Ibrahim, a Senegalese married to a Nigerian, gained his education and training in finance at premier western institutions like the IMF and ECP. He currently serves as Head of Financial Advisory at AFC
African infrastructure is one of the worst bottleneck existing. So what exactly is a bottleneck and why reference infrastructure in Africa as the key example? In engineering, "bottleneck" refers to a phenomenon where the performance or capacity of an entire system is limited by a single or small number of components or resources.
Given this example and extending this to Africa, one can envision its applicability when referencing our infrastructure. It is a little known fact but, according to an old report from the UN Economic Commission for Africa, only about a third of African roads are paved and port productivity is only a third of the international norm. Africa’s notorious customs environment poses yet another impediment to intra-African trade. The high fees that custom offices charge is part of the problem and the costs to businesses in terms of time delays is another – a Doing Business report published few years back shows that delays are up to three times as long in Sub-Saharan Africa compared with other regions of the world!
Even more absurd is the fact that at least third of all intra-Africa air routes are monopolies served by a single carrier. Journeys between West and Central African capitals are often quicker if routed back through Europe or the Middle East. This has been the case for my last 20 years of traveling across more than 25 African cities and while it has improved a bit, the difficulties seem unchanged. In fact, a 2016 report of the statistic division of the UN confirms that flight connectivity is still the lowest in the world and centered on only about 328 hubs for a land mass of around 11.7 million square miles, making it time consuming and costly to travel between African countries. While such data points and anecdotes may sound backward and even disastrous, they also serve to highlight serious profit taking opportunities for attentive parties. As the legendary “High Financier” Siegmund Warburg used to say “Show me trouble and I’ll show you profit.”
The Immediate Perspective
Africa’s current internal trade is low—making up only around 10 percent of its total trade according to Brooking Africa Growth Initiative. Most of its exports go to the world’s advanced economies, and most of its imports come from those same advanced economies. Comparatively speaking, other regions of the world enjoy significantly higher levels of internal trade. For the developing countries in Asia, intra-regional trade as a share of total trade was estimated roughly at 17 percent earlier this decade; for the member countries of the European Union, the same figure was more than 60 percent.
This low base (levels of trade) is bound to increase. Based on these facts, it’s important for African nations to take notice of the opportunities that exist by trading with their neighbors. The current infrastructure picture is a heritage of colonization; former colonies were traditionally the trade partner of choice, now African nations have a broader set of partners, and this increasingly includes neighbors and other African nations.
Huge infrastructure projects building toll roads, bridges, ports, airports, roads, as well as power stations will help improve Africa internal trade and propel growth in these markets even further, thus breaking significant ‘bottlenecks’ in place. The AFC (Africa Finance Corporation) has made infrastructure the center of its preoccupations, and has aggregated commensurate expertise around the subject matter. It has also been able to effectively tackle these issues hands on. AFC has already successfully helped deploy over usd 4 billion in more than 23 African countries via infrastructure projects ranging from power, transport, heavy industries, telecoms and natural resources. Benefitting from an investment grade rating from Moodys, the Corporation has in less than a decade been a participant in over usd 12 billion of infrastructure projects alongside other like-minded institutions. The more co-investing participants will deploy capital in this space, the more positive the collective impact resulting from these collaborations.
The Hurdles To Overcome and To Profit From
The ability of African countries to establish competitive industrial sectors and promote greater industrial linkages has been hindered by poor infrastructure (energy, transport, communication, etc.), which has resulted in high production and transaction costs. The current agendas of African Governments have never been more synchronized - the common tune is progressively becoming one of developing local manufacturing capacity, establishing an export strategy and becoming less reliant on imports. This phenomenon should trigger a greater focus from various regulatory bodies to put structure, coordination and order into their affairs in order to secure the international capital flows and expertise.
One should expect private capital to rotate towards critical agents of the sector such as agro-processing, and manufacturing, as well as infrastructure service providers such as telecom towers or data centers players. In essence any critical actor in the supply chain able to deliver scalable cost savings to traditional operators should be able to attract significant capital commitments.
Cost control and focus on core strengths will remain the main goal for many operators in the infrastructure and natural resources space. Parties who are able to assist these players with outsourced strategies will command particular attention from capital sources. Such approaches can be taken in other areas of infrastructure financing for both the benefit of the operator and of the financier.
In a poorly serviced continent like Africa, the opportunities with the greatest potential are those associated with improving manufacturing processing, trade systems, logistics service providers, consumers’ channels of distribution and critical infrastructure-plays between its fast growing nations. Africa includes some of the most attractive countries in the world in terms of GDP growth, resources, tradable asset base, relatively low leverage levels and other key metrics. The efficiencies and returns that can be generated from investing in African intra-trade enablers are simply massive.
Keeping an eye on market entrants can yield good outcomes
New market entrants are clear indicators of this trend. It is difficult to miss groups like Emirates Airlines, Etihad, Etisalat, DP World, Olam, Airtel, Indorama in the Africa scenery or the pouring in of Chinese construction companies who are now involved in 30 percent of the continental construction projects. Asian manufacturers are even designing for Asians and Africans phones that are not only able to hold two, three or four SIM cards, but also have enhanced radio and other features relevant to these local markets. As observed by the Economist in an old Edition titled “The world turned upside down”, developing countries long a source of cheap labour, are now becoming hotbeds of business innovation in much the same way as Japan did from the 1950s onwards.” We believe that actively establishing strategic partnerships between emerging markets based corporates and their African counter-parts is crucial. The innovations expected from such like-minded parties will continue to amaze and yield potent returns for involved investors.
The Invisible Hand is Needed
Governments can actively accelerate growth through Improved Intra-African trade. They can help industries become more competitive by creating economies of scale and weeding out producers that are less productive in the marketplace. Not only can Governments establish product value chains, they can also strengthen them by facilitating the transfer of technology and knowledge via spill over effects. This will Incentivize and spur infrastructure development while having the additional benefit of attracting foreign direct investment. For these reasons, expanding intra-African trade is a key to accelerating economic growth on the continent. It is especially important for the continent’s many small, landlocked countries that face tremendous challenges trading internationally. As mentioned earlier, unfortunately most of Africa’s current exports go to the world’s advanced economies, and imports come from those same advanced economies. But this issue...is also an opportunity Governments can profit from. Countries like Mauritius, South Africa Ethiopia and Rwanda amongst others are making strides in that direction.
Another welcome accelerator will be improved Cross-border movement of individuals and goods. This represents not only a powerful boost to economic growth and skills development, but it also supports competitiveness. Already 13 African countries have adopted a policy of visa collected at airport if you are African. The African Union (AU) launched an African passport last week at its summit in Kigali. Free movement of people benefits both the country opening its borders and the country whose citizens are on the move. The benefits derived from free movement of good such as increased intra-trade and capacity building between African countries is even greater.
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Africa has its unique set of issues, many are infrastructure related legacy issues and some are ‘bottlenecks’ to the continent's growth. But at the same time, these issues represent the greatest opportunities for savvy investors. Thankfully Africa is benefitting from a growing base of forward-thinking Governments and is populated with an increasing number of savvy, pioneering, experimented and globally exposed entrepreneurs determined to disrupt their market by tackling local problems via tailor-made solutions. Africa is, indeed, one of the most fertile grounds when seeking to serve both the people at the Bottom of the Pyramid (BoP) and those at the Top of the Pyramid (ToP).
Key Take-Aways
One can greatly profit from investing in “bottlenecks breakers” in Africa - whether a Foreign based investor or a member of the new breed of Africans Investing in Africa (AIAs) such as local pension funds, homegrown insurers or financial investors. When thinking about the best investment opportunities in Africa one must always keep one picture in mind - the hour-glass; top and bottom are sizable, middle is actually quite thin. In the particular instance of infrastructure investing, the biggest issue preventing the consummation of transactions and delivery of services is bankability (not the capital as is the perception). The private capital actually sees the profit making opportunity and is available. However the necessary regulation and needed expertise is often nowhere to be found. It will be up to the public sector to create an enabling environment suitable for private sector capital to pursue bankable projects.
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