Seizing the moment for attractive infrastructure investment returns in Africa

In 2015, the United Nations adopted the Sustainable Development Goals (SDGs), an ambitious set of principles with the ultimate goal of eradicating all forms of poverty by 2030. The SDGs commit all signatories to achieving sustainable development across economic, social and environmental dimensions and, as such, the goals are comprehensive in scope. A number of the SDGs have direct implications on infrastructure development. This includes but is not limited to Goals 6, 7 and 9, relating to water availability and energy access for all and building resilient infrastructure respectively. To achieve these goals, particularly in Africa, an immense commitment of resources and coordination among governments, NGOs and the private sector is inevitable.

Already the Global Infrastructure Hub (GI Hub) - a project launched by the G20 in 2014 to help “grow the global pipeline of quality, bankable infrastructure projects,” has performed in-depth analyses of infrastructure spending projections that quantify the need gap between current African infrastructure spending and peer-regions’ best practices.

Africa has a unique set of circumstances in its favour for exponential economic growth and development. These include the African Continental Free Trade Area’s creation of a vast single market of almost 1.4 billion people; its fast growing population which is forecast to reach 2.5 billion by 2050 which stands to provide a huge workforce as well as massively increasing consumer demand; Africa’s abundance of natural resources and the opportunities to capture the full value through beneficiation within Africa as well as to supply the world’s needs for its energy transition; diversification and industrialisation potential; and the reset in value chains in favour of local and regional as corporates seek to reduce risk by diversifying their suppliers following the disruptions experienced recently with the COVID 19 pandemic.

The gap

Despite the potential and the ambition therein, the Continent though, has a gaping infrastructure deficit and related economic challenges, as a result of delays and increased delivery costs caused by inadequate transport, frequent power outages generally and the widespread lack of rural power supply impeding output and productivity, or indeed health problems caused by insanitary conditions or lack of potable water.

That Africa needs quality infrastructure is beyond question. Investment in infrastructure development is a key driver for Africa’s sustainable growth, whether it be in deep-water ports, rail tracks and rolling stock, new or rehabilitated roads, airports, power generation (including renewable energy) and supply, oil terminals and refineries or gas plants, urban and industrial infrastructure, or information and communications technology and telecommunications.

Infrastructure as an asset class

It is a non-debatable fact, that infrastructure is firmly established as an asset class deserving of a place in the portfolios of many institutional and private investors. This can be attested to by the large commodity finds, like oil and gas in East and South-East Africa, as well as the huge demand – particularly from Asia – for agricultural and natural resources, including minerals such as iron ore, platinum, coal and copper as well as the growing demand for minerals required for the global energy transition such as cobalt, lithium and neodymium. In turn, investment in infrastructure is needed to extract and move these commodities to global markets (rail and port infrastructure) and continue to drive Africa’s economic growth. The lack of adequate infrastructure is thus a serious obstacle to growth and development, and results in a low level of intra-African trade and trade with other regions. Presently, the continent accounts for 12% of the world population but generates a mere 1% of global GDP and only 2% of world trade. A notable fact though, is that despite this, six of the world’s ten most rapidly expanding economies are at the moment located in sub-Saharan Africa. This gives even more impetus to speedy infrastructure transformation.

Value for money economic viability for investors

According to a 2017 report by the African Infrastructure Investment Managers, investments in African infrastructure projects from construction through to maturity could target US Dollar returns in the order of 20%, while investments made when projects are operational typically secure US Dollar returns in the low-to-mid teens.

AFC’s focus is on financing and mobilising the funding to deliver enabling infrastructure that will facilitate Africa’s economic growth and development.

AFC also provides lifecycle project development – from conception, design, bankability and construction through to operational – advisory services and innovative funding solutions, in addition to the Corporation’s ecosystem investment approach.

In relation to climate resilience, AFC’s partnership with the African Development Bank for a US$100 million climate-financing funding proposal was approved by the Global Climate Fund in 2019. Also, in 2021, AFC created Capital Partners (ACP) as its independent asset management arm, which then launched its Infrastructure Climate Resilient Fund. The Fund aims to raise US$500 million in its first year and US$2 billion in the next three years. It will act as a direct investor and a co-investment fund, supporting climate adaptation and projects that reduce carbon emissions, to enhance the quality of African ports, roads, bridges, rail, telecommunications, clean energy and logistics, in the face of rising temperatures and sea levels due to climate change.

With Africa’s unique advantages and opportunities, now is the time to seize the moment and take advantage of its infrastructure investment especially as the world builds back from the Covid-19 pandemic and continues to face rapidly increasing geo-political and economic change. Investors will not only benefit from attractive returns but will also help facilitate Africa’s sustainable economic growth and development, which would further increase the value of their underlying assets.

It is important to note that Investors need both patience and the willingness to develop strong relationships with partners on the ground. Multiple asset owners indicated that they began to seriously evaluate Africa’s infrastructure and real assets investments around the 2010–2012 timeframe, as the larger macroeconomic environment shifted to a search for yield. These funds built up their comfort and local knowledge over time through thorough desk research, robust local due diligence processes and organizational education efforts. In AFC many have also found the right partner and go-to-fund manager with the braod range of solutions and expert specialisms for investing in Africa. Institutional comfort with investing in the region has grown and is maturing. Most of the investors currently invested in African real assets have indicated that they are actively planning to increase their allocations in the Continent.

In conclusion, whilst inadequate infrastructure may be the single biggest threat to Africa’s long-term growth, it also represents one of the biggest and most significant opportunities for investors by financing physical infrastructure assets such as ports, railway lines, toll roads, power stations, hospitals and broadband ICT and more.

With governments across the continent committing billions of dollars to infrastructure, Africa is at the start of a 20 to 30-year infrastructure development boom that has lately been boosted through heightened political stability, improved governance and transparency and a warmer reception to increasingly open regional and global integration. This continues to attract global investors seeking growth opportunities beyond the depressed Western markets of Europe and North America.