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The road to Africa's industrial future
Date:2018-08-08 Readers:

Increased investment in infrastructure forecast as a prime topic for Beijing FOCAC summit

The third Forum on China-Africa Cooperation, scheduled to be held in Beijing in September, comes at a tumultuous time, as globalization is under siege from unilateralism and trade protectionism. Africa, however, is rising above sluggish growth as commodity prices recover, and the continent is seriously investing in structural transformation to quickly generate jobs for its rising population. Recommendations from the summit are therefore expected to steer the two partners to firmer ground.

The forum, where both China and Africa lay bare their development ambitions, has helped galvanize the participants' global image.

"Because we share the common believe of changing the world order, both partners have made strides in deepening relations and making visible the agreements," says Peter Kagwanja, CEO of the Africa Policy Institute, a think tank based in Kenya. The past two decades have seen the continent move from being viewed as without hope to becoming regarded as the last frontier, with seven out of 10 of the world's fastest-growing economies in the world found in Africa.

"That is no coincidence," Kagwanja says

Formed in 2000, FOCAC has given momentum to Africa's renaissance narrative, buoyed by China's financial assistance, which tripled during President Xi Jinping's first term, when he pledged a funding support of $60 billion (52 billion euros; £46 billion) during the second FOCAC summit, held in Johannesburg, South Africa, in 2015. He also proposed a 10-point strategy that included industrialization, agricultural modernization, infrastructure, financial services, green development, trade and investment facilitation, poverty reduction and public welfare, public health, people-to-people exchanges and security.

However, establishment and completion of these projects has faced hurdles. There have been concerns from experts who have expressed caution, voicing worries over discrepancies between financial and technical commitments made by China at the forum and the speed of implementation on the ground, which is determined by African governments.

At a think-tank meeting held in June in Shanghai and organized by the Shanghai Institute for International Studies and the Bill & Melinda Gates Foundation, Xu Jinghu, the special representative of the Chinese government on African affairs, said implementation of projects had faced head winds in the past two years due to rising anti-globalization sentiments, natural disasters that disrupted the priorities of African governments, and falling commodity prices.

"Increased efforts are therefore needed in designing strategies that would enhance sustainable China-Africa cooperation. China does meet its commitments and we aim to continue with this trend," Xu said.

The move is expected to steer the style of engagement between China and Africa away from the profit-oriented strategies used by traditional partners, she said. "China does not encourage blind investment and has ensured that intensive feasibility studies are undertaken and integrated planning is designed to ensure that mega-transportation and energy projects complement industrial growth," she said.

Giving a preview of the September summit, Xu hinted that infrastructure investment would continue to take precedence in the discussions. This time, however, the projects - railways, roads and ports - would be designed to support an industrial ecosystem.

"We will see a more integrated development, and these industrial nodes will make railways more beneficial," she said.

The Chinese-funded projects will also be highly conscious of green design to align them with Africa's priority of balancing conservation and development, Xu said.

With expansion of infrastructure triggering increased debt for African countries, there are concerns about whether African countries will be able to repay their debt, considering the weak economic growth of Africa's major economies. South Africa, Nigeria and Angola have been hit hard by the commodity market slump, and an upswing in global interest rates has increased fears of a repeat of the debt crises of the 1980s, 1990s and 2000s.

The environment for development finance in Africa is considered to be changing, however, with the entry of financiers such as China, new financing tools such as the Asian Infrastructure Investment Bank, the New Development Bank, the Silk Road Fund and the South-South Cooperation Fund, and a robust public-private partnership on development finance.

Africa is meanwhile exploring creative approaches to internal financing and improving the capability of self-financing, aiming to decrease foreign dependence and increase African ownership.

The continent has boosted its self-financing mechanism and is the major financier for mega infrastructure projects. According to data from the United Nations Economic Commission for Africa, external funding has remained 1 percent of Africa's development finance.

Africa's risky image has made it lose its luster with international financiers, says one expert.

"The continent continues to be characterized by a low saving culture and a large informal sector that is yet to be netted into the tax systems," says Kapil Kapoor, the director for strategy and operational policies and acting vice-president of the African Development Bank.

He says Africa is still unable to attract financing from assets held by the world's 10 largest pension funds, amounting to $2 trillion; from the largest insurance companies, amounting to $4.5 trillion; $5 trillion held by the largest sovereign wealth funds; and $100 trillion by global bond markets.

"The world needs intelligent development finance that goes well beyond filling financing gaps and can be used strategically to unlock, leverage and catalyze private flows and domestic resources," says Kapoor.

Nigeria, Africa's most populous economy, is facing serious challenges in meeting development finance needs.

"Nigeria has recently relied on debt, from both domestic and international markets, to finance budget deficits and specific infrastructure projects," says Chukwuka Onyekwena, executive director of the Center for the Study of the Economies of Africa, based in Nigeria. "The high domestic debt holdings are partly due to an attractive maximum permitted rate at 14 percent and a recent shift to restructure debt toward more foreign borrowing."

While conceding that concessionary finance will remain crucial for Nigeria, as well as for other countries vulnerable to shocks, conflicts and disasters, and those having large refugee and displaced populations, Onyekwena warns that rising external debt has serious implications for the financial health of African countries

The situation is also creating concerns in China, where it have been noted that further lending may hold back Sino-African development goals. The burgeoning debt is stretched by the costs of the mega-infrastructure projects that take a long time to complete.

"This is very expensive. But the huge stock deficit and booming population has seen the demand for these projects outstripping supply, and there is urgent need for capital," said Li Tieli, a scholar from Guangdong University of Foreign Studies, during a one-day meeting in Nairobi discussing the Mombasa-Nairobi Standard Gauge Railway.

With limited capital, Africa will therefore be forced to seek alternative strategies for mobilizing funds, Li said. This gives play to public-private partnership and build-operate-transfer models that would boost private participation and inject the required capital and skill capacity.

In addition, "The Silk Road Fund will also boost financing to African countries and stimulate development," said Li.

Ali Issa Abdi, executive director of the Horn Economic and Social Policy Institute based in Ethiopia, says: "Ensuring debt sustainability - that is very important. Despite the urgent need to bridge the infrastructure gap, especially transportation, the continent will need trillions of dollars in new investment."

He says that since infrastructure continues to feature prominently in China-Africa talks, discussions should focus on developing interborder transportation corridors that would speed up the integration process and link markets of the African Continental Free Trade Area. They should also consider the ability to mitigate financing of these projects and avoid disruptions and instability, not replicating the mistakes of the past in technology transfer that saw projects laid to waste once foreign companies left.

Lemma Senbet, executive director of the African Economic Research Consortium, a think tank based in Kenya, says that although infrastructure such as the Mombasa-Nairobi railway and the Djibouti-Ethiopia Standard Gauge Railway are demand-driven, the buildup of debt is a looming crisis.

"There is a need to come up with strategies to address this at the FOCAC Beijing summit. I also think China should partner with Africa in developing domestic mobilization strategies to plug the deficit," he says.

Chen Shaofeng, from the School of International Studies at Peking University, says, "Unfortunately, countries that are highly unstable have high demands for infrastructure, while those that are reasonably stable are not eager to shore up their infrastructure.

"Governments therefore need to design tailor-made approaches to specific countries and projects that are at different economic stages," Chen says. "There is a need to avoid a policy of one knife cuts all."


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