August 21, 2017

Infrastructure remains a hotbed for investment into Africa

De Buys Scott, Head of Infrastructure Deal Advisory, KPMG in South Africa

Despite poorer than initially projected growth in a number of the fastest growing economies in Africa, largely on account of lower commodity pricing, the continent is still rife with opportunities and infrastructure will remain a hotbed for investment and development activity for the foreseeable future.

Never before have we had such diversity in programmes and infrastructure projects on the go simultaneously in Africa, as we currently do. That being said, there are two critical and interrelated challenges that persist in creating barriers to transformed socio and economic development on the continent – including; affordability vs. bankability.

This is particularly true for massive primary infrastructure projects linked to water, power or transport – as in the past these have been state funded led projects.

With that in mind, it’s been estimated that – on overage – developing countries need to spend 5% of their gross domestic product (GDP) annually on infrastructure capital expenditures to sustain and expand essential public infrastructure.  For many countries unfortunately this isn’t possible and it’s well recognised that Africa has a sizeable infrastructure financing gap, where current spending (approximately US$ 40 billion per annum) pales in comparison to the US$ 93 billion needed annually and over the next decade – as estimated by the World Bank – to overhaul much of Africa’s infrastructure.

Can Africa afford it?

 The reality is that Africa consists of 55 developing countries. While a number of these countries have significant work in progress on infrastructure developments on almost every front; these developments need to be financed and many Governments in Africa face difficult decisions as they try to balance budgets whilst continuing to invest in much needed infrastructure – and prioritisation of infrastructure projects has become mission critical. Also, in countries that are experiencing poorer than expected growth – South Africa, for instance is a prime example of this – there is a growing fiscal deficit that exacerbates the overall problems.

In lieu of this, funding sources are beginning to be managed on a micro level, which is unavoidable but has also lead to wasteful expenditure and subpar procurement processes being given well deserved attention and scrutiny. These are certainly all positive measures – particularly when faced with difficult economic times, however, there is still a substantial shortfall that has to be financed through alternative sources.

Are Africa’s projects bankable?

African Governments have historically relied on donor aid, external borrowing or public private partnerships to finance their fiscal deficits. However, we have reached a point in Africa’s evolution where there needs to be less emphasis (for now) on where the finance will come from and, more on creating a pipeline of bankable projects.

In the power sector, for instance, if we look at the USAID initiative that was recently announced as part of their Power Africa programme; US $1 billion dollars of investment capital was launched to pay advisors to do bankable feasibility studies on infrastructure projects – with the sole aim of improving the quality of these deals so as to attract better investments. This is the biggest initiative of its kind and it will certainly be a game changer in Africa’s power project development – where there is already talk of the EU matching USAID’s commitment.

Additionally, I don’t doubt that the decision by Sustainable Development Investment Partnership (SDIP) to form a dedicated hub focused on infrastructure delivery in Africa was also influenced by the design to see bankable projects come to life. As was announced at the World Economic Forum (WEF) on Africa meeting in Kigali, Rwanda; this hub aims to mobilise funding through a “blended finance” approach and in so doing will play an active role in ensuring the development of 16 African infrastructure projects with a combined targeted worth of over $20-billion.

Forward looking trends…

If we look at basic country developmental principles, while primary infrastructure in water, power or transport continue to receive the bulk of investments currently, we are expecting that the next wave of bankable projects will be sourced in the secondary infrastructure areas such as education, housing, healthcare, and communications.

As we continue to monitor trends that influence investments into infrastructure across Africa, we have seen that Governments have become more interventionist in the area of infrastructure and are taking action to unclog the pipeline – and introducing infrastructure-specific development plans so as to strike the right balance between economic and social infrastructure needs.

Added to this, we anticipate that Governments in certain countries will look to privatisation (or part sale) of certain state assets – as not only would this provide a cash injection for the fiscus, but the opportunity to improve on asset performance and service delivery with the involvement of private enterprise.

Currently, we are living through an age of unprecedented investment in infrastructure and capital projects on the continent, however, there is no denying that Africa still has a massive infrastructure deficit. Therefore, continued investment in infrastructure and capital projects is unequivocally vital to long-term economic growth and to some of the greatest challenges of today – such as meeting energy demand and coping with the impact of urbanisation. In every sense, infrastructure projects of today are shaping the Africa of future generations.

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