BUSINESS INTEL
Africa’ s infrastructure challenges
By Sandile Hlophe, partner: government and public sector at EY
There is a growing pipeline of infra projects in Africa that the private sector is becoming increasingly involved in at an early stage to ensure they come to fruition.
In what has for the past five years been a weak construction market, funders and construction companies are no longer waiting on governments to complete project feasibilities to open up this pipeline and ensure bankable projects— especially given the fact that the harvesting of many mega projects is dependent on a five-yearly election cycle. One of the biggest challenges in infra development across Africa is the lack of funding. Each of the major economies in sub-Saharan Africa— South Africa, Nigeria and Kenya— has been plagued by economic slowdown issues, currency weakness, and low oil prices, thereby reducing its capability to execute projects— though not its appetite. During the decade up to about 2010, these countries had an infra boom in renewable energy, roads, and sports facilities, but have since experienced a slowdown. For any economy to grow, it requires infra to connect its cities and to connect it with other countries. An economic slowdown typically reduces state revenue, usually without a concomitant reduction in social spending. This significantly hampers the amount of capital available for infra projects.
Government response
We have seen a threefold response by governments across Africa: Firstly, some have embarked on international roadshows to promote their country’ s economic prospects, greater attendance at the World
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Economic Forum, and visits to the world’ s larger capital markets in the US and Europe. The response has been favourable: although Africa’ s GDP growth rate has slowed below 5 %, that is still materially higher than the OECD growth rate. Pension funds have remained interested in funding African infra projects, especially as these are long-term assets that match their need for longer time-horizon investments. Bond markets have also been a fruitful source of capital for African investments for the same reason. However, this type of funding also slows during an economic slowdown, as the liquidity of a pension fund is generally negatively affected, and they seek more liquid investments in cash and money markets. Secondly, African governments have responded by tapping their own domestic pension funds and encouraging participation by their Development Finance Institutions( DFIs). In most African countries, the state is the biggest single employer, and many of these public sector pension funds have broadened their investment mandates to allow infra-type investments of between 5 % and 10 % of their assets under management. In addition, other pension funds and asset managers have similarly broadened their investment mandates to include more infra in their investment classes. DFIs, like pension funds, used to have a country-only mandate, but many— the African Development Bank, DBSA, IDC, and the Nigeriabased Africa Finance Corporation( AFC)— can now invest pan-African into projects up to 10 % or 15 % of their assets under management. Thirdly, there has been a marked increase in collaboration between the public sector, DFIs, and other funding institutions and private sector construction players. The purpose has been to get involved earlier down the value chain to ensure projects meet all the bankable feasibility requirements: viability; how to fund the feasibility; construction; and the mitigation of risk.
A swelling project pipeline
The result of these actions has been a considerable build-up of projects in the pipeline, either at the stage of conceptualisation or feasibility, though not yet having reached the stage of execution. This is primarily due to lack of funds, as there is no shortage of prospective projects. As funding is being released more on a continent-wide basis, infra construction companies are mirroring this trend through a process of mergers and acquisitions( M & A) to extend their footprints across the continent. These are companies that are operating to international standards and becoming increasingly internationally competitive. We have, for instance, seen large cement manufacturers like Dangote Cement and Lafarge moving into new markets. These companies are simultaneously forming partnerships