Bulls n Bears Entrepreneurship Zone :: Alain Ebobissé: Infrastructure in Africa – investors noticing the commercial opportunities

[Bulls n Bears]

Improved infrastructure is a prerequisite for long-term sustainable growth
and development in Africa. Modern infrastructure will benefit individual
countries and their citizens and promote regional integration and Africa’s
full participation in the globalised economy. Closing the infrastructure
quantity and quality gap relative to the best performers in the world could
increase per capita GDP growth in Africa by 2.6% a year (World Bank, 2017).

Many countries have made substantial progress, but some remain in a
negative cycle. Businesses cannot grow because of poor infrastructure, so
they remain informal and do not pay taxes. Therefore, governments do not
have sufficient revenues to improve the infrastructure these firms need to
progress.

We can reverse this cycle. As infrastructure improves, Africa can
increasingly tap into its vast human, agricultural, mineral, hydrocarbon,
and water resources, increasing employment and government revenues. This, in
turn, will allow governments to finance more infrastructure.

The scene is set. After some recent reversals, key economic indicators such
as GDP growth, capital inflows, and trade are improving. Eighteen countries
have achieved medium to high human development status, and the share of
people living in poverty is falling (AfDB, AEO 2017).

This makes the gaps in infrastructure not problems but opportunities.
Growing middle classes and urbanisation are creating markets for determined,
creative investors. This was proven in telecommunications, where Africa has
become a showcase for mobile phone-based solutions to development
challenges.

To spread this success across the continent, we must leverage all available
finance and improve the enabling environment for projects. Governments have
a major role to play, but so do development finance institutions (DFIs),
private investors, and developers.

The latest estimates on infrastructure funding needs in Africa are
US$130-170bn a year, with a gap of $68-108bn (AfDB, AEO 2018). Most
countries have increased funding, and public funding, including from DFIs,
will continue to play an important role. However, governments have
recognised the need for outside investment, especially from the private
sector. To attract this, they are competing in a global marketplace, so they
must strive for state of the art investment climates.

There have been numerous successful private investments in infrastructure
in Africa in recent years, but the amounts have been small – only $3.4bn in
2016. With strong appetite from developers and financiers and growing demand
there is opportunity for significant increase. In the medium term Africa
should be able to reach the levels of private investment of other emerging
regions such as Latin America, which received over $33bn in 2016.

Institutional investors, both domestic and international, are also ready to
seize the infrastructure opportunity. In a context of low returns on
traditional asset classes, infrastructure is becoming more attractive,
including in Africa where returns can be higher.

The main obstacles to tapping additional financing are an inadequate
enabling environment and a concomitant lack of investment-ready, bankable
projects. To build up the pipeline of projects all stakeholders must play a
role.

First, governments must consistently implement policies creating bankable
sectors. In the power sector, for example, which represents almost 40% of
infrastructure needs, there is significant potential for private investment
in generation and, to a lesser extent, in transmission and distribution.
However, investors need to be assured that they can recover their costs and
earn a return commensurate with risks. Therefore, governments must align
tariffs to costs, ensure the independence of regulators and the solvency of
utilities, and allocate risks to those best able to bear them.

Many countries have been doing this, but we need more consistent sector
reforms across the entire continent, coupled with faster implementation of
projects. Another urgent measure for scaling up private investment is
improving governments’ capacity to organise infrastructure sectors and
structure and negotiate PPPs, using outside advisors when necessary.
However, investors must also do their part. They should take a long-term
view and be proactive, deploying more early-stage risk capital and other
resources to develop bankable opportunities.

The game changer is when enough public and private sector stakeholders
realise that the opportunity cost of delayed or failed project
implementation is too high. They must understand that it is in everyone’s
interest to bring projects to financial close and operations as quickly as
possible. Investors get a fair return, citizens get services, and
governments can highlight their positive enabling environment to attract
additional investment.

Infrastructure projects are, by their nature, long-term and thus fraught
with uncertainty, which can scare off investors. Countries will attract the
most competitive projects when they champion private sector participation by
formulating viable, long-term infrastructure strategies and creating the
enabling environment investors seek.

An important role of governments early in the project cycle is the
allocation of risks, generally through PPPs. The private sector is usually
best placed to hold the financial, technical, construction, and operational
risks, while governments should handle regulatory, foreign exchange,
political, and certain force majeure risks. In countries where sectors are
not yet bankable on a standalone basis, governments should also cover risks
linked to commitments made by their entities involved in projects. Fair
allocation of risks is in governments’ interest. When the private sector is
expected to carry most risks it will price this into contracts or look
elsewhere.

DFIs can also play an important role in mitigating risks, particularly
government related risk. They do this de facto by simply investing in a
project or de jure through partial risk guarantees and political risk
insurance. In general, all parties in a project must seek a balanced risk
allocation consistent with the development stage of the country and sector
in which the project is being implemented.

Improving Africa’s infrastructure is challenging, but it is also an
important commercial opportunity which investors are increasingly realising.
Most governments are committed to improving public services. It is the right
thing to do, and their increasingly educated constituents demand it. With
governments, DFIs, and investors working together, it can happen.—
Howwemadeitinafrica 

 

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