Inadequate infrastructure may be the single biggest threat to Africa’s long-term growth. It also represents the most significant opportunity for investors, writes Samaila Zubairu, President and CEO of AFC
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 comprehensive sustainable development across economic, social and environmental dimensions.
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. Achieving these goals requires an immense commitment of resources along with coordination among governments, NGOs and the private sector.
In line with these objectives, the G20 in 2014 launched the Global Infrastructure Hub (GI Hub), a project to help “grow the global pipeline of quality, bankable infrastructure projects.” GI Hub has performed in-depth analyses of infrastructure spending projections that quantify the need gap between current African infrastructure spending and peer-regions’ best practices.
What is clear is that 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, along with a rapidly growing workforce and consumer demand as the population expands to reach 2.5 billion by 2050.
Another massive advantage is Africa’s abundance of natural resources, combined with opportunities to capture the full value through beneficiation as well as to supply the world’s needs for new energy transition. The continent has strong potential for economic diversification and industrialisation, and to reset value chains in favour of local and regional production. This is particularly the case today, as companies seek to reduce risk by diversifying their suppliers following the disruptions experienced through the Covid-19 pandemic and the war in Ukraine.
Yet, despite the potential and the ambition, Africa still has a gaping infrastructure deficit and related economic challenges. Inadequate transport, frequent power outages and widespread lack of rural power supply continue to impede output and productivity. Policy makers additionally grapple with health problems caused by unsanitary conditions or lack of potable water.
Investment in infrastructure development is a key driver for Africa’s sustainable growth, whether in deep-water ports, or rail tracks and rolling stock, or new or rehabilitated roads, airports or power generation. Renewable energy supplies, oil terminals, and refineries and gas plants all need to be working efficiently for sustainable development. This should be complemented with urban and industrial infrastructure, and information and communications technology.
Finance at the scale necessary is eminently achievable for all such infrastructure. Infrastructure is now firmly established as an asset class, establishing its place in the portfolios of institutional and private investors. This can be attested to by the large commodity discoveries such as oil and gas in East and South-East Africa, as well as the huge demand – particularly from Asia – for agricultural and natural resources. These include minerals such as iron ore, platinum and copper along with growing demand for metals needed for the global new energy transition such as cobalt, lithium and neodymium.
In turn, investment in infrastructure is required to extract and move these commodities to global markets (rail and ports) and continue to drive Africa’s economic growth. In this context, the lack of adequate infrastructure is a serious obstacle to growth and development, and results in a low level of intra-African trade and trade with other regions.
Currently, Africa accounts for 12% of the world population but generates a mere 1% of global GDP and only 2% of world trade. Despite this, six of the world’s ten most rapidly expanding economies are in sub-Saharan Africa. This gives even more impetus to speed infrastructure transformation.
Value for money
Investors who take up the challenge of financing infrastructure development are likely to be highly rewarded. 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. Our ecosystem-based approach provides lifecycle project development – from conception, design, bankability and construction through to advisory services and innovative funding solutions.
Climate resilience is central to our project work. AFC’s partnership with the African Development Bank for a US$100 million climate-financing proposal was approved by the Global Climate Fund in 2019. In 2021, the Corporation created AFC 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.
As the world builds back from the Covid-19 pandemic and continues to face rapidly increasing geo-political and economic change, now is the moment to seize on Africa’s advantages. 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.
Investors will 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 organisational education efforts. In AFC, many investors have found the right partner and go-to-fund manager with the broad range of solutions and expert specialisms necessary for investing in Africa.
Institutional comfort with investing in the region has grown and is maturing. Most of the investors currently holding African real assets have indicated that they are actively planning to increase their allocations in the continent.
Whilst inadequate infrastructure may be the single biggest threat to Africa’s long-term growth, it also represents the most significant opportunity for investors. By financing physical infrastructure assets such as ports, railway lines, toll roads, power stations, hospitals, broadband ICT and more, investors will be tapping into investments paying out in economic, social and environmental impact as well as superior returns.
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.