Finding Opportunities In African Infrastructure Investment
Infrastructure is a hot topic in Africa, and rightly so with glaring examples of insufficient electrification.
A poignant one is the conclusion that the Dallas Cowboys’ AT&T Stadium in Arlington, Texas, consumes more electricity on game days than all of Liberia. Persistent inefficiencies faced by industries such as agriculture make it clear that there is ample opportunity for investment on the continent.
A 2010 World Bank report estimated that poor infrastructure curbs African economic growth by 2 percent per year and business productivity by 40 percent. One study estimates that the broader returns to infrastructure investment can reach 50 percent when accounting for GDP growth, while the World Economic Forum found that each dollar spent on infrastructure returns anywhere from 5 percent to 25 percent.
Are these figures for real?
There are issues with these kinds of measurements. Romain Py, executive head of transactions with African Infrastructure Investment Managers, said returns “defined as GDP against costs… (are) subject to heavy interpretation and (do) not seem to be particularly linked to the specific value created by the project/investment itself.”
However, the broader gains to infrastructure remain a key focus for development agencies, chiefly because of the qualitative outcomes of those hard-to-measure benefits.
For example, one study found that infrastructure improvements can enhance competition, lowering prices for consumers and making it easier for new firms to enter into the market. New firms beget more economic activity, and eventually more economic growth.
But private investors prefer to stick to the measurable outcomes — which are also compelling. Py said, “We take into consideration the environmental and social benefits, but more on a qualitative basis.”
This strategy is shared by Emile du Toit, head of infrastructure investments with Harith General Partners and chairman of the Southern African Venture Capital and Private Equity Association. When it comes to economic returns, he said, the pure financial return on infrastructure projects in Africa range between 16 percent to 25 percent, depending on the sector, country, structure, and risk.
Investment growth in context
In light of the opportunities, both socially and for investors, there has been a wave of new infrastructure investment on the continent. For example, 58 percent of West African industry insiders surveyed by Pricewaterhouse Coopers said they plan to increase their infrastructure investments by more than 25 percent in the coming period, a figure echoed by East Africans (53 percent) and Southern Africans (40 percent).
These kinds bullish numbers are staggering — but they require context.
Africa currently represents only 2 percent of the global infrastructure market. In 2012, Ernst & Young determined that there were more than 800 active infrastructure investments in Africa, to a total value of $700 billion. PwC estimates that annual infrastructure spending in Sub-Saharan Africa will only reach $180 billion by 2025.
By comparison, Europe spent $741 billion in 2012, chiefly on road, rail, and airports.
That means the opportunities are ample, if you know where to look.
Two key areas are transportation and power. Both are commanding the largest overall budget allocations from investors surveyed by PwC, at 36 percent and 30 percent, respectively.
The returns to roadwork developments have the potential to be breathtaking — not just for investors but for the people of Africa. One study looking at market integration as a function of road development found that food insufficiency can be directly linked to paved roads. It makes sense intuitively, of course: better roads linking cities and markets reduces the cost of doing business, bringing down prices.
Such an impact could be particularly powerful for agriculture (hence the relation to food security). As it stands, 40 percent of harvested crops rot before they even go to market, so one could imagine how a more efficient transportation network could impact the sector.
Power struggles with similar issues. “The largest need at the moment is clearly in the power sector,” du Toit said.
It is perhaps an over-cited statistic (but a compelling one) that sub-Saharan Africa, with a population of 800 million (in 2007), currently generates about the same amount of power as Spain, which has a population of 45 million.
This kind of overwhelming lack of provision is a major issue in development and in the cost of doing business. In Liberia, just 1 percent of the population has access to power. Even in highly-developed South Africa there is room for improvement; while 83 percent of the population has access to electricity, rolling blackouts are common.
Of course, this has drawn a great deal of interest into the region. In addition to local governments (Py notes that governments “will more or less always be involved in infrastructure”), foreign bodies and nations have taken an interest as well. For example, the U.S. recently established the Power Africa program to bring electrification to wide swaths of the African populace, and the World Bank recently committed $5 billion to energy infrastructure.
Private investors are also lining up: Africa was considered the world’s most attractive emerging market in an Ernst & Young private equity survey. So does the influx of investment dollars mean that competition among private investors is heating up?
“Competition has indeed increased,” du Toit said. “But not to the extent where our ROI (return on investment) would be negatively affected.” He notes that his fund is still co-investing with many of its competitors, implying that the opportunities still vastly outpace the number of investors in the space.
It’s also notable that, overall, greater interest in African infrastructure investments may actually benefit private investors rather than harm them.
“With competition on the equity front increasing, I would also expect competition to increase amongst lenders, which would hopefully bring down the cost of debt in these projects and mitigate some of the pressure on pricing,” du Toit said.
That could be a win for everyone: investors, African governments, and the people who ultimately benefit from improved infrastructure.