Africa’s infrastructure gaps are an investment opportunity waiting to happen
As the continent restructures its debt, shifting global trade relations, Africa’s rising incomes and young demographics, make investment in African infrastructure increasingly attractive
Africa’s infrastructure deficit offers US investors a compelling investment case on the continent. Addressing this infrastructure gap — in key sectors, such as transportation, energy, agriculture, telecoms and housing — remains critical to enabling economic growth and driving productivity for Africa, while offering investors attractive returns.
From windfarms to digitising financial services, building roads and water purification systems, about $1-trillion is required to build productive capacity in key sectors across the continent over the next decade.
As delegates met at the US-Africa Infrastructure Conference, held in Johannesburg in early November, it is clear that African countries are looking to international investors to help bridge the funding gap.
While hundreds of American companies have invested in the continent over the decades, US-African trade relations have been largely based on the African Growth and Opportunity Act (AGOA) of 2000: a non-reciprocal trade agreement that grants about 40 countries duty-free access for approximately 6,400 products to the US. It is time to move beyond AGOA as Africa gears up to address its infrastructure gaps to meet the needs of its growing urban population in the future.
Public-private partnerships have proven successful vehicles to driving sustainable infrastructural develop on the continent.
They harness governments’ ability to break down bureaucracy and to design supportive policy and regulations, while leveraging private-sector funding, skills and technology
It is clear that the challenge of building this infrastructure cannot be met solely through the efforts of African governments, many of which lack sufficient domestic revenue bases. Instead, it will require innovative financing mechanisms that harness both public- and private-sector capital to fund large scale, complex projects across sectors. US commercial interests are well placed to help deliver on these ambitions.
There is increasing recognition by many African governments that investment in infrastructure acts as a catalyst not only for intra-regional trade and industrialisation, but also underpins long-term, sustainable and inclusive economic growth.
SA’s government recently announced a R400bn contribution from the national fiscus over the coming three years of the medium–term expenditure framework. Ethiopia is attracting foreign investment in infrastructure and manufacturing and pursuing further diversification of its economy through tourism. Senegal’s government is driving growth by building infrastructure vitally needed to improve living standards, support the growth of the private sector and attract foreign investors, while simultaneously strengthening its public finances.
Ivory Coast has introduced pro-business reforms and tax breaks to encourage local processing of raw materials. It is also investing in rural infrastructure, notably in transport and energy, with further plans to double oil and gas production.
Public-private partnerships (PPPs) have proven successful vehicles to driving sustainable infrastructural develop on the continent. They harness governments’ ability to break down bureaucracy and to design supportive policy and regulations, while leveraging private-sector funding, skills and technology to deliver the large-scale infrastructure projects needed to transform the continent’s economies.
Central to this, accountability and governance frameworks that measure a project’s value — not only on commercial metrics but take into account quality, affordability, efficiency as well as the developmental gains they can deliver — are key. Ensuring the transfer of knowledge and skills to the local population is also important for long-term positive impact.
The continent’s increasing global integration and the health of its debt markets will likely help Africa attract external capital and manage debt through the current global cycle
For many decades, the risk of such large-scale and complex infrastructure projects seemed to outweigh the potential returns for investors. However, with shifting global trade relations, Africa’s rising incomes and young demographic profile, as well as the hunt for portfolio diversification and new frontiers of growth, investment in African infrastructure is becoming increasingly attractive. The continent’s debt capital markets have remained resilient against tough global market headwinds, which have affected other emerging markets.
While concerns over Africa’s sovereign debt remain, the continent’s increasing global integration and the health of its debt markets will likely help Africa attract external capital and manage debt through the current global cycle. Moreover, regional activity is picking up across the continent. East Africa is beginning to bounce back from a tough couple of years with renewed confidence and appetite. This has been driven by issuer-led initiatives across the region with Kenya (as with Nigeria and Ghana in the West) having raised local currency debt through sovereign bonds.
A common trend across Africa is that increased debt-servicing pressure is creating the opportunity for debt restructuring, which is, in turn, driving increased interest in local currency issuance. This reflects Africa’s ability to transform challenges into opportunities through the careful combination of innovative policy and use of new technologies to support the speed of the market, such as the issuance of a (local currency) kwanza bond in Angola. Nigeria issued a $300m Diaspora Bond in 2017 to help fund infrastructure projects.
The current pressure to restructure debt coincides with many African economies evolving deeper and more liquid domestic markets. This evolution emanates from pension-fund reform and other progressive legislation driving the growth of new asset classes. Further capital opportunities are becoming available to Africa, particularly from China, and Asia more broadly. Africa is also increasingly able to tap into dollar debt opportunities from other emerging markets, such as Asia and the Middle East.
Investors, including US insurance companies, pension funds, sovereign wealth funds, and bilateral trade organisations can find a productive and profitable home for their investments in infrastructural development as Africa positions itself for the next phase on its upward growth trajectory. Innovative financing solutions can turn this into a commercial reality.
• David-Borha is CEO, Africa regions, for the Standard Bank Group.