Infrastructure development: the catalyst to unlock growth on the African continent?

Africa accounts for an estimated 12% of the world’s population, yet only contributes approximately 1% to global gross domestic product and around 2% to world trade¹. A central obstacle to transformative economic growth and development of the continent is the lack of quality sustainable infrastructure.

The African Development Bank estimates that the continent’s infrastructure needs amount to US$130 to $170 billion a year, with a financing gap in the range of $68 to $108 billion.² These infrastructure needs are expected to increase over the next few decades, as Africa’s population is projected to reach 2,4 billion by 2050 (2022: 1,4 billion).³

Therefore, a great need (read: opportunity) exists for investments into African infrastructure, especially for the development of power, transport, ICT/digital, and water and sanitation infrastructure, which have been identified as critical to help drive Africa’s economic growth and improve business productivity and competitiveness. This will, in turn, help to deliver significant developmental impacts across the region, thereby reducing unemployment and inequality, and alleviating poverty.

INFRASTRUCTURE TRENDS

In developing the continent’s infrastructure to meet its growth requirements, several trends⁴ should be considered, which include, among others:

• Rapid urbanisation. The abovementioned growth in Africa’s population is coinciding with rapid urbanisation; it is expected that 59% of the continent’s population will be urban by 2050.⁵ In order to meet this trend, significant infrastructure development will be required.

• Increased need to mobilise private funding to support infrastructure development. Governments across the continent, impacted by rising debt burdens driven by the ongoing effects of the COVID-19 pandemic, are embracing private capital for infrastructure investments, and changing legislation to encourage greater participation by private institutions. This has resulted in an increased appetite from global investors who are seeking greater growth opportunities with enhanced, risk-adjusted returns, which Africa could provide. However, like Botswana, Ghana and Rwanda, other African countries need to create the correct investment environment and policy certainty to take advantage of this.

• Increased focus on sustainability and the environment. There is an increased call, amplified by the COVID-19 pandemic, for governments to build back better with the right kind of environmentally and socially friendly infrastructure, ranging from renewable energy and public transport to improved internet connectivity. In addition, governments across the continent are supporting initiatives that encourage more funding for infrastructure projects that would support Africa’s transition towards net-zero emission objectives. The spectre of climate change and the increasing number of extreme weather events point to the importance of investing in climate resilience, aimed at successfully coping with and managing the impacts of climate change while preventing those impacts from growing worse. Many African countries, like Kenya, do not have the legacy of coal and can therefore embrace green energy.

• Growing focus on ICT and digital infrastructure. ICT is increasingly becoming a driving force for how infrastructure is planned, delivered, operated and maintained, and as a means of leapfrogging traditional infrastructure constraints. Smart grids, for example, will increase energy efficiency and the uptake of renewable energy, and digitalisation is creating new opportunities in the services sectors, while increased mobile connectivity and communication infrastructure assists in improved financial service offerings. Rwanda is an excellent example of an African country focused on ICT and digital infrastructure development.

• The African Continental Free Trade Area Agreement (“AfCFTA”) will boost regional infrastructure development. There is a growing demand for large, regional projects which will allow countries and investors to take advantage of the economies of scale offered by the AfCFTA, drive intra-African trade, and gain access to new African and international markets.

KEY INTERVENTIONS

While not an exhaustive list, the following key interventions could help drive the continent’s infrastructure development:

(i) Mobilising greater pools of private sector capital towards commercially viable, large-scale infrastructure projects. While the availability of private-sector funding is a consideration, attention should also be given to better matching this capital with viable projects. Greater focus should be placed on improving the commercial viability of projects, including the mitigation of political, currency, and regulatory risks, and by increasing the deal flow of bankable projects.⁶

(ii) Increasing the number of commercially viable projects. Larger upfront investment is required to develop projects from concept to bankability. This will ensure that the most feasible projects are correctly prepared through the delivery of quality feasibility studies and commercial plans. This is expected to increase the number of commercially viable projects that are funding-ready. This will require greater collaboration by governments with financial institutions that can offer them critical skills in areas such as planning, transaction support and risk allocation.

(iii) Focus should be placed on developing infrastructure projects that have greater development impacts. Governments and investors should focus on developing projects that can drive greater developmental impacts, such as addressing issues of high unemployment, inequality, and the alleviation of poverty on the continent. Focus should also be placed on projects that deliver on the environmental, social and governance objectives of the continent.

If you are an investor wishing to invest in African infrastructure or in companies that are likely to benefit from African infrastructure development, a prudent first step would be to find a trusted adviser who is familiar with the African business landscape, to help navigate any potential pitfalls en route to future success.

1.https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Energy-and-Resources/dttl-er-power-addressing-africas-infrastructure-challenges.pdf
2.https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/2018AEO/African_Economic_Outlook_2018_-_EN_Chapter3.pdf
3.https://www.africa50.com/fileadmin/uploads/africa50/Casablanca_Finance_City_Africa_Insight_Report_on_Infrastructure.pdf
4.https://www.africa50.com/fileadmin/uploads/africa50/Casablanca_Finance_City_Africa_Insight_Report_on_Infrastructure.pdf
5.https://www.hoover.org/research/africa-2050-demographic-truth-and-consequences
6.https://www.mckinsey.com/capabilities/operations/our-insights/solving-africas-infrastructure-paradox

Siyabonga Shandu is an Associate Director | PSG Capital

This article first appeared in DealMakers AFRICA.

DealMakers AFRICA is the continent’s quarterly corporate finance publication.
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