Trade and Investment

Will the policy shift marked by the US infrastructure bill pave the way for more infrastructure financing to Africa?

An aerial view shows traffic on the East Los Angeles Interchange complex, the busiest freeway interchange in the world, in Los Angeles, California, U.S. August 10, 2021. Interstate 5 (I-5), Interstate 10 (I-10), U.S. Route 101 (US 101), and State Route 60 (SR 60) all converge at the East Los Angeles Interchange. Picture taken with a drone. REUTERS/Bing Guan - RC2J2P9AMJ60

Image: REUTERS/Bing Guan

Annalisa Prizzon
Senior Research Fellow, ODI
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Infrastructure

  • COVID-19 has highlighted urgent infrastructure gaps around the world.
  • The US infrastructure bill represents an ambitious effort to expand and update infrastructure in the country.
  • It also could inspire development finance focused on infrastructure in Africa.

A major crisis can help make what was unthinkable just a year ago a reality. Many governments had to take unprecedented measures to protect jobs and boost economic activity, mitigating the impact of a prolonged and far-flung COVID-19 crisis.

One such effort is the ambitious $1 trillion infrastructure bill in the US, which recently passed the Senate and now heads to the House of Representatives.

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What the bill would mean for the US economy

China, the European Union and Japan all announced fiscal stimulus packages in response to the COVID-19 crisis in the first few months of the pandemic. Infrastructure investment was a prominent component. The US infrastructure bill is also much needed. Public spending on water and transportation-related infrastructure in the US has reached a 30-year low in 2017 at 2.3% of GDP. There is a significant gap in the US between spending commitments and estimated public infrastructure needs and an urgent demand for upgrading and expanding the current transport system.

The infrastructure bill would do just that: it adds an additional investment of $550 billion in federal spending over the next five years – on top of $450 billion already approved in the annual budget. The bill covers what is traditionally referred to as hard infrastructure – the power grid, roads and bridges but also public transport like airports and railway networks.

But it also stretches to improving access to broadband and clean water. The investment of the infrastructure bill would generate new jobs - the US Council of Economic Advisers calculated that each $1 billion of transportation infrastructure investment can support 13,000 jobs for a year. It would reduce transport costs, improve public transport and contribute to a green recovery strategy.

This bill doesn’t come without risks though. First, inflation might rise (but spending is spread over a few years). Second, pressure on future public sustainability could mount. This would require Congress to raise the debt limit in the short term. In the longer term, however, if well invested, the infrastructure bill would boost the domestic economy at large, generating additional government revenue to help foot the initial bill.

What it would mean for foreign policy and development cooperation

Beyond these numbers, the infrastructure bill signals a landmark shift in economic policy. As the FT pointed out, it shows that democracies can deliver ambitious investment plans, and not always be in the shadow of other economies.

But the shift in economic policy should also extend beyond the US borders, to US foreign policy and its development cooperation. As an example, the African continent needs a major boost in infrastructure investment. Nigerian President Buhari recently asked the US for "a comprehensive partnership to close the disparity between economic and demographic growth”, especially on infrastructure investment.

Before the COVID-19 crisis, the AfDB estimated Africa’s infrastructure needs to be $130–170 billion a year, with a financing gap in the range of $68–$108 billion. Africa also entered the COVID-19 crisis with less fiscal space than before the 2008-2009 global financial crisis.

In July 2021 in Carbis Bay, G7 members backed the the US Build Back Better World (B3W), a new global infrastructure initiative for clean and green growth. This was on top of the commitment across G7 members to channel $80 billion to the private sector in Africa in the next five years. Many commentators have dubbed it an initiative to balance the influence of China on infrastructure development, particularly in Africa.

Despite the commitment made in the G7 communique in July, very little detail about this new global infrastructure initiative has emerged so far. There should be a commitment on financial volumes and their sources and clarity about beneficiaries and the division of labor and roles between G7, their development finance institutions and multilateral development banks. Development finance institutions – such as the US International Development Finance Cooperation – should boost their lending and government shareholders should expand the capital of these institutions.

Similarly, G7 members should increase the capital of multilateral development banks (MDBs) – such as the International Bank for Reconstruction and Development (IBRD) – by financing new capital increases over the next few years and committing to a larger envelope to the ongoing replenishment round of the International Development Association (IDA).

Investing in MDBs offers good value money. For example, since 1944, the World Bank’s IBRD window had lent over $700 billion and generated $55 billion in net income by 2018, based on shareholder capital of only $16.5 billion – 46 times leverage, compared to between 0.3 and 22 times for blended finance. Since 1944, the US has paid in a total of under $3 billion in share capital – less than 20% of the USAID’s annual budget.

Ambitious but vague initiatives are at the risk of never taking off. The Biden-Harris administration should not waste such momentum created on its domestic infrastructure agenda to boost much-needed infrastructure investment in African countries.

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