Transport In Africa Still Provides An Infrastructure Investment Opportunity
While the African energy sector has been the focus of infrastructure investment in recent years, transport remains an important investment opportunity on the continent.
Foreign investment in sub-Saharan Africa’s energy sector is at all-time highs. Propelled by the United Nation’s goal to achieve modern energy access for all by 2030, international donors are aggressively targeting spending towards electrification in sub-Saharan Africa.
These focused spending efforts are furthered by government efforts (i.e., Power Africa in the U.S., Belt and Road Initiative in China) to encourage corporate and private equity investment in the space.
The emphasis on electrification in sub-Saharan Africa, which is at about 35 percent—well below any other part of the world—, is captured by a few noticeable statistical trends.
First, aid to the power sector increased nearly six times despite relative lack of movement in Western aid commitment to sub-Saharan Africa. Secondly, committed private equity capital is now in the multiple of billions, yet China’s rapid boost in African energy investment underwrites one-third of all new power plants in the region. Third, sub-Saharan African governments today underwrite less than one-quarter of the spending in the power sector.
All this power spending is great, but it sadly eclipses the discussion that is necessary for transport investment in the region.
Investment in the transport space has trailed off in recent years, with sub-Saharan Africa being the only region in the world to see a decline in road density over the past 20 years. That mere fact can be coupled with several other aspects of sub-Saharan Africa to highlight the underinvestment (and as a result, opportunity) in the region.
Travel by road accounts for more than 80 percent of passenger and freight travel. Road network are essential to connectivity to seaports and central to connectivity to Africa’s more rural areas.
Only roughly 30 percent of the road network in sub-Saharan Africa is paved, of which 50 percent of the 30 percent is actually in good condition. West Africa performs the worst in this area with the lowest road density and road quality in the region, compared to northern and South Africa.
Only half of sub-Saharan African countries have road funds to support investment in new roads and upgrading existing roads. Increased financing accordingly is necessary to support the investment in new-build and maintenance road projects.
Simple innovative measures, such as truck-only lanes, coupled with increased bus transport could go far in the region, both for managing rising volume and economizing time.
Rail is an odd conundrum in Africa. Most railways lines were built during colonial times by mining companies to connect mineral resources to the ports. A little more than 80% of that network is operational, with a lesser percentage actually in good condition.
Many older rails were destroyed by war (during colonial times for independence), natural disasters, and overall natural decline due to lack of maintenance funding. Most countries survive on low-speed, small-scale networks.
That said, the reality of the situation in most countries, excluding South Africa and those in northern Africa, do not transport enough freight per annum to finance growth via revenue. The situation creates a catch-22 of whether investment is necessary to bump up volume or will demand rapidly grow first to support increased rail supply.
Ask many African businessmen and they will simply say that they don’t use rail because it is not an option. Some countries, in particular Ethiopia, invested upfront to facilitate more trade by rail with the new railway from its capital Addis Ababa to Djibouti. Other countries should be taking notice.
Ports in the region are central to future trade in Africa. Yet the data suggests a long way forward for the region. Africa possesses approximately 95 major ports along with a number of smaller ports for fishing and tourism. Yet Africa handles a little more than 7 percent of the global seaborne cargo traffic and under 5 percent of the global container traffic.
A few countries in the region have large shipping registries. Liberia, for example, possesses the second largest registry globally behind Panama, with nearly 220 million dead weight tons and about 4,170 vessels in 2017, which amounts to 12 percent of the global ocean going fleet.
None of the ships registered in Liberia have local domestic owners, which underscores the financial (let alone strategic) opportunity that is evading sub-Saharan Africa. As ports age out in the market, more money will be imperative to new build growth as well as updating outdated equipment and facilities.
Changing the course of transport investment
Transport infrastructure in the region requires more large scale investment which many sub-Saharan African governments likely cannot sustain over the next several years. Co-financing within the development space and with other multilateral institutions could help project development in the region.
The Africa Export-Import Bank (Afrexim Bank), African Finance Corporation (AFC), and African Development Bank (AfDB) are largely pushing this strategy into the market. But more can be done here, particularly with other major countries such as China and India, to encourage local multilateral institutions to increase involvement in these large scale projects that benefit all sides (considering exports are growing in these same countries).
Creative financing tools will also be necessary for road networks and the less exciting projects. Some investors have suggested that Toll-Operate-Transfer (TOT) models could be attractive, with the lessee operating and maintaining roads already built and charging a toll in the set time period.
Increased funding from TOTs could add funds for constructing new roads and highways. More investment trust and public-private partnerships (PPPs) would also help to facilitate TOTs as well as co-financing on transport projects.
Although innovation is key to boosting investor excitement in the space, the basic concerns still apply. Financing ideas will need to address the conspicuous challenges in aligning risks and returns between public and private parties as well as finding the right symmetry between available financing, the type of financing, and ensuring viable and bankable projects get first priority.
The power sector in sub-Saharan Africa faced a similar crossroad only several years back.
Today the governing and financing mechanisms have improved and been backed by private and public players, so much so that the growth trajectory in the space rapidly changed. Transport requires a similar theoretical, political and physical transformation to keep pushing sub-Saharan African countries down the growth pathway.
Kurt Davis Jr. is an investment banker with private equity experience focused on Africa and the Middle East. He earned an MBA in finance, entrepreneurship and operations from the University of Chicago and J.D. in tax and commercial law at the University of Virginia’s School of Law. He can be reached at email@example.com.