Roads – Simple, Mundane and Absolutely Vital

By Saravana Sivasankaran

Fresh into my first semester in HBS, I took time with a professor to discuss my post-MBA plans in West Africa. The area was developing fast and looked to reap the benefits of political stability. When I finally finishing ranting on about my ideas, the professor looked up and asked, “Can you build roads instead?”

As simple as it may sound, roads are the backbone of a country. The A2 motorway case highlighted the difficulties of financing a project in a developed country like Poland as well as the numerous benefits that the country would derive from the project. Shift to Africa and a well-constructed road could make the difference between a thriving trading town and desolate place with large, unsold, undervalued produce.

Take the case of Sierra Leone – a country that has seen numerous civil wars in the last decade. It has finally shown signs of political stability and relative calm. As the new leaders look to rebuild the country, the number one priority is attracting foreign investment into the country to invest in its transport infrastructure. Sierra Leone is flush with greenery, and agriculture is a major source of employment and a huge contributor to its GDP. For the farmers in Sierra Leone to capture the full value of their produce, they will need transportation infrastructure to be in place.  A good transportation network also means less inventory leading to less working capital needs for small businesses. Investors are also willing to pay more for a country’s resource when it has existing good transportation networks.

The idea of successfully raising financing for a project in an underdeveloped country like Sierra Leone has been discussed for ages. The challenge is finding the middle ground between what the country can afford to pay and investors return expectations for the perceived risk. I will highlight two very different approaches that have emanated through this road-building task that poor African countries have before them.

While the discovery of mining resources have often resulted in what economists like to call the “Resource Curse,” the arrival of mining companies in a country usually leads to better infrastructure, especially in roads. The new companies have a vested interest in ensuring that their output gets transported to their final markets for delivery. Take the case of Olam in Gabon. Olam is on the largest agriculture trader in the world. Olam not only owns plantations in Gabon but is also building roads and ports with cooperation with the Gabonese government. (The counter argument is that the roads are only purpose built for the mines and do not help other industries. This is true but when you are starting with very little road infrastructure, even small marginal improvements have huge visible impact on trade and development).

On the other hand, Zambia provides a completely new framework. China has been busy buying up resources in Africa. Zambia is today a major source of copper in the world and Chinese state owned enterprises have numerous investments in the country. But in order to solidify the relationship further, Chinese companies have opted to build infrastructure, especially roads, in the country. The Chinese companies have been immensely successful in bagging contracts due to their price competitiveness and also willingness to take risks. This new found relationship has not been free of controversy with both sides suffering – contractors not being paid or roads falling apart due to shoddy constructions. But it highlights the importance and urgency with which countries like Zambia are treating the development of roads.

Eradicating poverty in Africa might well be the biggest challenge we face in our lifetime and that would only be possible if African countries become self-sustainable and produce goods that the rest of the world needs. And this boils down to building roads so that the Ethiopian coffee farmer captures a fair share of your Starbucks Latte, so that Sierra Leone palm oil producers can compete with the military efficiency of Malaysian palm oil producers and so that landlocked African countries can count on trade and, not charity to run their countries.

The construction industry has not seen any “Disruptive Innovation” as HBS professor Christenson calls it.  More effort needs to go towards finding innovative ways to construct and finance these critical road projects in Africa.

While mobile banking and Internet start-ups in Africa may appear “uber cool” for the budding Africa-bound entrepreneur, it’s the dull, low margin, high-risk business of building roads in frontier African markets that will inevitably unlock Africa’s full potential.

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3 thoughts on “Roads – Simple, Mundane and Absolutely Vital

  1. This is an interesting topic and one that is close to heart, especially from the angle of China-Africa infrastructure investments. While the risks of the current China approach are well expressed in Western literature, one of the more powerful counter-arguments is the execution capability (or lack thereof) currently available in many African countries. The cold truth is that many contracts given to African construction firms fall victim to poor follow-through and value dissipation along the construction value chain. When I pushed several Chinese firms to defend their position on the matter during my J-term IXP with Professor Koll, the most common rebuttal was that they can get the work done – faster and more efficiently than any local firm.

    Now there are obviously questions about sustainability with such a model. Many African countries are in a difficult bargaining position against China, as political obstacles preclude any united bargaining front against Chinese players (not to mention that many mining assets are contained within internal country borders). This vacuum in inter-Africa policy is also a key contributor to the lack of infrastructure between major African cities. The dream of a Cape to Cairo railway or road network, which was not so unbelievable 100 years ago, now appears further away than ever before.

    I believe there is indeed a role for PPP, if it is effectively overseen by a strong political force, or a private player with a long term horizon. But there is an even greater role for stronger involvement from institutions like the African Union in setting regional development standards and plans.

  2. I agree that roads form the backbone of a country and its ability to economically function. A strong transit system is also paramount in allowing emerging countries to capture a greater share of an increasingly global economy. However, relying on private enterprise or foreign companies to forge this development in emerging economies (i.e. Africa) can be dangerous. Corporates focused on resource extraction, for example, have the incentive to develop infrastructure projects only as far they stand to benefit. Foreign enterprise with mining interests in an emerging economy could thus focus on transit development, but could neglect other vital infrastructure projects such as utilities, healthcare or education. There’s also the risk that a company could pursue such projects without fully utilizing local businesses, labor and materials, which could greatly benefit a developing economy.

    China’s state-linked enterprises are notorious for pursuing development projects in other countries that employ their own nationals and building materials without truly benefiting a local economy. Resource-rich African countries should mandate that foreign companies not only pursue transit / port development aimed at resource-extraction, but also hospitals, utilities and schools. There have been many historical examples of corporates (usually from developed countries) exploiting poor, emerging economies without truly benefiting local populations. It’s essential that governments closely collaborate with companies to forge mutually favorable development. In some emerging countries, companies provision such “soft infrastructure” more effectively than the government itself. Ultimately, such cooperation also serves the interests of foreign companies through the development of local labor/human talent, and associated economic sectors that can support industry for many years to come.

    • By Jessica Asinugo

      In order for transportation networks in Africa to achieve the goal of spurring economic growth, it is important that the conversation focus not only on intra-country road infrastructure, but also on inter-country road infrastructure. Air freight is unavailable and/or prohibitively expensive in majority of the countries, and with a third of the countries being landlocked, there exists a staggering need to promote country-to-country trade through expanded networks such as transnational highways. Many talk about the need for facilitating regional economic integration in Africa through changes in policy, however, this alone will have no impact if the actual roads never get built.

      Lack of funding, instability and a lack of political will are the main reasons why these transnational highways either do not exist, or exist in a low capacity. Development organizations such as United Nations Economic Commission for Africa (UNECA) and the African Development Bank (ADB) have played key roles in developing the Trans-Africa Highway Network plan. However, the execution of this plan has proven to be a slow and arduous process. Business leaders in Chinese companies looking to expand their roads-for-oil programs may start to consider transnational highways as an opportunity to increase their leverage and access – having ‘successfully’ partnered with several African countries already.

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