the underlying access rate to the services at the neighbourhood level."

Hulten (1996) contended that "the efficiency of any one segment of an infrastructure network depends on the size and configuration of the entire network, and complementarities may exist between some segments while others are substitutes." The starting point of assessing policy options for efficient use of infrastructure should be separation of different infrastructure types and their impact on productivity and intra African trade. Ferreira & Khatami (1996) argued that, "to determine the direction of causation, the link would need to be disaggregated for the various types of infrastructure, since each infrastructure component has a different impact on productivity. If a comprehensive package of infrastructure services is viewed as essential for underpinning the productivity of labour and capital and facilitating growth, then the link and causation become even more difficult to define."

Francois and Manchin (2007) in a World Bank study, concluded that

"Infrastructure, and institutional quality, are significant determinants not only of export levels, but also of the likelihood exports will take place at all. Our results support the notion that export performance, and the propensity to take part in the trading system at all, depends on institutional quality and access to well developed transport and communications infrastructure. Indeed, this dependence is far more important, empirically, than variations in tariffs in explaining sample variations in North-South trade. This implies that policy emphasis on developing country market access, instead of support for trade facilitation, may be misplaced."

The shortage of adequate FDI for infrastructure development in Africa calls for an increase in domestic mobilisation of resources to complement those from foreign sources. Chang (2000) evaluated this prospect "mobilization of domestic resources for private participation in infrastructure development in developing countries has gained momentum in recent years, mainly in consequence of the demonstration effect from the broad-based ownership approach taken by Czechoslovakia and Russia in their respective privatization programs in the early 1990s. In addition to demonstrating that domestic resources can be mobilized despite the absence of the institutional infrastructure, it served to help develop capital markets by promoting trading in shares of enterprises privatized."

Policy option 1: Private Investments, Private sector role in increasing efficiency.

Private sector role in infrastructure development is not without precedence and has long been encouraged in developing countries after its successful implementation in developed economies and those in transition. Several reasons account for this surge. Ferreira and Khetami state that "among the most important are the inefficiencies of public provision of services, the need for economic pricing and cost recovery, technological advances enabling greater private participation, advances in regulatory frameworks, the need for private resources, and the potential investment gap developing countries face." It is important to note that the inefficiencies associated with public provision of infrastructure is highly related with poor economic pricing and cost recovery such that the resources needed for rehabilitation and maintenance, proper remuneration of staff, hiring adequately qualified personnel and proper service delivery becomes difficult. At the same time, uneconomic pricing, usually spurred by subsidies, discourages private sector involvement in infrastructure services.

Ferreira and Khetami justify private sector investments in infrastructure by describing the inefficiencies characterising the public sector as "low productivity of labour and capital, weak incentive structures, neglect of timely maintenance, lack of sufficient economic and institutional links between demand and supply, soft budget constraints, the absence of financial risk management, and the entwining of financial management of public enterprises providing infrastructure services with macroeconomic management are only a few sources of the inefficiencies that have characterized the provision of infrastructure services by public entities."

According to Jerome (2011) Private participation in infrastructure is about capacity building, transferring better technologies, innovations and removing capacity constraints to implementation and not just financing capital projects. Capacity building should entail improving efficient use and maintenance of infrastructure. Despite a minimal increase in private sector involvement in infrastructure projects, sub-Saharan Africa remains the least recipient of such investments. Chang 2000 stated that only 2.38 percent of GDP (with 0.07 percent attributed to private capital) of Sub-Saharan Africa budgets was put towards investment in infrastructure. This was the lowest of all the developing regions in 1993.

Private participation in infrastructure however needs concrete and sound regulatory frameworks to ensure balancing of service provision, private interests and social needs and values. An effective regulatory framework guarantees both the private investor and the public in terms of protection of property rights, recoupment of investments and proper service delivery. Furthermore, there is need for capacitating of developing country governments to enable them to properly source and negotiate private investments into infrastructure.

Private sector role in infrastructure services provision has proved to be economically efficient. It however lacks on the social needs cost benefit analysis since it is profit oriented. Infrastructure projects are implemented after establishing their worth (Net present Value) and hence do not necessarily follow social requirements. In this case, it is critical for governments to establish proper frameworks and regulation in private infrastructure investment to ensure a balance. Furthermore, government can encourage private investment in lesser socially fragile infrastructure such as ICT while partnering or wholly involved in others.

Policy option 2 Privatisation,

Privatisation has become a catch word for economic reform in developing countries. What it actually entails, the expected effects and benefits, however, still remain a mystery to most governments. In Pamacheche & Koma (2007), the World Bank defines privatisation as "a transaction or transactions utilizing one or more of the methods resulting in either the sale to private parties of a controlling interest in the share capital of a public enterprise or of a substantial part of its assets", or "the transfer to private parties of operational control of a public enterprise or a substantial part of its assets". Privatisation can take several forms; that is, contract management, lease, divesture, joint venture, assert sale and concession.

There is however no one size fits all in privatisation. Results are bound to differ depending on how and when it is implemented. Implementation is fundamental to privatisation as much as it is to every policy and thus requires full commitment and knowledge. Privatisation is not implemented as a home grown initiative in most sub-Saharan African countries. According to Jerome (2004), "although private sector participation in infrastructure services has become the new orthodoxy, these reforms have not lived up to their billing in Africa." Jerome bemoaned the conditions under which most privatisation is undertaken in Africa, stating that "Infrastructure sector reform in Africa are not always designed to solve perceived problems in the sectors, but often implemented in compliance with loan conditionalities set by development aid agencies and multilateral development banks or regional and global trade arrangements." Privatisation is therefore not demand driven, nor necessarily always aimed at increasing efficiency and better infrastructure service provision.

Under management contract, Pamacheche & Koma (2007) state that the "responsibility for the provision of services that were hitherto provided by a state-owned firm is passed on to a private provider. Ownership however, remains with the state and all required capital investments continue to be provided by the state." Usually, a performance contract is signed with outsourced management. In a lease agreement, "a private firm takes the responsibility of operating and maintaining the assets of a hitherto publicly owned firm. Government retains ownership as well as responsibility for financing capital investments, usually through a special vehicle established for the purpose. When privatisation takes the form of divesture, publicly owned assets are sold to a private sector actor. This means, the management as well as all future capital investment requirements become the responsibility of the new private sector owners."

When its privatisation via concession, it, "takes the form of a private firm taking over responsibility for operating and managing the assets of a public enterprise, as in the case of a lease arrangement. However, unlike in the case of a lease, the private firm takes on the further responsibility of financing long-term capital investment of the firm. It also provides incentives for the private operator to minimize cost and increase efficiency." In a joint venture, "this can take the form of a partnership between an existing public enterprise and a private investor (public private partnership). It can be an acceptable solution in a situation where full-scale privatization faces much resistance. Risks are generally shared and the struggle for control can be an impediment to success. However, economies of scale and access to new technologies and management expertise can be positive outcomes of joint ventures." (Pamacheche & Koma (2007)). A southern African example is Debswana Diamonds, a joint venture between the government of Botswana and De Beers. Lastly, assert sale "is the process of selling off the assets of an enterprise, probably following the cessation of operations. It is usually less complex than other forms of privatization. However, the possibility of a number of assets being left over without a buyer is there. Given its nature, this method tends to create much negative public perception. Governments generally tend to be accused of selling off public assets at give away prices in this form of privatization."

Jerome (2004) further asserted that "Infrastructure privatization should be viewed as a means to an end, and not an end in itself. The goal should be a more efficient sector delivering quality service while fulfilling its social responsibilities. Privatization is only an effective means towards the achievement of this goal if it is done in the context of an appropriate market and regulatory/legal framework."

Privatisation has however taken route in Africa, despite all its limitations. Jerome 2004 states that, "approximately 2,500 private investment projects in 132 countries worth $755 billion took place in emerging markets with varied results and about 2% of all projects cancelled or renationalized. Sub-Saharan Africa’s share in annual investment in private infrastructure projects in developing countries grew from 0.3 % in 1990 to 2% in 1996 and 8% in 2001."

Privatisation has not always brought the desired results. Its effects on productivity have been ambiguous. Kirkpatrick et al (2006) posits, "...but the evidence also suggests that privatization, per se, may not be the critical factor in raising productivity and reducing production costs." According to the International Transport Forum, (2008) "Complete privatisation of surface transport infrastructure assets are only applicable under certain circumstances, and create a need for more proactive government regulation." Regulation is therefore fundamental to privatisation of infrastructure so as to guarding against abuse, excessive profiteering and balancing human needs.

Post privatisation monitoring to assess competitiveness and improvements in efficiency. This is done as a follow up to assess whether privatisation has been successful or not, particularly with increased concern for efficient use. Knowledge that privatisation will not be the end in itself helps to pressure the new management and owners to ensure improved service delivery.

The Asian Development Bank suggests five stages towards restructuring or privatisation.

Five stages of restructuring, Asian Development Bank, 2000

1. Getting the investment framework right.

2. Deciding on the goals of restructuring and the ideal industry structure.

3. Preparing the players to participate in a competitive market.

4. Privatizing existing and new assets.

5. Ensuring that the competitive market is implemented properly

The first point; getting the investment framework right, points to the need for proper regulative frameworks, from the onset. Most African countries are so eager to attract investment to the extent of being rushed into deals that are not properly regulated and in the end do not achieve intended benefits for their populations. It is therefore very critical that governments get this first stage right and others will flow easily. Attempts to patch up amendments when they are already being implemented can lead to investors pulling out or scaring away prospective investors.

This option has been the most widely used in Sub-Saharan Africa and has had a positive effect on efficiency. However, the effect has been minimal and has not lived up to the expectations of its promoters particularly the World Bank and the International Monetary Fund. Firstly, it has not contributed new infrastructure formation and secondly, it has not implemented successful ideas towards increased efficient use.

Policy option 3 Public Private Partnerships (PPPs);

PPPs are also not a new policy option for African governments. They have however gained momentum in the last decade and continue to be negotiated. The nature and environment in which they have been negotiated however, leaves a lot to be desired. Effectively, their results have been mixed, bordering between success and failure depending on where and how they have been implemented.

According to Chang (2000) "Central to a (Build Operate and Transfer) BOT scheme is the idea of risk-sharing. This can be at the ownership level by participating in the equity of the enterprise, or at the funding level by providing some or all of the loan capital without bearing ownership risks. Equity participation also can be in the form of contribution of equipment from the manufacturer or services from the engineering contractors." Several advantages can be attained by PPPs of this nature. In particular, BOT allows the government to "increase the provision of infrastructure services without having to increase public investment by shifting the risk to the privat