Public Agenda (Accra)
3 November 2008
editorial
Africa is a continent of approximately one billion people. All its major regions have recently experienced strong economic growth, driven in part by its wealth of natural resources. Africa produces 13% of the world's oil, 46% of its diamonds, 21% of its gold, 57% of its cobalt, and 50% of its platinum group metals. Strong global demand for energy and natural resources will continue to stimulate Africa's economic growth and increase the continent's strategic value to foreign investors.
In addition to the continued demand-driven commodity boom, increasing political stability, improved legal and regulatory environments, sustained economic growth and deepening financial liquidity are all positive trends for economic growth and are attracting international investors to Africa more than ever before.
Africa is finally grabbing the world's attention with more companies setting up offices, increased financial coverage by banks and strong stock market performances versus global markets in 2007 and 2008.
The production and movement of energy supplies and natural resources are significant drivers of infrastructure requirements in Africa. In West Africa, the growth of the oil & gas and mining industries is creating demand for investment in new power generation capacity and transport infrastructure, especially ports and rail. In North Africa, there is growing demand for gas-fired power plants, oil & gas installations and export-led infrastructure such as ports. In East, Central and Southern Africa, the mining industry needs power and transport infrastructure. In addition growing populations are demanding more and improved electricity, water, transport and telecoms services.
Focus on Sub-Saharan Africa
Each country within Sub-Saharan Africa is different - each has its own regulatory regime, macroeconomic dynamics, political priorities and culture. Consistent themes in each of these countries include a shortage of volume and quality of existing stock of infrastructure assets.
Drivers of this historic underinvestment include inefficient delivery of new Greenfield projects due to lack of political will, a shortage of public finances and relatively few private sector investors with appetite for Sub-Saharan Africa countries.
The pressure on governments to address this underinvestment is now compelling. There are indications that the political and economic environment is now improving in many of Africa's important economies, with key markets currently showing average GDP growth of between 6% and 7% per annum. In particular, regulatory frameworks are developing that enable the private sector to play an enlarged role in bridging the continent's infrastructure supply: demand gap.
Private sector finance is increasingly being seen as the saviour of the situation. Over the past five years, new regulations have come into force in markets such as Nigeria, Kenya and Tanzania that have created opportunities for private investors to participate in the privatisation of infrastructure assets and in Greenfield development.
Private sector equity finance is attracted to infrastructure opportunities where the risk: reward balance is favourable to the investor. Drivers of this balance include the regulatory environment, financial liquidity and the ability to deliver projects on time and in budget.
Delivering projects on time and on budget is a challenge for the global infrastructure industry but Africa seems to have gained a reputation for its share of 'white elephants' such as the Inga Falls hydro scheme in the Democratic Republic of Congo, where the potential is there but the delivery of the project by private or public sector continually fails due to its huge size and challenging location.
Actis has a working database of 450 projects in Africa and the team keeps track of these on an on-going basis. The continent's major projects are dominated by oil & gas and mining projects and these represent 150 of the 450 projects and US$190b of the US$340b tracked. Within the infrastructure sector's 300 projects, the major markets in Sub-Saharan Africa are South Africa, Nigeria, Botswana and Mozambique with a number of smaller deals in Kenya.
The transactions of most interest to Actis are in the power and transport sectors, which are more attractive to private investors than other sectors. Actis is tracking 70 transport opportunities and 50 power opportunities. These transactions are in sectors and countries that welcome private sector equity and where Actis sees true commitment by all partners and stakeholders to delivering the project.
There is increased interest in African infrastructure opportunities from a host of investors experienced in and new to African countries. Development Finance Institutions (DFIs) continue to play a lead role in advising and financing challenging projects. African and international banks are broadening their debt offerings to include equity for infrastructure projects, contractors are prepared to commit more equity and state-sponsored entities from countries including Russia and China are taking on significant infrastructure projects.
Investors are looking for strong demand for infrastructure services, favourable private sector investment climates and stable politics, regulation and macroeconomics. This environment occurs in Africa.
Risk-return balance in Africa is favourable to the investor
Despite the increasing need for infrastructure services and the improving investment environment, the supply of both capital and development expertise in Africa remains limited compared to other markets.
This creates an opportunity for investors who understand and can manage the risks to make superior risk-adjusted economic returns. Investors that are prepared to take on the increased risk of developing new assets will create the most value. Africa's rapid economic and population growth is increasing the size of the prize and the renewed private sector interest in its infrastructure projects is not surprising.
Infrastructure assets have long lives and it is impossible to forecast every turn in a country and sector's fortunes over a twenty or thirty year period. Time will tell whether the private sector transactions currently being structured and negotiated are pricing the risk correctly, but the indications are that Africa's risk continues to be over-rated and experienced investors are able to lock in superior risk-adjusted returns.
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