BUILDING UP HOPE - JSE MAGAZINE

BUILDING UP HOPE

Billions of dollars are needed over at least the next decade to rectify deficiencies in sub-Saharan African infrastructure. Where will the money come from?

BUILDING UP HOPE

Don’t mess with Africa – not anymore. Sceptics may point out that the continent accounts for 12% of the world’s population, but only generates 1% of global GDP and just 2% of world trade. However, consider that according to Standard Chartered Bank and others, Africa will grow by 7% per annum over the next 20 years, outpacing even China.

The IMF says Africa had six of the 10 fastest-growing countries in the world between 2001 and 2010, and that between 2011 and 2015, seven of the 10 fastest-growing countries will be African. The base may be low for most African countries but momentum, like compound interest, can be a powerful force.

On the bright side, Africa’s traditionally disappointing figures on economic output and trade have been seen for some years as a potential long-term opportunity by investors. Add to this the fast-growing middle class and the case for a boom in infrastructure, the essential underlying lever for sustained economic growth, becomes compelling.

There is a potential upside in virtually every direction. A World Bank study on African infrastructure found that the substandard levels of sub-Saharan Africa’s electricity, water, roads and ICT reduces economic output by two percentage points a year and slashes business productivity by as much as 40%. Various studies have indicated that nearly $100 billion a year is needed over at least the next decade to rectify the situation in sub-Saharan African infrastructure.

About two thirds of the $100 billion is needed for new infrastructure and about a third for maintenance of existing infrastructure. Action continues to accelerate. The Deloitte on Africa: African Construction Trends Report 2013 found that some $222 billion was being invested in African infrastructure on known projects at 30 June 2013. According to the report, top sectors (rated by value) were energy and power (36%), transport (25%), mining, real estate and water, followed by oil and gas.

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Development is strongly concentrated in Southern and East Africa. Of projects underway, 38% were located in Southern Africa, 29% in East Africa, 21% in West Africa, 7% in North Africa and 5% in Central Africa. Bigger projects include Tanzania’s Bagamoyo port, the Mombasa to Mabala standard gauge railway line, Ethiopian Renaissance dam, Addis Ababa-Djibouti railway, the Lamu Port-South Sudan-Ethiopia Transport Corridor project, Ugandan Farm-down Geothermal Plant, Ghana’s Akyem mine project (Newmont) and the Ghana National Gas project.

Where does all the funding come from? According to Deloitte’s in-depth analysis, 16% is funded by international development finance institutions (DFIs) and 13% by African DFIs. Some 7% is co-funded by international and African DFIs, while 8% is funded by domestic governments.

Some 15% is funded by Europe and US based stakeholders, 10% by Chinese stakeholders, 11% by private domestic investors and 7% by foreign institutional investors. The balance of funding is provided by Indian based and intra-African funding structures, with a portion of funding data categorised under ‘not disclosed’. DFIs provided an aggregate of 36% of funding.

On paper, at least, there is no shortage of funding sources. The African Financial Markets Initiative (AFMI) noted that SA has a large and sophisticated investor base amounting to over $600 billion, more than other African countries combined. Over the past decade there has been significant progress in markets as witnessed in Kenya and Nigeria, as governments have shown, ‘a willingness to reform’, as stated by the AFMI.

The African Development Bank (AfDB) is playing a significant role in leading the charge to finance the infrastructure build on the continent. It has established the African Infrastructure Financing Facility (AIFF) ‘aimed at mobilising significant resources in the most targeted and cost-effective manner for the bank’.

The AfDB’s targeted sources of capital include African central banks, which are estimated to preside over more than $500 billion in foreign exchange reserves, and international capital markets (pension funds, insurance companies, high net-worth individuals and sovereign wealth funds) that ‘have an established appetite for African risk’.

The AfDB has taken specific steps in the field of infrastructure financing. Given the reality that physical infrastructure projects inevitably require large-scale and long-term financing in a mix of local and foreign currencies, the AfDB has made significant efforts to developing ‘infrastructure project bonds’ (IPBs).

For these specialised instruments, servicing of principal and interest is tied directly to the cash flows of a given project. A number of emerging countries such as Malaysia, Korea, China, Chile and Brazil have been deploying IPBs for some years. The AfDB sees these bonds as a more efficient form of financing as they ‘reflect the long-term nature of infrastructure financing, which is often not available from the banking system. They also bring more transparency to the transaction, and to the financial market as a whole’.

It could be some time – years – before banks and stock exchanges warm unequivocally to Africa’s infrastructural funding needs

SA and Kenya have used variants of IPBs for some years, while SADC, the Common Market for Eastern and Southern Africa and the East African Community are considering issuing regional infrastructure bonds. However, there are still mountains to climb.

According to a report by the Programme for Infrastructure Development in Africa (PIDA), titled Transforming Africa Through Modern Structure, the total estimated cost of implementing all the projects identified by PIDA as opposed to merely addressing projected infrastructure needs by 2040 is running into $360 billion. PIDA’s Priority Action Plan (PAP) envisages spending $68 billion during the period to 2020. PAP comprises 51 priority infrastructure back-bone projects and programmes in energy, water, transport and ICT.

PIDA estimates that ‘domestic sources [public or private] will meet 50% of the cost by 2020, with the share growing to 66% by 2030 and as much as 75% by 2040’, states the report. Official development assistance (ODA) will continue to play an important role, but will remain insufficient and will need to be used innovatively to leverage investments, especially from the private sector.

It could be some time – years – before banks and stock exchanges warm unequivocally to Africa’s infrastructural funding needs. Meanwhile, niche private equity funds are, in some senses, leading another charge of funding. A number of private equity funds are targeting key areas such as electricity and transport infrastructure (roads, ports, rail and airports).

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In recent months, Harith General Partners has been involved in fund-raising for an infrastructure fund targeting $1.2 billion, aimed at investing in projects across Africa. Sithe Global, a company majority-owned by a fund managed by Blackstone, implements large-scale, socially responsible power generation projects. It recently helped develop the Bujagali hydropower project in Uganda, the largest of its kind in Africa, almost doubling electricity supply in the country.

Most recently, Reykjavik Geothermal, working in partnership with Sithe Global, announced that it had reached an agreement with the Ethiopian government to build the country’s largest independent power project, utilising geothermal energy, at a projected cost of $4 billion.

There is no doubt that infrastructure bonds may come into their own across the continent. It’s fair to say that, overall, the private sector remains the main target for financing the infrastructure boom in Africa.

The AfDB sees it as imperative for the private sector to be wooed on all fronts in every country across the continent by accelerating a number of key initiatives by continuing to implement financial market reforms; developing increasingly deeper and wider markets for bonds and other financial instruments; fostering an increasingly suitable environment for private-sector activities; constantly re-examining contractual, political and regulatory risks; and ensuring adequate protection measures to stimulate local, regional and international investment in infrastructure bonds.

It is important too that infrastructure development benefits surrounding communities. As Snowy Khoza, CEO of construction company Bigen Africa puts it: ‘The socio-economic benefits must trickle down, for example creating jobs for locals and leading to economic activity around the infrastructure. This leads to capacity building and empowerment, improving the quality of life for ordinary people.’

Africa may be lagging behind much of the world, but it can learn from others’ mistakes and there is great place still for innovation.

By Barry Sergeant
Image: Fredrik Broden/reneeryner.com