THE AFRICAN CITY AS AN ENGINE FOR GROWTH

Discerning investors should be looking towards Africa’s growing cities for sustained returns on investment and positive socio-environmental dividends.

The 'Africa Rising' narrative in its current iteration, along with its mainstream implications, is outdated for a continent that is home to unprecedented uncertainties. Positive sentiment regarding the outlook for the African market, which is attributed to sustained economic growth since the 1980s and accredited to policy reform and rising commodity prices, is wavering. Price volatility, sluggish growth, governance and security concerns, and humanitarian crises have all increased the perceived risk of Africa as an investment destination.

In the wake of these trends, discerning investors should now be looking away from financing the reckless consumption of an imagined emerging middle class and, instead, towards creating a competitive, productive economy that enhances shared value.

Cities are the engine room for both national and global growth. In the 21st century, we see the diminishing importance of national governing structures in determining urban economic resilience, and the rise of the City. The bulk of the global population wake up in cities, contributing about 80% of global GDP and as much as 70% of global resource and energy consumption (and the carbon-related emissions).

Understanding urbanisation and its implications for cities is critical if you want to gain a complete understanding of 'Africa Rising' and it is a fundamental requirement for savvy decisionmaking regarding investment opportunities.

Relatively resilient economic growth trends and an expanding urban labour force are seen as positive indicators that Africa will soon be able to leverage its underutilised urban demographic dividend associated with the agglomeration of markets and people. Yet, the specificities of African urbanisation remain poorly understood.

Prospects for positive rates of returns will be heavily influenced by how Africa manages the effects of rapid, unprecedented urbanisation. For now, population growth is concentrated in both rural and urban areas. But, every year, for the next three decades, 22 million people will shift from rural to urban settlements, and by 2050 the urban population will have increased threefold compared with 2010, and will amount to 1.34 billion people1 .

Compared to the West, which urbanised over a period of about 200 years, this is a relatively short urban transition and is occurring in the absence of adequate financing models and governance systems to support such a rapid transition. The rate and scale of this transformation has profoundly transformed Africa’s urban landscape, placing significant pressure on scarce public resources.

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We simply do not yet understand how to harness the power of the informal economy, while creating inclusive, sustainable economies.

Growing urban populations2 exert pressure on already overburdened, dilapidated infrastructure systems, increasing the demand for basic and social services. The physical manifestations are evidenced in heaving urban motorways scattered with potholes, city-wide blackouts that bring economic activity to a standstill, and a rising stench from uncollected waste and non-existent sanitation systems. Infrastructure deficits are present even in what are considered advanced, diversified economies3.

To maintain their role as the drivers of economic growth, cities urgently require investment in infrastructure. A staggering US$93 billion4 is needed annually for the next decade if we are going to make a dent in resolving infrastructure backlogs on the continent. Without the financial resources needed to meet the finance requirements – which can be attributed to the relationship between poverty, informality and the tax base – cities will have to look beyond their borders for financial support. Importantly, they should not rely on national transfers5 from governments whose priorities generally exclude urban infrastructure.

Major international institutions have singled out infrastructure investment as a catalyst for sustained recovery in the global economy. Meanwhile, it has become evident that pension funds and insurance companies, among others, have an appetite for investing in infrastructure. Long-term liabilities and predictable returns are not only complementary to the infrastructure lifecycle, but these investments improve the capacity to raise capital from other sources of finance.

Over the past decade, financial flows from the private sector have grown continuously, yet cities still need more private participation in urban infrastructure financing. But allocations cannot continue to be ad hoc and uncoordinated. It is concerning that there is no comprehensive data set that clearly analyses how these financial flows are being allocated, nor is there any sort of integrated planning system.

Compelling evidence demonstrates that while the needs of the elites, multi-national companies and the upper middle class are met by a patchwork of gated residential enclaves, modern shopping centres and sophisticated fibre-optic networks, elsewhere informality predominates within a splintered6 urban landscape.

Mega-projects seem to hold a significant allure for even the most discerning investor despite the high risk of financial overruns and failure7, not to mention the lack of social dividends. Examples include the pipeline of mega-power plants juxtaposed against negligible access to the grid and exorbitant, exclusive electricity prices, and expansive dams, in a context where improved water access is denied to over 30% of the population8.

Sustained, equitable growth will be possible if there’s a surge in infrastructure investment that facilitates the development across sectors and infrastructure categories, i.e. economic and urban infrastructure. But Africa’s urbanisation specificities and infrastructure requirements also need to be interpreted in the context of global environmental change, diminishing finite natural resources, and accelerated climate change. The convergence of these trends is becoming increasingly visible, manifesting as environmental crises, while the associated risks of inaction significantly outweigh the cost of adaptation9. Valuable insights from academic research show us that the specific configuration of networked urban infrastructure ensures and determines urban economic reproduction10. Here is an opportunity for investors to contribute to an 'Africa Rising 2.0' narrative.

As Africa’s urban landscapes are yet to be configured, there is a unique opportunity to leapfrog obsolete and unsustainable conventional technology of the 20th century and become world leaders in creating low-carbon, resource-efficient, productive urban spaces. Herein lies an attainable competitive advantage for the continent.

Infrastructure, as the nexus between the impacts of urbanisation, economic productivity and the resolution of global environmental change, is a key intervention point. Much needed are investments into renewable energy, reliable public transport systems, efficient water and sanitation systems and, importantly, a sustainably built environment. The imperatives of meeting basic needs, while lifting economic productivity and growth, can simultaneously be materialised by targeted and coordinated infrastructure investments that take advantage of the opportunity offered by Africa’s urbanisation.

1 Cartwright, A. 2015. Better Growth, Better Cities: Rethinking and Redirecting Urbanisation in Africa. NCE Cities, Paper 03. Online: http://2015 newclimateeconomy.report/wp-content/uploads/2015/09/NCE-APP-final.pdf.
2 OECD/AfDB/UNDP (forthcoming): African Economic Outlook 2016: Sustainable Cities and Structural Transformation. Paris: OECD Publishing
3 OECD/AfDB/UNDP (forthcoming): African Economic Outlook 2016: Sustainable Cities and Structural Transformation. Paris: OECD Publishing
4 Foster, V. and C. Briceño-Garmendia (2010). Africa’s Infrastructure: A Time for Transformation. Africa Infrastructure Country Diagnostic. Washington DC: Agence Française de Développement and World Bank.
5 Pieterse, E. 2014. Filling the Void: an agenda for tackling African Urbanisation. In: Africa’s Urban Revolution. Parnell, S. and Pieterse, E. (eds). London: Zed Books.
6 Graham, S. and Marvin, S. 2001. Splintering urbanism: networked infrastructures, technological mobilities and the urban condition. Psychology Press.
7 Flyvbjerg, B. 2014. What you should know about megaprojects and why: an overview. Project Management Journal, 45(2): 6-19. Castellano, A., Kendall, A., Nikomarov, M. & Swemmer, T. 2015. Brighter Africa: The growth potential of the sub-Saharan electricity sector. Electric Power and National Gas Working Group, McKinsey & Company.
8 Cartwright, A. 2015. Better Growth, Better Cities: Rethinking and Redirecting Urbanisation in Africa. NCE Cities, Paper 03. Online: http://2015.newclimateeconomy.report/wp-content/uploads/2015/09/NCE-APP-final.pdf. Parnell, S. and Pieterse, E. (eds.) 2014. Africa’s Urban Revolution. London: Zed Books. Watson, V. 2014. African urban fantasies: dreams or nightmares? Environment and Urbanization, 26(1): 215-31.
9 Stern, N. 2007. The economics of climate change: the Stern review. Cambridge University Press.
10 APP (African Progress Panel). 2015. Power People Planet: Seizing Africa’s energy and climate opportunities. Africa progress report 2015. Geneva: APP. Hodson, M. and Marvin, S. 2009. Urban ecological security: a new urban paradigm? International Journal of Urban and Regional Research, 33(1): 193-215. Hodson, M., Marvin, S., Robinson, B. and Swilling, M. 2012. Reshaping urban infrastructure. Journal of Industrial Ecology, 16(6): 789-800. Intergovernmental Panel on Climate Change (IPCC). 2014. Chapter 12: Human Settlements, Infrastructure and Spatial Planning. Mitigation of Climate Change. Working Group III- contribution to the IPCC 5th Assessment Report. Available: http://www.ipcc.ch/report/ar5/wg3/. Kennedy, C., Cuddihy, J. & Engel-Yan, J. 2007. The Changing Metabolism of Cities. Journal of Industrial Ecology. 11(2): 43-59.

AUTHOR

Dr Katherine Hyman
Researcher, African Centre for Cities

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