July 11th marks world population day. The United Nations Population Fund leads this annual day dedicated to raising awareness of population issues. This year is significant. It marks the countdown to a record 7 billion global population.
Africa has also reached a milestone of 1 billion with one of the largest youth populations in the world – 50% of Africans are 16 years old or below. This growing demographic is expected to shift the development focus of many African governments to job creation and improved access to critical services such as water and electricity.
In Lions on the Move, a groundbreaking study by McKinsey, the authors note that Africa’s working age population would grow from 500 million to 1.1 billion by 2040, a figure that is expected to outpace that of China and India.
If managed properly, this shift could boost African competitiveness. Rapid job creation will be one of the main challenges to achieving this potential. Failure to achieve adequate job growth could lead to discontent and political upheaval on the scale that Egypt and Tunisia have experienced in North Africa.
“Political uprisings in Africa have historically been caused by stolen elections and government mismanagement. We’re now seeing a notable trend. The recent youth movements in many countries is placing pressure on governments to do more, efficiently and quickly,” observed George Otieno, the CEO of ATI.
The services and consumable goods sectors are expected to account for a majority of future job growth on the continent. Given that currently some 40% of African people live in cities and produce 80% of the continent’s GDP more spending will be needed for skills development and improved infrastructure and services to attract companies in the service sector.
In several African countries, the projects that the African Trade Insurance Agency (ATI) has insured will help address some of these important challenges facing governments. In one such partnership with housing developer Shelter Afrique, ATI insured projects valued at close to $30 million which has built much needed housing in several East African countries. With shortages in housing units ranging from 1.2 million units in Tanzania to 150,000 units per year in Kenya, these projects are placing a dent in the housing shortfall while also creating hundreds of jobs.
The term “energy poverty” has been used to describe populations with a lack of access to reliable energy sources and reliance on traditional biomass for cooking. According to the UN’s annual energy index, The World Energy Outlook 2010, just 31% of Africans have access to electricity while 80% rely on biomass for fuel supply. Africa lags behind the rest of the world and even developing countries in indices that measure the access to electricity (see figure 1: Impact to unreliable infrastructure, World Bank, 2007).
Figure 1: Impacts of unreliable infrastructure (World Bank, 2007)
Lack of access to energy is far reaching. It impacts on education – students require light to study; health issues – poor refrigeration can cause food to spoil; export potential – electricity can provide the means to create value added on some exports leading to increased foreign exchange and capital; and foreign direct investment – investors will be less likely to do business in a country that cannot provide access to reliable sources of energy.
The UN estimates that $36 billion a year will be needed to achieve universal access to energy and clean cooking facilities, which is well below 0.5% of global GDP. Africa will stand to gain the most from this investment because its citizens suffer disproportionately from low access to energy.
In the first half of 2011, ATI insured over $285 million worth of energy projects in Burundi, Tanzania and Uganda. In Burundi, the project will help to revamp the country’s distribution infrastructure. In Tanzania, ATI’s support is helping to diversify power generation away from unreliable hydro-based energy that will help to decrease the volume of power outages, which can run up to 14 hours a day during droughts. And in Uganda, ATI insured a project that will help to raise the low rate of electricity penetration in rural areas, which stands at just 10%.
Another challenge to jobs generation on the continent is lack of access to financing in the critical SME sector. Banks are currently more risk averse, tightening financing requirements that negatively impact many SMEs. The World Bank’s IFC estimates that there are between 30 and 37 million SMEs in Africa that are financially underserved, representing a gap in credit financing of between US$140 and US$170 billion. With a 75% contribution to employment in Africa, SMEs play a significant role in its development.
In Southern Africa, ATI supported two projects in the critical services sector which will impact positively on SMEs. In Zambia, ATI insured a project that facilitated a local investment company’s access to financing and in Malawi ATI covered a project that supports the burgeoning banking, retail and tourism industries.
Without insurance it is arguable that many of these projects would not have progressed and thousands of jobs may have been lost. Insurance provides comfort to the private sector that their business interests will be protected. “The challenge for risk insurance in Africa is education. Not enough is known about the benefits,” notes Otieno.
As Africa continues down the path of urbanisation, increased population growth and a demographic that is largely comprised of youth, it will need to develop at a pace that satisfies the often impatient timeline of generation Y and those that follow. Risk insurance can play a role in attracting investments, increasing intra-regional trade, freeing up credit and creating hospitable environments for business to flourish. Ultimately, it will be up to African governments to tap into this potentially valuable contribution to development.
