Inside the World Bank’s gamble on ‘digital economies’ in Africa

By Sophie Edwards // 10 May 2018

 

As the proliferation of technologies risks leaving Africa further behind, the World Bank is betting on “digital economies” as a way for the continent to leapfrog over old development pathways. But as the world grapples with the potential consequences of rapid technological change, even insiders say the strategy is a gamble.

Launched by the World Bank and International Finance Corporation last month, the new strategy seeks to help African governments follow in the footsteps of countries such as India and China, by capitalizing on the billions of online interactions that take place every day.

While investment in the area has historically been weak, a Devex analysis found that as of March 2018, approximately $2 billion worth of projects awaiting approval in the World Bank’s pipeline could fall into the category of Africa’s digital economy, including projects focused on public policy, service delivery, and skills development.

Discussions are already underway with a number of African governments — and pilot projects are set to be announced at the World Bank meetings in October.

“Fundamental change is taking place in virtually every industry … [and] supply chains are being disrupted,” Atul Mehta, director at IFC, told Devex.

“The traditional path to development is probably going to get disrupted … But the digital economy potentially offers an alternative.”

The strategy kicked off during the bank’s Spring Meetings in Washington, D.C., with a high-profile event that brought together African entrepreneurs and investors, as well as LinkedIn Chief Executive Officer Jeff Weiner, and Nigerian businessman and philanthropist Tony Elumelu.

Bank insiders admit the approach is shrouded in uncertainty, but say it could be the continent’s best chance for success.

“The stakes are high,” stressed IFC chief Philippe Le Houérou, speaking at the event.

“We cannot afford to wait and see how the new model [of development] evolves and then join the gang, because you may fall behind — and then it will be much harder to catch up.”

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The problem

As the traditional development trajectory from agriculture to manufacturing to services is disrupted, experts warned that African countries will need to find an alternative pathway.

Technology is part of the problem, as the shift toward automation threatens to cut low-skilled manufacturing jobs. But it could also be part of the solution: A study by Deloitte predicted that expanding internet access in Africa to match levels in high-income countries could enhance productivity by as much as 25 percent, generating $2.2 trillion in gross domestic product and more than 140 million new jobs.

India is often held up as the poster child for the digital economy, which IFC defines as “the economic activity arising from billions of online interactions every day between people, businesses, governments, machines, and processes.” Indian Prime Minister Narendra Modi has set his sights on a trillion dollar digital economy capable of generating jobs and economic growth both within India and for export.

However, while Africa currently has the fastest growing proportion of internet users, it still has the lowest levels of internet access in the world, with 75 percent of the region’s population offline, according to the International Telecommunications Union. Of those online, the majority connect via their mobile phones and do not have access to high-speed services.

The lack of connectivity infrastructure, including reliable electricity, is a major barrier to internet expansion, along with protectionist government policies and issues of affordability which make the sector unattractive to investors.
The World Bank has been working to address these issues for a while, but the new digital economy strategy marks a greater and more holistic push to get African governments to embrace the digital boom — or risk being left behind, IFC’s Mehta said.

Although the best alternative to the traditional development pathway is not yet clear, he cited a precedent in the mobile phone revolution that swept across the continent in the past decade, leapfrogging over old technologies such as landlines. The World Bank and IFC were early backers of mobile phones in Africa despite skepticism from some parts of the institution, he said, and the gamble paid off.

While the hope is that the same will be true for the digital economies agenda, the World Bank and IFC will take a similarly cautious approach as it did with phones, he said — testing the model in a few countries and assessing take up, before scaling accordingly.

The strategy

The strategy consists of three foundational elements to support African governments in creating the right conditions for the digital economy.

The first involves strengthening digital infrastructures, such as broadband cables and mobile networks, and building toward universal internet access. According to Omobola Johnson, honorable chair at the Alliance for Affordable Internet and Nigeria’s former minister of communication technology, infrastructure remains the biggest hurdle to connectivity in Africa. It is a challenge that will require mobilizing major sums of money from both the private sector and government, she said, potentially via multilateral development banks as “core catalytic funders” to “crowd in the others.”

An estimated $10 billion a year is needed to close the universal access gap, according to the latest figures from the World Wide Web Foundation, yet multilateral development banks have only invested 1 percent of their total commitments to ICT projects since 2012.

The second element of the strategy involves building out government and private sector “platforms” to operationalize the benefits of the digital economy — for example, expanding access to financial services through fintech, and enabling e-commerce and digital payments. As part of that, the World Bank wants to expand digital identification. An estimated 1.1 billion people live without proof of identity, something the bank is already working on.

The third pillar of the strategy works around supporting tech startups and entrepreneurs to create jobs, and develop new products and services for the African market.

Since the digital market in Africa is still nascent and plagued by challenges, it offers an ideal “test case” for IFC’s so-called “cascade” approach, which requires the organization to go into risky environments and build markets, according to Mehta.

“Where traditional IFC thinking is that you go and help the private sector do what it’s already doing better … here, it is more about shaping the direction in which the economy develops, because there is no market, so you have to start at first principles,” he explained.

Creating new digital markets will require the World Bank and IFC to develop a “set of new tools,” Mehta said, aimed at “bridging that gap between commercial and non-commercial money,” in order to get the private sector to invest in projects that have no immediate commercial payback — or which serve those unable to pay.

Blended finance is one of the main instruments IFC will deploy, but Mehta said the institution will need to be careful to ensure these tools do not distort the market.

“The subsidy part must be minimized … and concessionality has to disappear over time,” he said.

While it is hoped the private sector will be the driver of the digital economy, “the government has a lot to do in terms of facilitating and putting in place the enabling policies and regulations,” said José Luis Irigoyen, senior director for transport and information technology at the World Bank.

This is where bank expertise and loan financing come in: Its ability to play a “convening and facilitating role” and to “forge partnerships and risk sharing between public and private partners” would be especially important, he finished.

Mexico’s Red Compartida or “shared network” project is a prime example of the World Bank and IFC working together to promote financing and remove barriers. The project is building an open access, wholesale telecom network, that covers the majority of the country and can be rented by telecom companies, thereby cutting down costs and expanding coverage. The head of the project attended this year’s World Bank Spring Meetings  to brief African leaders.

Irigoyen also mentioned the “dig once” policy, which mandates the inclusion of broadband pipes during the construction of other infrastructure, an approach it has been urging African governments to adopt. So far, 8,228 kilometers of fiber optic cable have been laid along bank-financed energy transmission lines in Africa, he told Devex.

Supporting entrepreneurs

Once the infrastructure is built, investment needs to flow to tech entrepreneurs, according to Johnson, who is also a senior partner at TLcom Capital, a venture capital firm investing in technology companies in sub-Saharan Africa.

“When we talk about the digital economy it’s about building businesses on top of this digital infrastructure … There are lots of entrepreneurs [in Africa] doing interesting and innovative things, but when it comes to the capital required to grow their businesses it really takes them too long to find,” she said.

Investors are missing out on the “huge untapped market” of African tech companies, Johnson said — partly because many African entrepreneurs “don’t speak the language required for investment,” which is where the bank’s strategy to support incubators and accelerators could help.

It is also because African investors remain risk averse and tend to prefer investing in “something you can touch and see,” such as real estate over technology, which “is still a very new thing for the people who have capital in Africa.”

Here, the multilateral development banks could help with a shift in thinking, the former minister added.

IFC has been investing in the enterprise ecosystem in Africa through direct support — such as the recently announced $8.6 million equity investment in Kenyan startup “Africa’s Talking” to scale its model providing software developers with technology infrastructure and support.

It has also seeded investment in venture capital funds to support tech companies across the continent, including helping Partech Ventures launch a 100 million euro ($118.5 million) fund, which is likely to become the largest venture capital fund for digital technology startups in sub-Saharan Africa, said Mehta.

Developing digital skills

The dearth of highly-skilled tech developers on the continent poses another challenge to the digital economy strategy, according to Seni Sulyman, vice president of global operations at Andela, which trains African software developers “to bridge the divide between the U.S. and African tech sectors.”

“People do not believe that Africa is a place where you find high-end software developers,” he said.

While global tech companies are in desperate need of human capital, he continued, they don’t see Africa as a viable place to recruit from, let alone house their business. Considering the continent’s rapidly growing youth population, this is a missed opportunity.

The World Bank and IFC strategy discusses promoting digital skills through mentoring, angel investors, incubators, accelerators, office co-working facilities, and venture capital funds. One example is the IFC fund that supported Andela with early-stage capital, allowing it to build its highly exclusive training program for Africans as “technology leaders,” who have gone on to work for top international companies. Google also recently signed a partnership with Andela to train 15,000 Africans in digital skills.

“By showing that one of the most challenging parts of the tech ecosystem can be done by Africans at scale,” Andela makes the case for additional investment in the continent and encourages other companies to set up there, Sulyman said.

“Capital always follows talent,” so increasing the tech talent pool will attract follow-on capital and investment with digital technology acting as “the beachhead,” he finished.

But the World Bank’s gamble on building digital economies in Africa comes with a number of risks. As resources are diverted to the cause, not everyone is convinced the region’s digital momentum can be sustained, or that the challenges of limited internet access, poor infrastructure, and low average purchasing power can be overcome.

Fears that technological advancement will only serve to displace more jobs also persist. A digital economy could widen inequality further, if not managed with an eye toward inclusivity, Mehta explained. So it is important that it serves African consumers — and that tech companies, engineers, their products, and profits, remain largely within the continent.

“As long as you’re setting up the business to cater to the African consumer in Africa that’s good.  What’s bad is if the businesses are not being developed for the African consumer … Or if all the profits are being sucked out of the country, that’s equally bad,” Mehta said.

This is why the bank’s strategy places such an emphasis on creating “entrepreneurial ecosystems,” he continued, since “you want the money to revolve in that ecosystem in the same geography.”

There are also concerns about cybersecurity and data protection, as highlighted by the recent Facebook scandal. Ibrahim Mayaki, chief executive officer of the New Partnership for Africa’s Development, wrote that national legislation must keep pace with the transferral of citizens’ data online, and the growth of internet businesses.

For Mehta, however, the “more fundamental risk” for Africa, which outweighs all of these, is being left behind.

“Given that no one has a crystal ball saying exactly how the world’s going to develop, you want to at least give yourself a chance — so you can have this alternative path to development,” he said.

World Bank’s Irigoyen agreed: “Africa has a lot to gain, but also a lot to lose if they are not part of this effort.”

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 Sophie Edwards is a reporter for Devex based in London covering global development news including global education, water and sanitation, innovative financing, the environment along with other topics. She has previously worked for NGOs, the World Bank and spent a number of years as a journalist for a regional newspaper in the U.K. She has an MA from the Institute of Development Studies and a BA from Cambridge