Africa’s Growing Appetite for Infrastructure Expenditure

Keith Boyfield - July 2013


Speed Read
  • The African Development Bank estimates Africa’s infrastructure financing needs US$390 billion by 2024, much of it required for power projects.
  • Nigeria, Ghana, Senegal, Kenya, Namibia, and Zambia have tapped global markets to raise resources for domestic investment
  • A crucial area neglected in the past is the need to invest in infrastructure maintenance since many African projects have failed because of inadequate maintenance expenditure.


Africa is looking increasingly interesting to investors who are searching for attractive total returns on their capital. In the rush to invest in the continent much of this capital has been channelled into oil and gas assets, mines and agri-business projects. However, for the continent to begin to fulfil its potential considerable sums need to be invested in infrastructure, whether it is in the form of physical transport links, telecommunication cables or energy and social infrastructure, notably medical and educational services.

 

According to estimates published by the African Development Bank (AfDB) the continent’s infrastructure financing needs total US$390 billion over the medium term, i.e. by 2024, and much of this capital expenditure is primarily required for power projects. The AfDB is one of the key investors in Africa. In 2012, the Bank committed over US$6.5 billion – with the largest share going to infrastructure (see table). Furthermore, for every one dollar the Bank invests, it estimates it attracts a further six dollars in project funding.

 

 

In total, the AfDB approved US$1. 37 billion last year (2012) in respect of 14 separate power projects with the objective of providing access to modern power for at least 1.2 million households across seven countries. This was equivalent to approximately 21% of its total investment programme. Among specific initiatives is the Bank’s support to the Programme for Infrastructure Development in Africa (PIDA), which includes among its projects Inga, a 40,000 MW power plant in the Democratic Republic of Congo (DRC).

 

In terms of transport AfDB invested US$ 928.5 million in transport and related infrastructure, equivalent to around 14% of its total approvals in 2012. Much of this capital expenditure is targeted at establishing transport corridors, notably in West Africa (Lome-Cinkanse-Ouagadougou); and in Southern Africa (Nicala, Mozambique, to Lusaka, Zambia via Malawi).

 

In water and sanitation, 13 operations with a budget of U$415 million (roughly 6% of AfD’s total investment programme) were approved across the continent, notably through the Rural Water Supply and Sanitation Initiative, the African Water Facility and the Multi-Donor Water Partnership Programme.  These schemes not only improve and enhance sanitation but they also play a vital role in promoting agricultural growth.

 

‘Infrastructure development will continue to be a key imperative’ says Dr Donald Kaberuka, President of the AfDB. In this context he notes that three principles will be crucial for Africa’s structural transformation: political leadership; the degree to which the whole population is embraced within specific economic growth initiatives; and the interconnectedness of the continent’s economies, nationally, regionally and globally.  He identifies one of the major challenges facing the continent as ‘bringing infrastructure projects to bankability’. In this context, Dr Kaberuka distinguishes between projects which only governments can fund and those projects which are specific to the needs of a particular industry, for example the transport of minerals from mine to port; and other projects which are highly attractive to the private sector and may need little support in the form of Public Private funding.

 

Crucial to the delivery of infrastructure projects are experienced and skilled contractors. Bechtel is one the leading companies in this sector and its current operations on the continent extend across Angola, Egypt, Gabon, and Mozambique. Paul Gibbs is the Regional President for Bechtel’s African operations. In an exclusive interview for World Economics Zimbabwe-born Mr Gibbs observed, ‘the crucial thing is to prioritise what one wants to achieve and then incentivise the contractors’. In this context, the Emerging Gabon strategy set out by the President, Dr Ali Bongo Ondimba, and approved by the Gabonese Cabinet has proved invaluable as a roadmap for reform. Similar challenges are faced in countries such as Sierra Leone and Mozambique, where there is an urgent need to develop human capital and the skills base available. This is a prime focus for Bechtel and, as Paul Gibbs points out, training can make a dramatic impact on safety standards, which in turn enhances continuity and delivery performance. Accordingly, Bechtel has established comprehensive training programmes at every level. Fortunately, the primary and secondary school systems in many African countries are of a very high standard.

 

It is worth emphasising that natural resources could finance a substantial part of Africa’s infrastructure development. Many countries have already issued Eurobonds for infrastructure, on the basis of natural-resource revenues. And better infrastructure—including especially access to clean water and proper sanitation, electricity, as well as better roads to markets—can play an important role in reducing poverty.

 

A number of countries are already exploring innovative approaches to raising resources for domestic investment, especially for infrastructure. Nigeria, Ghana, Senegal, Kenya, Namibia, and Zambia have gone to global markets. Their successful example is likely to be followed by others over time. Sovereign wealth funds (SWFs) are also likely to prove a significant source of future funding, not least from the Gulf region. Direct foreign investment by SWF in Africa has surged from US$900 million in 2005 to US$11.42 billion in 2011. Interestingly, an important source of such SWF funding is from Africa itself – Angola, Ghana and Nigeria have all established SWFs in the last couple of years on the basis of tapping their oil and gas export revenues.

One crucial area which has tended to be neglected in the past is the need to invest in infrastructure maintenance. There are far too many examples of grand projects across the continent that have failed to realise their original objectives because of inadequate maintenance expenditure. In this context, there is considerable scope for encouraging competition between service providers to maintain and enhance infrastructure assets. In the past, maintenance was not performed because of excessive charges levied by monopoly suppliers of crucial parts required for major capital assets such as power plants.

Given the impressive record of success associated with recent infrastructure initiatives there is also considerable justification for the argument, deployed for example by Dr Donald Kaberuka, that ‘African’ risk has been overstated. Consequently, both governments and public and private institutions had been paying an unwarranted premium to raise capital. A pivotal factor in managing risk, as Bechtel’s Paul Gibbs notes, is clarifying ownership of a project: who is going to deliver that project and who are the sponsors?  That, of course, is why it is so important to have credible leadership in the management of a project and a record of successful delivery.

 

It will be fascinating to see the extent to which the risk element may or may not be repriced over the next couple of years as investors gain a better understanding of the precise risks and opportunities associated with the numerous infrastructure initiatives planned for the continent.