Connecting Communities: Public-Private Partnerships for Digital Development in Eastern Africa

The World Bank's report emphasizes leveraging private sector investment to enhance digital communications infrastructure in Eastern Africa, highlighting strategic public-private partnerships and innovative procurement methods to bridge the digital divide and promote economic growth. By aggregating demand and mitigating investment risks, the initiative aims to ensure efficient use of public funds and widespread internet access.

In an ambitious effort to transform digital connectivity in Eastern Africa, the World Bank has unveiled a detailed report targeting six countries, Djibouti, Ethiopia, Kenya, Madagascar, Somalia, and South Sudan, highlighting the pressing need for robust digital infrastructure to bridge the significant internet usage gap.

Prepared by CEPA Ltd, with experts Chris Doyle and Jack Kemp at the helm, the study underscores the pivotal role of private sector investment, augmented by public funding and support from multilateral development banks (MDBs). Digital communications infrastructure (DCI), including technologies like fiber optic cables and cellular services, is essential for modern societies, enabling vital services such as identity verification, payments, and data exchange.

Bridging the Digital Divide

Despite some improvements in urban areas, thanks to increased submarine cable connections and new fiber networks, the majority of the population in these regions remains disconnected. For example, as of 2021, only Djibouti surpassed the global average of internet usage, with Ethiopia, Kenya, Madagascar, Somalia, and South Sudan lagging behind. This digital divide is largely due to a market efficiency gap, where the reach and coverage commercially feasible in a fully functioning market are still inadequate. The report outlines strategic interventions to mobilize private capital, emphasizing public-private partnerships (PPPs), government agencies as anchor tenants, and innovative procurement methods like Multi-Round Reverse Auctions (MRRAs). It highlights projects such as the Kenya Digital Economy Acceleration Project (KDEAP), which aims to expand high-speed internet access and improve digital services in education and government, and the Eastern Africa Regional Digital Integration Project (EARDIP), which focuses on enhancing cross-border digital infrastructure.

Ensuring Value for Money

One of the report's key recommendations is to ensure value for money in closing the funding gap. It suggests that aggregating demand for DCI services through government agencies can reduce costs and promote wider adoption of digital services. Moreover, MRRAs can foster competition and drive down subsidy costs, ensuring efficient use of public funds. To address both supply and demand-side constraints, the report proposes measures such as market liberalization, favorable tax policies, and digital literacy training. These interventions aim to boost private sector investment and increase internet adoption among the population.

Managing Risks in Digital Investments

The report further delves into the economic characteristics of DCI investments, noting their large-scale, capital-intensive, and long-term nature. These projects involve substantial capital outlays and construction costs, often ranging from 15,000 dollars to 30,000 dollars per kilometer for fiber optic networks, depending on the terrain. In Kenya, the World Bank has allocated 60 million dollars to extend the backbone network and 90 million dollars to last-mile connectivity, with additional funds directed at connecting government agencies and improving cross-border connectivity. These investments are expected to leverage an additional 100 million dollars in private-sector funding through matching investments. The report stresses the importance of managing risks associated with DCI projects, such as market uncertainties and demand-side revenue streams. It advocates for the role of government and MDBs in mitigating these risks by aggregating demand, offering guarantees, and establishing clear regulatory frameworks.

Unlocking Network Effects

Network effects, another crucial aspect highlighted in the report, involve externalities across different user groups accessing services over DCI platforms. For instance, services accessed by end-users and provided by firms and government agencies can lead to market failures if investors cannot monetize these externalities. Public support is often necessary to correct this imbalance and promote optimal investment levels. The World Bank's report emphasizes the need for well-designed policy interventions to ensure these investments deliver value for money. One proposed strategy is the aggregation of demand for DCI services by government agencies, which can lower costs and enhance service delivery. Additionally, the use of MRRAs is recommended to promote competition among private suppliers seeking government subsidies, ultimately driving down costs and improving efficiency.

Public sector participation in DCI projects is vital, especially in low-income countries where private capital markets are immature, and fiscal constraints are prevalent. The report notes that substantial private sector funding and operational involvement can be leveraged through strategic public finance interventions. These include universal service access funds, subsidies, guarantees, and PPPs. For instance, subsidies can bridge the gap between the required returns for investors and the willingness to pay of households and businesses. In Rwanda, a subsidy scheme for mobile handsets in rural areas demonstrated positive welfare impacts, with a social rate of return of at least 44%. Such initiatives, although less common in Sub-Saharan Africa due to concerns about corruption and administrative capacity, highlight the potential benefits of demand-side subsidies.

The report also discusses the use of public sector demand aggregation as a means to stimulate private capital mobilization. By guaranteeing payments for services, public agencies can reduce the perceived risks for private investors. In summary, the World Bank's report provides a comprehensive strategy for enhancing digital communications infrastructure in Eastern Africa. Through strategic public finance interventions, leveraging private sector investment, and implementing innovative procurement methods, the region can significantly improve its digital connectivity. This, in turn, will drive economic growth, promote inclusivity, and ensure that the benefits of digital technologies are accessible to all.