Trends and Opportunities in Africa's Infrastructure sectors

Author: Linet Overesch | Junior Business Consultant @ Aizen Consulting

Africa is one of the most urbanized continents in the world. The urban areas in Africa currently contain 472 million people, a number that is expected to double over the next 25 years. The rapid urbanization rate intensifies Sub-Saharan Africa’s infrastructure needs. But while the need for infrastructure is growing, African countries are at ate same time confronted with a large financial funding gap. In an effort to overcome these challenges, the demand for private and public-private partnerships across the African infrastructure sectors is rising. Therefore, despite the fact that an inadequate infrastructure may be one of the biggest threats to Africa’s long-term growth, it also represents a significant opportunity for investors to finance physical infrastructure assets such as ports, railway lines, toll roads, power stations, and broadband ICT. 

Infrastructure funding gap

During the last two decades, Africa’s urban population grew by 3.65 percent per year and this growth rate is expected to hold into 2050 (Brookings Institute, 2017). In 2010, the AICD estimated that the yearly infrastructure needs of Sub-Saharan Africa was approximately $93 billion (World Bank, 2010). By now, this number has been even increased by the Africa50. They estimated that until 2025, around $135 billion a year will be needed to finance African infrastructure needs (Africa50, 2016). However, while there is amount of $130 billion needed, only around $77 billion has been actually funded, from which $44 billion was invested by the public sector, $28 billion by DFIs, and $5 billion by the private sector. Taking all together, this leaves Africa with a large infrastructure financing gap of $58 billion a year.

Public-private cooperation

Due to the fact that some of these infrastructure needs are just too essential, alternative ways of filling this funding gap needs to be sought. One way is to utilize the private sector resources to a bigger extent, for example through the use of public-private partnerships (PPP) and private investments. This new approach to fulfill infrastructure needs in Africa, despite a scarcity of government funds, seems to become every day more popular by both the public- and private sector. Up till now, a growing number of businesses are already exploring the business opportunities behind this under served market. Big companies like GE, and private equity investors like Blackstone and Abraaj already took their chances, and made use of such partnerships to invest in infrastructure projects in Africa. To speed up this process, and to uplift the attractiveness of such investments, a collection of (currently) 23 countries, in cooperation with 3 African banks, established the African 50. Their aim is to facilitate the creation of such partnerships.

Opportunities for investment

By now, there are multiple examples of roads, power, ports and water projects that have been built through successful funding models of public-private partnerships and private investments (Harvard Business School, 2017). Opportunities for private investments, or those on the basis of PPP, can be found in a wide range of sub sectors across the (hard) infrastructure industry in Sub-Sahara Africa. The energy, water, transport and ICT sectors are some interesting examples of sectors offering interesting investment opportunities.

  • Energy Sector

With a funding gap of around $23 billion, the energy sector seems to be in the highest need for investment (African Development Bank, 2013). The power infrastructure in Africa only delivers a fraction of the services found elsewhere in the developing part of the world. To give an idea of this lack of power infrastructure: the Sub-Saharan African region, with a population of almost 800 million, generates roughly the same amount of power as Spain, who has a population of 45 million (World Bank, 2015).

Considering the fact that energy infrastructure underpins the development of all productive activities in an economy, it is not surprising that research done by Preqin (2016) shows that 60% of all completed infrastructure deals in Africa (since 2013), were related to the energy infrastructure. It is interesting to see that the largest proportion of these energy deals were related to renewable energy assets, and in specific related to solar- and wind power (51% and 23% respectively). This could be explained by the Africa’s enormous power potential in wind, solar, and hydro energy. Now that new technological options, such as PV-based solar home systems, have become economically more attractive, taking advantage of Africans potential is crucial to spurring and sustaining its economic growth.

  • Water supply sector

The water (supply) sector has the second largest funding gap, with approximately $11 billion (World Bank, 2010). Besides this large funding gap, the water sector receives a low amount of large-scale investments, when compared to other sectors (Deloitte, 2016). This is for several reasons a cause for concern. First of all, it is the water sector which can fight poverty in both direct and indirect ways. Whereas other infrastructure sub sectors like transport and ICT can support a countries economy directly, thereby only indirectly reducing poverty, it is the water sector which can fight poverty directly as well indirectly, since it cuts across a number of sectors in an economy.

Today, the biggest problems in the water infrastructure are an inadequate access to improved water, especially in rural areas, and a lack of improved sanitation (septic tanks and improved latrines). In about half of the countries that make up the African continent, less than only 35% have access to improved sanitation facilities, and less than 76% have access to improved water resources (Africa50, 2016).

For that very reason, it’s remarkable that Africa is actually rich in water resources. Africa has 9% of the world’s water resources, while offering home to 11 percent of the world’s population. The amount of water in Africa is comparable to that in other regions of the world. It is however the lack of water storage and irrigation infrastructure, in combination with a high inter-annual rainfall variability in especially east- and south Africa, that makes Africans’ water resources underutilized. To overcome these challenges, and to reach a solid water security, it is estimated that the current level of 200 cubic meters per capita needs to be expanded to at least 750 cubic meters per capita (World Bank, 2010). This makes that the water sector is an area with a lot of challenges and opportunities for development and investment.

  • Transport sector

In order to sustain high economic growth levels, solid and qualitative infrastructure needs to be in place. Therefore, importance should be given to the transport sector. Overall, the transport problems in Africa are mostly a combination of poor infrastructure (a lack of integrated multi modal transport infrastructure), high transport costs, and a lack of modern logistics systems and competences. There is a high need for investments in road networks, railway, airports and ports. According to Preqin (2016), 11% of all the African infrastructure deals between 2007 and 2016 were related to the transport sector, thereby ranking No. 3. Interesting to note is that this number seems to increase. Research done by Deloitte even shows that in 2015 and 2016 the transport sector received the highest number of deals, when compared to the other infrastructure sectors. This uplifting of the investments in the transport sector could partly be caused by the need to modernize many already existing airports and ports, which are becoming obsolete.

  • ICT sector

The African ICT sector is staying relatively close to the developments elsewhere in the world. Africa has experienced exponential growth in the ICT sector owing to mobile and internet penetration. While this sector was subject to ‘only’ 5% of the total African infrastructure deals between 2013 and 2016, the internet penetration in Africa is the highest in the world. According to TeleGeography, African internet bandwidth grew with 41% between 2014 and 2015, despite its relative high costs. Stated by the The International Telecommunication Union (ITU) and the World Bank, the cost of a broadband connection is, on average, about US $110 for 110 kilobits per second. In comparison, in Europe and Central Asia the same type of connection costs US $20. Solving the current deficiency in competition within this market, could solve important issues such as the high costs, a low bandwidth and unstable connections.

An exponential growth in mobile penetration is also visible. In 2016, Afrobarometer reported that 93% of Africans possess a cell phone. This amount of cell phone users will be supported by the percentage of Africa’s population that is living within range of a GSM signal. Whereas this was 5% in 1999, it already became 57% in 2006. In some countries nowadays, the household access to cell phone even exceeds the access to piped water (World Bank, 2010). The current rise of smartphone penetration will probably amplify cell phone and internet use, and could even offer a new platform to spread new innovations which address existing issues and challenges in several areas. Smartphone penetration is also on the rise meaning more people can connect to the internet. Several innovations have been initiated in Africa to address challenges in health, education, agriculture and finance.

Towards the future

It is a given that infrastructure development has a positive correlation with economic growth. It is also widely recognized that an insufficient infrastructure is one of the key challenges that Africa faces, in their pursuit of economic development. Addressing the funding gap for infrastructure projects has become a priority of governments and international organizations in recent years, and by now, private investors have also come to play an important role in providing finance for new infrastructure projects. Working together with international partners in the public and private sector can chart a new and prosperous path for Africa, while at the same time bringing significant gains for all other parties involved.

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