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Infrastructure: literally, the building blocks of development

Welcome to the second installment of Building Market’s blog series on international development and foreign direct investment (FDI) from the extractive sector in Africa. Last week we presented our ideas and a challenge to you. This week, we are delivering some interesting insights on how the extractive sector has contributed to Africa’s infrastructure.

Let’s start with a quick overview of the benefits of infrastructure. Infrastructure comprises all of the roads, telephone poles, and power plants that make living in a modern society possible. Because they enable us to drive to work, communicate quickly, and lower transportation and production costs, the economic returns on infrastructure investments are very high [1] [2]. Furthermore, infrastructure improves welfare by increasing access to utilities and social services and has been documented as an important means of implementing the United Nation’s Millennium Development Goals (MDGs) [3]. Infrastructure is an important asset because it delivers on two fronts; it promotes growth and reduces poverty [4].

Unfortunately, many African countries cannot meet their infrastructure needs. An estimated $93 billion annually is necessary to upgrade, expand, and maintain Africa’s infrastructure; the continent’s funding gap is believed to be well over $40 billion a year [5] [6]. Traditionally, official development assistance (ODA) has been the primary source of foreign infrastructure investment into Africa. However, since 1995, infrastructure financing has lost priority and decreased by more than half (see graph) [7] [8]. Though ODA is still an important source of foreign infrastructure investments, FDI is starting to pick up the slack. In fact, one UN report suggests that FDI investments have begun to overtake ODA in this sector; the report documents that 7% of current infrastructure spending comes from ODA, compared to 20% from the private sector [9].

The extractive industry, in particular, has invested billions of dollars in infrastructure [10]. Many of these investments are directly linked to the business activities of the firm. For instance, a mining company may invest in a highway that connects its operations to a shipping hub. Though these projects are driven by fiscal incentives, they also benefit the citizens and governments of host countries. Furthermore, there is an emerging tendency for mining operations to participate in infrastructure projects not directly related to their operations, such as building schools, hospitals, and housing in the localities of their operations [11] [12].

Despite the good they provide, these projects are not without controversy. Local citizens often feel left out of the decision-making process that conceives mining operations and frequently feel that the infrastructure provided is inadequate or not widely available. These are serious concerns that deserve careful consideration and attention. However, as you read further, you will see that they are part of a very complex issue.

Traditional donors have encountered similar criticisms, framed in terms of ‘donor accountability to recipients.’ In the current aid system, recipients are highly accountable to donors, but donors are seldom accountable to recipients or to national governments [13]. This is reflective of systemic problems that characterize many North-South relationships. While development organizations and private companies are increasingly being forced to address this issue, it is a process that will likely occur over an extended period of time. The Paris Declaration and Accra Agenda for Action is now the development community’s baseline for producing effective aid. The declaration outlines five principles, including local ownership and mutual accountability, which are intended to improve the quality of aid and its impact on development [14]. Though there is no overarching mechanism that regulates the entire private sector, industry associations are beginning to take a closer look at accountability. For instance, the International Council on Mining and Metals, which represents the extractive sector, has pledged to improve accountability and collaboration within extractive operations [15].

Throughout the course of this week’s research, a conundrum regarding the responsibility of mining operations surfaced. Many of the projects and services provided by mining firms fill crucial gaps that local governments are unable to provide [16]. This creates an expectation regarding the responsibility of mines to citizens [17]. However, what is the full degree of this responsibility? No doubt, it is absolutely crucial that firms do not make residents worse off. Equally important, a firm that is granted access to a country’s natural resources owes both the host government and people proper economic and social compensation. However, how does one define proper compensation? And, outside of these strictures, how much extra should firms contribute?

The case of the AngloGold Ashanti mine in Ghana is an effective example of this dilemma. The mine has contributed millions of dollars to local infrastructure projects in its town of operation, Obuasi (see Image). Annually, the firm provides approximately $145,000 on utilities, $296,000 on schools, and $192,000 on health, among other contributions [18]. Furthermore, AngloGold constructed the local hospital and a professional football stadium [19]. Many of Obuasi’s residents feel that the mine should provide more of such services, to a wider community [20]. However, though the mine is certainly responsible to the inhabitants of Obuasi, AngloGold has come to provide services that clearly fall under the prevue of the government. This begs the question, are the locals’ complaints reasonable, or should citizens be turning to their leaders? How can we determine the ‘right’ level of contribution?

There is no black and white answer to this question. But, it sheds light on the fact that issues of accountability and responsibility are becoming increasingly complex. The relationship between private and public actors is changing, impacting citizens of all countries. Understanding and formalizing these relationships is important, especially in the context of African infrastructure.  This process can help bring coherence, efficiency, and productivity to the region.

While it is in this writer’s opinion that FDI funded infrastructure projects have the potential to generate wealth and improve livelihoods in Africa, we at Building Markets would like to serve some questions to our readers. Are FDI infrastructure projects generally positive? Where does the responsibility of foreign firms lie? In examples like the one presented, how can the concerns of local inhabitants be addressed?

[1] African Union Commission (AUC), and United Nations Economic Commission in Africa (UNECA). Building a Sustainable Future for Africa’s Extractive Industry: From Vision to Action. Proc. of Exploiting Natural Resources for Financing Infrastructure Development, Addis Ababa, Ethiopia. 2011. Print. P 9.

[2] AUC and UNECA, Building a Sustainable Future, P 9.

[3] AUC and UNECA, Building a Sustainable Future, P 9.

[4] AUC and UNECA, Building a Sustainable Future, P 9.

[5] AUC and UNECA, Building a Sustainable Future, P 41.

[6] AUC and UNECA, Building a Sustainable Future, P 41.

[7] AUC and UNECA, Building a Sustainable Future, P 12.

[8] Price Water House. Knowledge Concierge. http://www.knowledgeconcierge.com/>

[9] AUC and UNECA, Building a Sustainable Future, P 57.

[10] AUC and UNECA, Building a Sustainable Future, P 28.

[11] Lanier, Mukpo, and Wilhelmsen, “Smell-No-Taste,” P 30.

[12]”Ghana Case Study: The Challenge of Mineral Wealth: Using Resource Endowments to Foster Sustainable Development.” Interantional Council on Mining and Metals (2007). Print. P 52.

[13] Overseas Development Institute. 2006. Promoting Mutual Accountability in Aid Relationships. P 1.

[14] OECD, Paris Declaration and Accra Agenda for Action <http://www.oecd.org/document/18/0,3746,en_2649_3236398_35401554_1_1_1_1,00.html>

[15] International Council on Mining &Metals <http://www.icmm.com/about-us>

[16] Overseas Development Institute. 2006. Promoting Mutual Accountability in Aid Relationships. P 1.

[17] “Ghana Case Study,” P 54.

[18] “Ghana Case Study,” P 54.

[19] “Ghana Case Study,” P 52.

[20] “Ghana Case Study,” P 55.

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