Africa’s Infrastructure Boom A Boon To Private Investors

Africa’s Infrastructure Boom A Boon To Private Investors

Turkana, a hot and dusty county at the northern tip of Kenya that borders Ethiopia, South Sudan and Uganda is infamous for runaway insecurity – especially deadly cattle rustling from communities living along the border.

But this December it was in the headlines for all the right reasons.

Vestas, a Danish firm whose stock trades on the NASDAQ, broke a sales record courtesy of an order to deliver turbines for a massive project that is coming up in Turkana.

The company announced that it had won a tender to supply 365 turbines for the Lake Turkana Wind Project, the largest wind farm in Africa that is expected to produce 310 megawatts when completed in 2017.

Neighboring Ethiopia is putting up a $475 million electric train while in Tanzania the government is spending $11 billion on the Port of Bagamoyo. These are some of the massive infrastructure projects that are popping across the continent. This is only the beginning.

Billions of dollars are being spent on power plants, ports, roads and railways and a report by financial consultancy PwC says that by 2025, spending on Africa’s infrastructure will reach $180 billion per year.

The report says this massive spending on developmental infrastructure is justified by growing industries such as mining, oil and gas need a strong road and rail network and reliable power, a fact that even Beijing has realized.

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“Africa is rich in a whole range of natural resources, but poor in transport infrastructure. When it comes to hydrocarbons and some raw materials, China faces the opposite situation. The Chinese Government and Chinese state-owned enterprises are looking for solutions. One route they’ve taken is financing massive infrastructure projects throughout the sub-Saharan region,” said the PwC report that was released earlier this month.

Economists argue that the massive projects make sense, adducing evidence that investments made now will yield a strong dividend in future.

Nelson Wawire, chairman of Kenyatta University’s macroeconomics departments, says that a poor roads network is one of the biggest obstacles to food security in Kenya and much needed private investment.

Farmers in Kenya’s coastal region bemoan that the bad roads result in pineapples rotting in farms every season, while their compatriots in the central region have to pour milk, also due to poor roads that result in their produce going bad long before they reach markets.

Wawire said that fixing roads is one way that would boost the average farmer and the effects would also be felt all along the value chain.

Offices or Farms

“If you improve infrastructure you improve the marketability of products and the multiplier effect is big,” Wawire told AFKInsider, adding that there also the need to increase country-to-country linkages in addition to county-to-county linkages.

PwC findings concurred with the economics professor.

“One of the most important factors in Africa’s future development will be increasing cross-border trade, both within Africa and with the rest of the world. That means solid road and rail networks that span regions, and indeed, the continent,” said the report.

Wawire however had a caveat that roads, railways and power investments should go to areas where they will generate a return.

“Is this road going to offices or is it going to farms?”

The elephant in the room is how these projects will be funded, when governments all over the continent are grappling with demands for higher salaries and other social needs.

The answer lies in Public-Private Partnerships (PPS) models which allow private money to fund projects that will benefit the general public.

Analysts say that most projects are being funded by this model and the momentum will accelerate in the coming years.

Renaldo DeSouza, a Nairobi-based analyst, says that the PPP model works because on one hand the mega projects cannot be financed by the government alone and on the other, the double-digit returns the projects promise are a strong incentive to investors.

“This has already started.   It will be a windfall for financiers considering most projects are highly capital intensive,” Renaldo told AFKInsider.

PwC’s report found that for every dollar that goes to infrastructure investment, the same dollar generates between 5 and 25 percent in economic returns each year.

Lake Turkana Wind project is one example.

The African Development Bank, Nedbank (South Africa) are leading a consortium that will fund Africa’s largest wind plant, contributing 80 percent or $533 million of the $761 million the project will cost.