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
40 - CEC July 2018
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