Infrastructure spending in Africa is at a crossroads

By George Philipas, Africa correspondent of Business Day

Despite the current pandemic-induced malaise, there are enough reasons to be cautiously optimistic, says AIIM co-head Vuyo Ntoi.

The pandemic has certainly not been kind to investment prospects in Africa. Led by a slowdown in infrastructure investment from China, foreign direct investment (FDI), already heading south before the onset of the pandemic, fell by 18% in 2020.

More ominously greenfield investment, investment in new projects, fell precipitously by 63% according to the Global Investment Trends Monitor released by the UN Conference on Trade and Development (Unctad) in January 2021, the largest regional fall in the globe last year. The proverbial onslaught culminated with the announcement earlier this month at the Forum of China-Africa Cooperation (Focac) in Dakar, Senegal, that plots Sino-African relations for the next three years, of a vertical drop in investment from China from $60bn to $40bn.

All this is coming at a time when Africa as a whole is in dire need of a sizeable injection in investment if it is not to be left behind once again in the drive towards the Fourth Industrial Revolution, powered by renewable energy. According to a March 2020 report by global consultancy firm McKinsey & Company, the continent needs to double its inward investment in absolute terms to $150bn if it is to have any chance of meeting these goals. It is unlikely, however, that African governments, already squeezed fiscally by the pandemic, will be able to step up in any way either.

Despite the current pandemic-induced malaise, however, there are enough reasons to be cautiously optimistic. In October, Unctad forecast a rebound to pre-Covid-19 investment levels on the continent by some time in 2022. This relatively quick reversal is remarkable on its own. It points to a long-term resilience and a more conducive investment environment than widely acknowledged. “The macro story for the continent remains sound,” assured Vuyo Ntoi, co-MD of African Infrastructure Investment Managers (AIIM), a private equity firm that manages long-term infrastructure investments on the continent. “Many countries have implemented fiscal consolidation measures that have gained credibility for these economies.”

And it is the sound fundamentals that have helped attract investors. Between 2007 and now, 21 African countries accessed foreign private funds, nearly all for the first time. This is especially true of the phenomenal increase in Eurobond lending (debt raised in foreign currency) that now stands at about $136bn for sub-Saharan African economies. In 2021 alone, $13.2bn was issued, the majority by the likes of Kenya, Ghana, Benin and Senegal.

Growing post-pandemic confidence in Africa can be seen nowhere more than in a recent Nigerian $3bn Eurobond issuance that saw over-subscription by a factor of four. It was eventually increased to $4bn to accommodate investor demand. “If people don’t believe in the underlining policies of the government, will they come in?” Shuaibu Idris, a development economist and director of Time-Line Consult, a financial consultancy firm based in Lagos, Nigeria asked rhetorically. “Even if you are being offered the best rates, you wouldn’t go in and invest. So, the fundamentals are right as of last count.”

Such confidence has been accompanied by direct private sector investment in African economies, which include a mouth-watering $1bn from Google. Mergers and acquisitions by foreign companies seeking a foothold on the continent have also increased exponentially in the first half of 2021, with SA a notable beneficiary.

At the very heart of the persistent investment drive is the perception that Africa is still the only game in town for significant returns in the long-run, in an otherwise low-growth, and potentially deflationary climate with generally ageing populations in most parts of the world. “The continent has a young population, a growing population, one that’s increasingly urbanising. One that is resilient and entrepreneurial.” AIIM’s Ntoi said. “Just from that, I think there’s enough macro impetus for infrastructure to be provided to those people.”

But even so, Africa remains blighted by age-old concerns, where there is genuine interest but a fundamental lack of investment-ready projects to throw money at. Much of this comes down to a lack of expertise in bringing projects to financial close. Karen Taylor, CEO of Invest Africa, a leading business and investment platform for the continent based in London, feels there is a pressing need to address these structural issues coming out of the pandemic. “Chief among these are a deficit in information sharing, navigating public-private partnerships, shortages and wastage in project funding and challenges around foreign exchange,” she said.

With the increased engagement with the private sector, Africa becomes more vulnerable to the whims of global financial markets and to increasing debt loads that have often become unsustainable in the past. This is why in the short-term multilateral institutions will continue to play an outsized role. “During the pandemic development finance institutions and development banks have stepped up to fill the gap left by retreating capital.” Taylor said. “If this mobilisation of blended finance vehicles can continue to be used at scale, we could see significant progress towards improving the attractiveness of African infrastructure projects over the medium- and long-term.”

Ironically, Africa’s historic disadvantages might also prove to be one of its biggest benefits. The ability to leapfrog straight into new digital technologies and renewable energies at far lower costs, not having to upgrade old infrastructure, is proving to be a great advantage and helping to attract investment. According to a March 2020 risks and ratings agency Fitch Solutions report, almost half of all power infrastructure projects in Sub-Saharan Africa are currently in non-hydropower renewables, a trend which is set to continue.

The primary commodities that will drive the Fourth Industrial Revolution have also been a principal driver for investment and will likely become supercharged as the decade progresses. It is telling that while FDI collapsed during the pandemic, in the DRC it actually increased by 95% in value in 2020 (albeit from a low base) compared with 2019. Nearly all of this went into funding cobalt mining operations, a metal that is an essential component of electric car batteries and mobile phones.

In and among the doom and gloom in the current economic climate lies a second narrative for Africa that is gaining potency. As Idris said: “Investors are realising that if they don’t get to Africa now, they might miss the boat. So, notwithstanding the challenges and policy restrictions, investors are still looking at Africa being a continent not just for the future, but for now.”