The State of Africa Infrastructure Investment in Turbulent Times
THE world has an infrastructure problem, Africa is at the top of the list. African governments find themselves fiscally strained by retracting economies, reduced tax revenues and oil receipts due to low oil prices, State Owned Enterprises across parts of Africa are struggling and starved for cash such as South Africa utility giant, Eskom and greater demands for public assistance [entitlements, health care, welfare, pensions, unemployment benefits] and support of their populations. Ultimately, infrastructure is mostly a financial problem due to lack of long term, readily available and cost effective capital which is at the core of successful global infrastructure development.
Consequently, infrastructure spending and development has been delayed. The United States alone estimate over the next five years the federal government will need to spend at least U.S. $2.2 trillion (yes, U.S. $2.2 trillion) just to maintain, repair and build merely its most critical infrastructure – they do not know where the funds will come from. The United Kingdom has declared similar infrastructure needs, and has admitted that the UK government and HM Treasury do not have the resources to complete their infrastructure plans.
Asia Development Bank estimates Asian countries need to invest $8 trillion for infrastructure by 2020. Governments worldwide, including Africa nations are in desperate search of infrastructure solutions to tackle their massive and growing needs.
Let’s look closely at Nigeria and the Africa continent as a whole
Nigeria and Africa nations are still viewed as “frontier or emerging markets” by the international community. In general, global frontier and emerging markets have historically depended deeply on foreign investors, multinational corporations and global financial institutions to finance and develop infrastructure assets. Africa has also in great part depended upon cheap Chinese financing, which is now dwindling for infrastructure that is not related to resources such as oil and gas that benefit export to China. Africa nations has followed suit by attracting and striving to capture ever larger amounts of foreign investment capital.
African nations future infrastructure demands have now run into severe obstructions. More importantly for Africa nations, these studies and market reports indicate that the infrastructure finance and lending industry is reducing investment abroad and in emerging markets as many African economies are tied closely to oil prices and petrol revenues.
In 2014, per a report by the Wall Street Journal, Africa sovereigns issued slightly less than U.S. $13 Billion of international sovereign bonds in 2014, which was a record amount. However, this was for Africa as a whole; most African countries own governmental infrastructure needs exceed U.S. $13 Billion. Instead, these foreign institutions are focusing on local infrastructure opportunities within their own geographical region.
These local infrastructure capital requirements are at an unrivaled high, and at the same time face a shortage of large amounts of institutional capital required. There are plentiful local investment opportunities. What does this mean? Africa nations need tens of billions more of new infrastructure capital than is currently readily available from the markets that commonly provide capital to Africa, while the local financial systems are generally under-capitalized and unable to undertake the capital budgets and requirements of Nigeria and other leading African economies.
Foreign investors will invest closer to home and will carefully select emerging market investments that offer exceptional upside yields with limited downside risk with political stability.
Global Forces Affect Local Access to Capital and Infrastructure Development
For many government ministers or urban financial planners, competing for funding in a worldwide market is an unfamiliar activity that most do not properly understand. Where construction and maintenance of infrastructure was required in the past, many officials and their advisors first looked to local banks, or sought to raise money in the bond markets, with levies of taxes used to pay the interest payments on those bonds.
In some cases, financial advice was, and still is, sought from the very people who stand to profit from the issuance of traditional local bonds or local market borrowing and who therefore are in conflict with capital market alternatives. In a global financial market, credit ratings and risk assessments for infrastructure projects must compete favourably with analogous opportunities across the world. Local political obstacles and risk elements are being compared across nations and investment opportunities.
Financial planners and government officials need to educate themselves about the methodologies of new financial techniques that are rapidly evolving in light of the economic crisis globally and become aware of where they stand on the world stage so that they can present the best possible environment to attract and maintain investments. If cabinet-level ministers ignore infrastructure-based financial basics and fail to
understand the financial markets requirements, they will not be able to compete effectively and will continue to fall short in the development
of new critical infrastructure assets.
One key global driver for infrastructure development is urbanization. For the first time in human history, more people live in
cities than in rural areas. This trend is forecast to increase. Urbanization requires infrastructure: housing, roads, power, ports, light and heavy rail, schools, lighting, communications, water, waste management and police. Governments and businesses need to provide this framework to allow for stable societies that can compete in the marketplace.
Whether the ideology leans towards free-market, or is based on more controlled economies, large-scale development is now a fundamental task of governments and industry. Urban investments can create positive feedback. For example, better lighting in urban areas increases safety, which encourages people to invest in housing and businesses, to enjoy urban entertainment, creates safer neighborhoods, and encourages growth.
The Different Classifications of Infrastructure: Social vs. Economic
Bankers and investors categorize infrastructure into two distinct asset classes. Infrastructure can broadly be defined as long-term physical assets that operate in markets with high barriers to entry and enable the provision of goods and services. Social Infrastructure is a subset of the infrastructure sector and typically includes assets that accommodate social services.
Examples of Social Infrastructure assets include schools, universities, hospitals, prisons, government buildings and community housing. In contrast, Economic Infrastructure supports economic activity and is often characterized by user-pays or demand-based revenue streams such as toll roads, water systems, energy, communications, financial systems, airports, sea ports and convention centers or hospitality.
Russell Duke is Chairman & Managing Principal at National Standard Finance, LLC. Mr. Duke can be reached at RDuke@NatStandard.com.