Africa’s infrastructure gap has many roadblocks to overcome

With an annual infrastructure deficit in excess of $90bn, Africa still faces a massive infrastructure gap which impedes economic activity and GDP output, says Dumile Sibindana.

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Africa's infrastructure gap has many roadblocks to overcome

Africa continues to face a massive infrastructure gap that impedes economic activity and progressive GDP output on the continent. The African Development Bank (AfDB) estimates the continent has an annual infrastructure deficit in excess of $90bn.

Therefore, private sector developers have a critical role to play in the development agenda on the continent. However, this will require active participation from all relevant stakeholders: private sector developers, governments, financiers and other relevant parties.

The pivotal role played by the private sector project development industry across African is yet to be fully realised, perpetuating an environment which impedes the continent’s true GDP growth potential. We, at Africa Investor believe that much of the narrative and public sector interventions around PPPs (private public partnerships) has traditionally focused on the leadership role of the public sector (or lack of adequate capacity) in partnering with the private sector to execute key infrastructure projects.

Emphasis has been placed on the critical role that the private sector plays in driving infrastructure project development and ensuring the investability of infrastructure projects. The fundamental role the private sector plays in the project development space has largely been relegated to secondary status.

Road works in Zambia

As the lifeblood of the economy, the private sector is inextricably vital to the infrastructure project development agenda in Africa. Dialogue around bolstering relationships between private sector developers and investors should be enhanced, with the aim of creating an environment in which African project developers can thrive by embarking on more larger-scale projects (in excess of $50m).

Vishal Agarwal, development and investment leader at General Electric (GE) Africa, made salient points relating to the need for effective collaborative prioritizsation between private sector developers, investment partners and the public sector in realising the financial close and ultimate completion of infrastructure development projects in Africa.

Agarwal stated that GE is profoundly passionate about playing an active role in the development of infrastructure projects across Africa by empowering local developers: “At GE, 60% of the leaders are African and we are growing the pipeline.” He stressed the need for a closer alignment between the private and public sector for infrastructure projects to thrive in Africa.

The public sector needs to work hand-in-hand to create an environment in which unnecessary ‘red tape’ is detached. Agarwal set forth GE’s objective: “We are committed from a region standpoint. We are long term players and continue to be committed to the region.”

African developers need to aspire to meet the highest standards of infrastructure project development. Achieving high standards has become a prerequisite in attracting more international financiers and local private sector investment, creating access to larger pools of capital for infrastructure projects on the continent. Dr Herbert Pohl, co-founder and board member at Timu Energy Holdings, outlined some of the key characteristics possessed by competent African developers according to international project development standards located.

A competent project developer possesses a solid track record that is proven or “tangible”. Competent developers understand market expectations and deliverables imposed by the projects undertaken and should possess the required technical acumen. Lastly and perhaps more crucially, good developers can raise capital provided they can build a solid business case and comply with best practices for project development.

Timu Energy Holdings has an ‘appetite’ for feasible development projects across the world, including Africa, according to Dr Pohl. One of the issues restricting project development investment in Africa pertains to African developers’ inability to meet the requirements laid out by investment partners in advanced economies, making them ineligible for project finance programmes.

light rail transport system recently launched in Ethiopia.

However, Dr Pohl affirms the fact that the infrastructure development industry is perceived as risky relative to other asset classes by global standards. This notion often challenges financiers to find suitable project development partners amid the inherent risks.

Africa’s infrastructure development must change to ensure sustainability

The next few years are critical for Africa to close its infrastructure development gap relative to advanced regions and raise standards of living through sustained, robust GDP growth. The massive scaling up of infrastructure project developments has a crucial role to play in this endeavour. However, more importantly, the role of private sector project developers and collaboration efforts with local and international financiers will determine whether Africa can reduce its infrastructure deficit.

 

Private project developers require their respective governments to play an enabling role by removing unnecessary red tape stifling project development initiatives. They can do so by supporting the development of projects through active engagement with the developers and financiers, particularly on matters pertaining to regulation.

Brian Hilherly, founder and CEO of Black Rhino, contends “governments spend more time pushing risk to the private sector than they do imposing local impact programs. Governments should take responsibility on certain risks (currency, default of payments, etc) but in turn should force project developers to have greater integration with the local economy.”

We should bear in mind that the holistic model of project development must benefit both investors – by granting them a satisfactory premium on their investments – and the local communities, who will benefit from the use of the established infrastructure projects.

Furthermore, Basel III will increasingly have a profound effect on the banking sector by pushing up liquidity ratio requirements and limiting credit extension. Bank assets are becoming less favourable to short-term investors and will prompt these investors to seek alternative asset classes to invest in. The future growth prospects of the project development industry is immense.

From a global perspective, only a small fraction of infrastructure assets are currently listed or under private ownership. In Africa, even less so. The project development industry generally agree increased securitisation is likely to drive the growth of infrastructure developments in Africa, particularly if more private developers are ‘corporatised’ and eventually become listed entities in capital markets.

Other drivers of future growth within the industry will include dynamic demographic changes, private capital and the focus of institutions such as the G20 to mobilise institutional investment within the industry.

* Dumile Sibindana is content and marketing manager at Africa Investor. Views expressed are his own.

This article was first published on Fin24: http://www.fin24.com