SADC Infrastructure Development Review

PESA Regional Integration Monitor, Mar 2017

The March 2017 issue focuses on infrastructure and investment in SADC – What are the infrastructure and investment trends within SADC? what are the key institutions driving infrastructure development and investment? how do we evaluate their impact on regional development? infrastructure bottlenecks in the region? The PESA Regional Integration Monitor, Mar 2017 examines some of these questions

SADC Infrastructure Development: An Overview

The merits of colonialism and its impact on Africa is contended by some. Prominent writers like Walter Rodney, How Europe Underdeveloped Africa, and Albert Adu Boahen, African Perspectives on Colonialism, argue that colonialism underdeveloped Africa and created an infrastructure deficit due to poor investment on the continent.
 
Since colonialism was largely motivated by economic exploitation of land, minerals and raw materials to catalyse the expansion of capitalism and European industrialism; most colonies were forced to grow one or two cash crops which resulted in neglecting food production and import-substitution1. In addition European expatriate firms were encouraged to export natural resources, repatriate all surplus capital, and given unlimited opportunities to import manufactured goods from the metropolitan countries2. This resulted in little, or no, investment in Africa during colonialism and in the exclusion of the majority of Africans from all direct economic and trade activities.
 
In the absence of post-colonial violence, this infrastructure deficit is the most persistent and severe challenge faced by post-colonial African governments. Even in South Africa, which attained independence from colonial influence in 1910, the Apartheid programme of separate development has resulted in infrastructure deficits in most African communities, particularly townships and the former Bantustans. So how are African governments dealing with this infrastructure deficit and what policies are in place in the SADC region?
 
African countries are now the beneficiaries of various forms of infrastructure and investment finance, predominantly from foreign sources. Due to poorly developed domestic financial markets, many African countries rely on foreign or donor finance for infrastructure investment. Foreign institutions engaged in infrastructure investment in Africa can be characterised as follows:

  • Sovereign Development Finance Institutions and Concessional Lending Banks, including: USAID, Department for International Development (DfID), Kreditanstalt für Wiederaufbau (KfW), Japan International Cooperation Agency (JICA), Asian Infrastructure Investment Bank (AIIB);
  • Private Banks, including: JP Morgan, HSBC, Deutsche Bank;
  • Multilateral Institutions, including: The International Monetary Fund (IMF), World Bank, European Union (EU), African Development Bank (AfDB); and
  • Multinational Companies, whereby a plethora of companies invest across different sectors but mostly through Public-Private Partnerships (PPPs).

 
Currently in SADC, only a few countries can sustainably rely on domestic sources of infrastructure finance. Therefore, most governments approach foreign financial institutions for funding toward government investment programmes. Most countries maintain a system of incentives such as a set of targeted and strategic industrial and trade policies to attract foreign direct investment (FDI) from multinational companies. In addition, most governments implement fiscal and monetary policies to absorb external economic shocks and to maintain enticing macroeconomic conditions to attract development finance from sovereign development finance institutions, concessional lending banks, and multilateral institutions as part of a broad national development plan.
 
In SADC, countries that have been the most attractive to foreign multinational companies include Angola, Mozambique, South Africa, Zambia, and Namibia3. Most of the investment has been in extractive industries and agriculture, which is partly a legacy of colonialism and due to structural constraints in most African economies. In some cases, countries receive development finance that is negotiated at a bilateral level and administered by the government. Typically, governments would work through national departments to facilitate and administer the development finance depending on how it is earmarked and disbursed.
 

SADC Investment and Infrastructure Snapshot
Figure 1: SADC Investment and Infrastructure Snapshot

 
At a regional level, SADC countries have a Regional Indicative Strategic Development Plan (RISDP) which provides the main framework for integration. The RISDP’s key areas of regional cooperation and integration include: politics, defence and security, trade & economic integration, infrastructure development, food security, natural resources, social and human development, and cross-cutting areas like gender, HIV/Aids and environment. Most notably, under the infrastructure development sectors prioritised are energy, tourism, meteorology, ICT, transport, water and sanitation, and maritime, ports and inland Waterways. Investment on infrastructure, particularly transport, is vital for SADC trade activity, and has been the largest attraction of FDI in Angola, South Africa, and Mozambique. FDI in the region has been volatile, partly due to difficult business environments and lacking or poor infrastructure availability.
 
To fast-track regional infrastructure development, the SADC Project Preparation and Development Facility (SADC-PPDF) was introduced. The PPDF was introduced particularly to finance projects in the transport, energy, ICT, water and sanitation, and tourism related infrastructure sectors4. The PPDF is managed by DBSA and has so far allocated preparation funding to the tune of US$3.5mn towards the development of the multi-country Regional Interconnector Transmission Line Project5. The Project, which will benefit Mozambique, Zimbabwe and South Africa, is expected to create a conducive environment for investment in the region. Financial contribution from the German government through the KfW as well as the EU through its regional office in Gaborone will play a huge role in the success of the PPDF in the region.
 
The region has made significant strides in terms of regional infrastructure development and have included private investors. Dedicated national road agencies have led to transport infrastructure being more established than other infrastructure sectors in the region. In particular, the three primary corridors (the North-South Corridor, the Maputo Corridor, and the Dar-es-Salaam Corridor) are the focus of most development. However, challenges persist as funding and technical capacity are still lacking. Efforts have been made to attract private investors and a SADC Public Private Partnership Network (PPP Network/SADC 3P) was introduced to facilitate project development and act as an advisory hub in the region. Infrastructure development needs to be prioritised in order to attract the level of investor attention worthy of the region. Weak infrastructure has long been cited as the reason for relatively low levels of investment, the region has responded to address this, but there is certainly still more to be done.
 


1 Boahen, A. A. 1987. African Perspectives on Colonialism, John Hopkins University Press: Baltimore.
2 Rodney, W. 1973. How Europe Underdeveloped Africa, Bogle-L'Ouverture Publications & Tanzanian Publishing House: London and Dar es Salaam. Available At: http://abahlali.org [Last Viewed: 16 February 2017]; Boahen, A. A. 1987. ibid.
3 UNCTAD 2016. World Investment Report 2016: Investor Nationality: Policy Challenges, United Nations Conference on Trade and Development: Geneva. Available At: http://unctad.org [Last Accessed: 21 February 2017].
4-5 SADCPPDF 2017. ‘About the PPDF’, in SADC Project Preparation and Development Facility, from http://sadcppdf.org [Last Accessed: 22 February 2017].
Country Spotlight: The Republic of Angola

Angola is the second largest oil producer in sub-Saharan Africa (SSA) after Nigeria1. However Angola’s economic outlook for 2017 remains uncertain due to the decline of international oil prices, which are not expected to recover in the short-term. Economic growth is projected to remain steady at 3.5% in 20172. The decline of the oil price had an adverse effect on fiscal revenue and exports. For instance, oil rents as a share of gross domestic product (GDP) accounted for about 10.75% in 2015 compared to 27.17% in 20143, and oil and gas exports as share of GDP accounted for 31% in 2015 compared to 45.5% in 20144.
 
From 2010 to 2013 Angola lost an average of US$5.07 billion in foreign investment due to policy mismatch. Angolan legislation requires foreign investors to have a local partner but due to the lack of appropriate partners, some projects failed, resulting in divestment despite the demand for Angolan projects by foreign investors5. However, the country has since improved its policy by passing new legislation reducing bureaucratic procedures required for the admission of eligible foreign investments6.As a result, in 2015 Angola achieved a 352% growth in FDI after receiving US$8.7 billion, accounting for about 39% of total SADC FDI inflows, with South Africa receiving just 8% of total SADC FDI inflows7.
 

Angolan Real GDP Growth Comparison
Figure 2: Angolan Real GDP Growth Comparison, % (2009-2017)

 
From 2010 to 2015, oil production in Angola averaged approximately US$1719 million barrels per day8. Angola’s oil industry comprises 47% of GDP, followed by services at 39% and Agriculture at 5%9. Angolan agriculture remains primarily a subsistence sector, with half of the country’s demand for food being met through imports10. Angolan food imports accounted for approximately 17% of total merchandise imports11. There is a need to diversify the Angolan economy from its current reliance on commodity and primary exports.
 
Angola should strategically channel FDI towards sectors and industries with a trade deficit outside of oil and extractive industries. In this regard, Angola has been able to redirect some foreign investments from Brazil, China, USA and the UK towards the financial sector, transport infrastructure and logistics12.
 
However oil and extractives remain the strongest and most attractive sectors for FDI. Angola has made significant progress toward maintaining political and economic stability since its 27 years of civil war which ended in 2002. However, Angola is still faced with infrastructure development challenges and an infrastructure investment backlog. Angola’s main export trading partner is China, which accounts for 44.3% of Angola’s exports – predominantly made up of oil, followed by Portugal (18%) and India (10.2%). In 2015, China signed new construction contracts in Angola for about US$6 billion13. China has also invested significantly in Angolan transport and social infrastructure through the construction of railway, roads, and ports14. China plays an important role in Angola.
 
Angola’s power sector has experienced severe inefficiency and a shortage of supply. The Angolan government had committed to invest US$16 billion in the energy sector in last few years15, including the building of two large dams: the Cambambe Dam with 960 megawatts (MW) and the Laúca Dam with 2060MW, which will increase Angola’s electric power generation. In 2017, the power generation is expected to reach 5000MW. Several hydropower projects are underway and aimed to reach 62% of Angola’s energy requirements in 2017 such as Caculo Cabaça, Jamba-Ya-Oma and Baynes, which is a joint project with Namibia. In addition, Angola’s government plans to interconnect the three grids (North, Central and South) to increase the electricity coverage from 30% to 60% by 2025. The aim is to expand access to basic energy services. Angola’s investment in the energy sector aims to increase power generation in order to meet the strong growth in demand, as well as to boost economic growth and improve the business environment16.
 
Due to strong economic dependence on the oil industry, the Angolan government seeks to reinvest surplus oil revenues in other high-potential sectors such as agriculture, fisheries, tourism and port services in order to diversify the economy. In 2015, the Angolan government promulgated the new private investment legislation to create incentives for investment in strategic priority sectors and also established the National Agency for Promotion of Investment and Exportation of Angola (APIEX). However, investment in the other key sectors such as mining, finance, and oil are governed through different regulations. The government’s strategy is aimed at investing in infrastructure, reducing imports, promoting financial sector reforms, enhancing skills development and improving the business environment. Angolan investment in infrastructure is targeted at improving the country’s economic competitiveness and intra-regional trade through cross-border agreements with the Democratic Republic of Congo, Namibia and Zambia.
 


1 AfDB 2012. African Economic Outlook 2012: Angola, African Development Bank: Abidjan. Available At: http://afdb.org [Last Accessed: 10 February 2017].
2 AfDB, OECD, UNDP 2016. African Economic Outlook 2016: Sustainable Cities and Structural Transformation, African Development Bank, Organisation of Economic Cooperation and Development, United Nations Development Programme: Abidjan, Paris, New York. Available At: http://afdb.org [Last Accessed: 17 January 2017].
3 World Bank. 2017. World Bank Database. Available At: http://worldbank.org [Last Accessed: 10 February 2017].
4 IMF 2016. Angola: Article IV Consultation, International Monetary Fund: Washington, D.C. Available At: http://imf.org [Last Accessed: 10 February 2017].
5 UNCTAD 2014. World Investment Report 2014, United National Conference on Trade and Development: Geneva. Available At: http://unctad.org [Last Accessed: 17 February 2017].
6 UNCTAD 2016. World Investment Report 2016, United National Conference on Trade and Development: Geneva. Available At: http://unctad.org [Last Accessed: 17 February 2017].
7 UNCTAD 2016. ibid; UNCTAD 2017. UNCTADstat Database. Available At: http://unctad.org [Last Accessed: 8 February 2017].
8 IMF 2016. ibid.
9 UNCTAD 2017. UNCTADstat Database. Available At: http://unctad.org [Last Accessed: 8 February 2017].
10 Makaya, D. 2016. ‘Angola’, in Investment Climate Statement 2016, viewed on 31 January 2017, from http://state.gov.
11 World Bank 2017. ibid.
12 Muzima, J. 2016. African Economic Outlook: Angola, African Development Bank: Abidjan. Available At: http://africaneconomicoutlook.org [Last Accessed: 17 January 2017]; CIA 2017. ‘Angola’, in The World Factbook, viewed on 8 February 2017, from http://cia.gov.
13 UNCTADstat 2017. ibid.
14 Dionisio, T. E. 2014. Rebuilding Angola’s Infrastructure, Infrastructure Journal Limited: London. Available At: http://eaglestone.eu [Last Accessed: 17 January 2017].
15 AfDB 2012. African Economic Outlook 2012: Angola, African Development Bank: Abidjan. Available At: http://afdb.org [Last Accessed: 10 February 2017].
16 Government of Angola & UNDP 2015. Rapid Assessment and Gap Analysis, Ministry of Energy and Water: Luanda. Available At: http://se4all.org [Last Accessed: 21 February 2017].
Industry Spotlight: Energy

Over the past 30 years, SADC countries have been challenged by a rapidly increasing gap between demand and supply for infrastructure, resulting in, among other things, insufficient energy supply. As a result of this infrastructure deficit, SADC member states introduced the Regional Infrastructure Development Master Plan (RIDMP) in August 2012. The plan is aimed at defining regional infrastructure requirements and conditions to facilitate key infrastructure development needs in the energy, water, transport, tourism, meteorology, and telecommunications sectors1.
 
Broadly defined, the energy sector encompasses all power generated and derived from the utilisation of physical and chemical resources including, but is not limited to, electricity generation, oil and gas, coal, nuclear power, solar, wind and other renewable energy sources. Due to the demand for energy from the natural resource endowments in SADC, the current priority energy subsectors are: coal-generated electricity, renewable energy, oil and gas2. All these are significant to catalyse infrastructure, investment and development. Moreover, energy investment is a vital foundation for regional integration due to the cross-border nature of energy investment projects.
 
The energy sector in the SADC region has historically been characterized by “scattered reserves” of natural gas and oil in Angola and along the coasts of Mozambique3, coupled with rich coal deposits in South Africa, Zambia and Zimbabwe. However, this changed when a potential 500 trillion cubic feet of natural gas was identified across Mozambique and South Africa along with 11 billion barrels of oil in Namibia4 in 2010 and 2011. Furthermore, additional natural gas discoveries in the offshore Kwanza Basin in Angola indicate the area could hold an equivalent of 813 million barrels of oil5. Despite the numerous discoveries of natural resources in the region, biomass such as wood or other organic material is still the major source of energy6, primarily due to the relatively low proportion of urban dwellers among SADC member states.
 
Apart from a few exceptions in regionalcity centres, the region has a total population of 294 million with 39% of the population living in urban areas7, suggesting that the majority of increased demand for electricity will arise from the rural areas. The Southern African Power Pool’s (SAPP) operating capacity was recorded to be 46 959MW in 2016 against a demand of 52 542MW; indicating a 10.25% electricity demand-capacity deficit8. Projects are in place, aspiring to achieve a total generation capacity of 32 695MW by the end of 2022. However, these projects focus on grid extensions and on-grid generation growth. Electrifying the rural areas, where electricity demand is highest, requires high voltage lines. Subsequently, projects need to include a variety of available technologies in order to provide energy for on-grid and off-grid systems9.
 
Another major challenge, apart from investment in new infrastructure, is the maintenance of existing energy infrastructure in SADC. This means that producers are typically operating at full, but not optimal, capacity. For example, the Zambian national energy producer (ZESCO) is currently operating at 56.9% capacity utilisation due to dilapidated infrastructure and insufficient investment. Despite the current installed capacity of 2.3GW, ZESCO has 1.1GW unutilised capacity because the state has not been able to invest in improving capacity utilisation due to capital constraints and a persistent public deficit10. Although the Zambian government has invested in projects to add 0.2GW capacity in FY2017/18, this is insufficient to resolve persistent load shedding11.
 
Electricity supply shortages, rapid climate change, and environmental degradation have been the main drivers toward renewable energy and energy efficiency initiatives through exploitation of solar, wind, biomass, geothermal, and mini and micro hydroelectric sources. The SADC region’s renewable energy sources provide great potential for the region to establish the correct infrastructure to avoid the negative environmental cost of non-renewable energy. However, there is need to stimulate the uptake of renewable energy technologies through firstly developing a harmonised regional renewable energy framework12 that will result in reduction of investment costs and improved reliability. Secondly, it is important for SADC countries to invest in infrastructure maintenance and skills development to ensure localisation of infrastructure maintenance instead of turnkey solutions. Lastly, taking a lifetime and value-chain approach to infrastructure investment and maintenance is the first step to resolving energy and broader infrastructure deficits in SADC, and across Africa.
 
Technical and financial barriers have also contributed to low levels of uptake of renewable energy technologies to facilitate growth in energy demand, leaving a vast amount of untapped energy resource potential13. The energy sector is characterised by an abundance of potential energy sources, but a lack of relevant infrastructure to exploit them or limited capital to invest in meeting surplus energy demands.
 
For this reason, it is encouraging to note that there has been a renewed spirit in the involvement of development finance institutions (DFIs) in infrastructure development and regional integration generally. Notable regional DFIs championing regional infrastructure investment include the African Development Bank (AfDB), the Development Bank of Southern Africa (DBSA) and the Industrial Development Corporation (IDC). Some of the key energy projects that these DFIs are involved in include:

  • Maamba Collieries Power Generation Project, US$150mil, Zambia, funded by AfDB.
  • !Ka XU Solar One, US$16mill, South Africa, funded by DBSA.
  • Lake Turkana Wind Power Project, UD$4.8mil, Kenya, funded by AfDB.

 
Notwithstanding the progress achieved, if the sector is to develop to its full potential, more improvement is needed in terms of financing infrastructure projects. Participation of DFI’s and private investors, in collaboration with regional bodies should be prioritised, to ensure the efficient planning and execution of such long-term strategic projects.
 


1 Zhou, P. P. 2012. SADC Regional Infrastructure Development Master Plan: Energy Sector Plan, Southern African Development Community: Gaborone. Available At: http://sadc.int [Last Accessed: 29 January 2017].
2 SADC Secretariat 2016. SADC Energy Monitor 2016, Southern African Development Community: Gaborone. Available At: http://sadc.int [Last Accessed 11 February 2017].
3 REN21 Secretariat 2015. SADC Renewable Energy and Energy Efficiency Status Report, Renewable Energy Policy Network for the 21st Century: Paris. Available At: http://ren21.net [Last Accessed 19 February 2017].
4 REN21 Secretariat 2015. ibid.
5 Ramos, M. L. 2011. Angola’s Oil Industry Operations, Open Society Initiative for Southern Africa: Johannesburg, Available At: http://osisa.org [Last Accessed 19 February 2017].
6-7 SADC Secretariat 2016. ibid.
8 SAPP 2016. SAPP Annual Report 2016, Southern African Power Pool: Harare. Available At: http://sapp.co.zw [Last Accessed 11 February 2017].
9 Kapolo, L. T. & Lalk, J. 2012. Lack of Investment in Large Scale Generation Plants in the Southern African Power Pool: A Question of Policy, Political Will, Pricing or Planning?, International Council on Systems Engineering South Africa: Highveld Park. Available At: http://up.ac.za [Date Accessed 13 February 2017].
10 ZESCO 2015. ‘Generation’, in Zambia Electricity Supply Corporation, viewed on 17 February 2017, from http://zesco.co.zm Last Accessed: 17 February 2017]; Mutati, F.C. 2017. 2017 Budget Speech, National Assembly of the Republic of Zambia: Lusaka. Available At: http://parliament.gov.zm [Last Accessed: 17 February 2017].
11 Mutati, F.C. 2017. ibid.
12 SADC Secretariat 2016. ibid.
13 Karekezi, S., & Kithyoma, W. 2003. Renewable Energy in Africa: Prospects and Limits, Republic of Senegal & United Nations: Dakar. Available At: http://un.org [Date Accessed: 22 November 2016].
Policy Spotlight: Rules of Origin

The development of global value-chains (GVCs) has brought the importance of rules of origin (RoO) to the fore, as they are required in any preferential trade agreement (PTA) in order to confirm that goods being traded under preferential tariffs originate from an eligible country. RoO are developed to prevent trade deflection, where countries bypass higher tariff rates in one member state in a PTA by importing goods through a secondary member state with lower tariffs1. With the development of GVCs however, goods do not simply originate from one country and even when the final product does originate from one location, inputs are usually sourced from multiple locations. Hence RoO have become an important tool governing regional trade, especially given the overlapping membership to regional economic communities and the proliferation of PTAs. RoO are primarily used to address trade challenges and to compliment various industrial policy instruments.
 
In SADC the SADC Rules of Origin: Exporter’s Guide Manual is aimed at providing a simple and transparent criteria for determining the eligibility of goods under the SADC Free Trade Area (FTA). The SADC RoO are used to distinguish between goods produced within the SADC region and eligible for the preferential tariff, from those originating from outside the region which attract the full import duty rates2. Following the formation of the SADC FTA, regional trade and economic integration was complicated by overlapping memberships of SADC member states across the region which resulted in contradictory trade obligations. Although the RoO provided clarity within SADC they also forced producers to source inputs from within the region, which drove up production costs in some instances thereby increasing barriers to entry for new producers in the market3. Also, the compilation of regional trade statistics is adversely affected by trade deflection which may hamper the monitoring, evaluation and development of regional trade and economic integration. In some instances, the absence of clear RoO poses a greater risk of revenue miss-allocation, such as in the case of SACU, where intra-regional trade is used to determine member state shares of the customs duty revenues4.
 
The RoO under the SADC Trade Protocol are not only intended for authentication but also serve as a broader development tool. The developmental function of RoO is justified by Article 2 of the Trade Protocol, which identifies the enhancement of economic development, diversification and industrialisation of the region as an objective of the protocol5. In light of this, there has been strong pressure to use RoO to encourage the use of local raw materials in downstream processing industries. Therefore, the SADC RoO allow for designating goods as originating in SADC, even if they are not wholly produced within the region. Goods are considered as originating in SADC as long as they have been worked on locally, such that there is a change in the good’s tariff heading categorisation; or if local works add at least 35% to the ex-factory value to the goods6.
 
However, these provisions do not resolve all problems associated with trade deflection and other related trade challenges. Balancing the need to determine eligibility of goods for preferential treatment with the ambitions of regional industrialisation, development of regional value-chains and economic integration is very complex. As the process of regional integration consolidates regional economic communities across the continent, and as the set of administered preferences becomes more complex, the role of RoO becomes ever more important and complicated. Moreover, given that these rules need to be dynamic in order to respond to real-time challenges of regional trade and economic integration, the lag between developing robust rules and capacitating customs administrations makes the objectives of RoO ever more unattainable.
 

The Mohale Dam
Figure 3: The Mohale Dam, Lesotho Highlands Water Project.

 


1 Erasmus, H., Flatters, F. & Kirk R., 2004. ‘Rules of Origin as Tools of Development?: Some Lessons from SADC’ Queen’s University: Ontario. Available At: http://queensu.ca [Last Accessed: 25 November 2016].
2 SADC, 2003. ‘SADC Rules of Origin: Exporter’s Guide Manual’, Southern African Development Community Secretariat: Gaborone. Available At: http://sadc.int [Last Accessed: 30 November 2016].
3 Kajuna, K., 2016. ‘Connecting to the World through Regional Value Chains’, Bridges Africa, Volume 5 (1). Available At: http://ictsd.org [Last Accessed: 30 November 2016].

4 SACU, 2010. ‘Study on an Assessment of Trade Data Limitations Amongst SACU Member States’, Southern African Customs Union Secretariat: Windhoek. Available At: http://sacu.int [Last Accessed: 30 November 2016].

5-6 SADC, 2011. ‘Protocol on Trade in the Southern African Development Community Region’, Southern African Development Community Secretariat: Gaborone. Available At: http://sadc.int [Last Accessed: 30 November 2016].


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