South African participation is imperative
Given the tough trading conditions at home, local companies would do well to look north for additional business initiatives, writes Andrew Maggs
Dwindling business confidence and its implied negative effect on investment, coupled with low levels of public sector expenditure in infrastructure, is motivating SA’s contractors, consulting engineering firms and other project-orientated companies to look cross-border to offset difficult local conditions.
Albeit local residential and commercial developments have provided a sizeable work stream over the past few years, the slow roll-out of large government projects has forced contractors to rely on lower margin projects to build their order books.
And it is unfortunate that as global commodity prices recover, the perilous state of SA’s mining sector will see limited, if any, new investment in mining projects, traditionally fertile territory for contractors and engineering firms. The fact that SA has fallen out of the top 10 mining investment destinations on the continent underscores a bleak outlook for this sector.
There is consensus among African governments and development partners that the installation of infrastructure, particularly energy, is the single most important driver for growth on the continent. The Infrastructure Consortium for Africa (ICA), a platform supported by bilateral donors and multilateral agencies, estimates that $90bn in infrastructure spend is required annually to address Africa’s infrastructure requirements.
Current expenditure falls well short of this. In part, poor planning and a lack of coordination have contributed to what is commonly referred to as the “infrastructure deficit”. But with the establishment of the Programme for Infrastructure Development in Africa (PIDA), there is now a more focused approach to development. PIDA brings together various initiatives, such as the New Partnership for Africa’s Development (Nepad) Short Term Action Plan and the African Union’s Infrastructure Master Plans into one coherent programme covering four major sectors: transport; energy; transboundary water; and ICT. Importantly it has backing of the AU, Nepad and major donors.
The largest provider of funding for infrastructure on the continent is the World Bank, which in 2016 approved $9.3bn. Nigeria, followed by Tanzania and Kenya, were the biggest recipients.
Clearly the World Bank has prioritised Africa as evidenced by its President, Jim Yong Kim, earlier this year announcing a record $57bn in financing for sub-Saharan African countries over the next three years.
A recent entrant in the funding arena is the New Development Bank (aka Brics Bank). Time will tell whether it can deliver on its aim to be “fast, flexible and efficient” in the design and implementation of its projects.
The bank has identified four key areas of operation — clean energy with emphasis on promoting renewable technologies; transport infrastructure that enhances connectivity; irrigation, water resource management and sanitation; and sustainable urban development. Although it currently has a limited project pipeline, it could play a vital role as a co-financier working with larger development finance institutions.
Whether loan applications are made to development finance institutions or private lending institutions, they need to be backed up by proper preparation and due diligence. Unfortunately, this is an area where project developers often fall short, suggesting a lack of bankable infrastructure projects in Africa. Mindful of this, the oversight committee for Nepad earlier this year appealed to donors to step up funding for project preparation.
To accelerate infrastructure development there needs to be a greater contribution from private funding sources. It is concerning that levels of private investment in infrastructure have dipped. According to the World Bank’s Private Investment in Africa Annual Report (2016), the sub-Saharan Africa region saw 11 infrastructure deals totalling $3.3bn in the reporting period. This amount falls 48% below the 2015 figure and the fiveyear average investment level, both at $6.4bn.
While the impasse regarding SA’s Renewable Energy IPP Procurement Programme continues to frustrate would-be developers, other countries in Africa are accelerating development of their renewable resources. Much of this is being done under the Scaling Solar initiative (see prospects story below). Also taking a lead role in exploiting renewal resources is the African Renewable Energy Fund (Aref), a dedicated renewable energy fund managed by Berkley Energy that is focused on sub-Saharan Africa. Aref is considering an investment into a potential pipeline of five hydropower projects in Cameroon.
While each country has its own development agenda, emphasis is being placed on infrastructure spend that allows for shared resources and better regional interconnectivity, for example trade and transport corridors that speed up the movement of goods across international borders.
LAND BRIDGE
The Lapsset Corridor Programme typifies this development approach. Once completed, the programme will create a “land bridge” across the continent, linking Lamu Port in Kenya on the east coast to Douala Port in Cameroon on the west coast.
The programme comprises a number of large-scale projects, including development of Lamu Port with 32 deep sea berths. The government of Kenya plans to concession the first three berths to the private sector for operations in 2018 while the remaining 29 berths will be concessioned for both construction and operation.
The Lapsset Programme also includes the building of inter-regional standard gauge railway lines that will traverse Kenya, South Sudan and Ethiopia, and the installation of crude oil and product oil pipelines. Inter-regional highways are included, for which a mix of public and private finance will be used. Projects such as these have spurred competition between ports and railways, particularly those serving landlocked countries, which in turn has stimulated investment to improve operations and reduce transit times.
Power transmission projects, most notably those that interconnect national grids, are also contributing to greater regional co-operation. The Eastern Electricity Highway Project, which will connect the power grids of Kenya and Ethiopia, represents the first phase of a regional East Africa power integration programme which is estimated to cost $1.3bn. The construction of a 2,300km transmission line connecting Zambia, Tanzania and Kenya is also planned.
ADDED IMPETUS
Projects such as these will be of interest to South African companies. While foreign contractors and consultants will also seek participation, there is added impetus for South African firms given the difficult trading conditions at home and forecast low growth over the medium term that will do little to improve this situation.
EMPHASIS IS BEING PLACED ON INFRASTRUCTURE SPEND THAT ALLOWS FOR SHARED RESOURCES AND INTERCONNECTIVITY