Africa’s creaking transport infrastructure, mostly untouched since the colonial era, is putting the brakes on further development. Eleanor Wragg discusses how funding needs will be met.
With foreign banks tightening their belts and shying away from non-core markets, Africa faces challenges in finding funding for the roads, railways, ports and airports it needs to support its economic emergence.
Construction is booming, FDI inflows are surging and telecommunications, retail and banking are flourishing, while oil and gas finds are set to line government coffers across the continent. But Africa’s rickety and at times non-existent transport infrastructure is holding it back. Originally developed to move minerals and other raw materials from the interior to the coast for export, rather than to connect countries and facilitate intra-regional trade, it is no longer fit for purpose.
As a result, for Africa’s 16 landlocked countries, transport costs can reach up to 77% of the value of exports, compared to an average of just 17% in other developing countries. Even for coastal African countries, this figure is as much as 50%.
According to the Economic Commission for Africa’s (ECA) Status of Regional Integration in Africa report, transporting a car from Japan to Abidjan costs US$1,500, whereas the same operation from Addis Ababa costs a whopping US$5,000. Only 10 cents of every dollar exported from an average African country goes to another African country. In East Asia, half of every dollar exported is bound for another East Asian market.
Speaking last year at the opening session of the African Union (AU)conference of ministers of transport, Dr Elham Ibrahim, AU commissioner of infrastructure and energy, said: “In most of our countries, transport has become a constraint rather than a facilitator of economic development,” adding that the biggest challenge for the continent to be competitive and combat poverty more effectively is to reduce transport costs to the world average.
Africa’s economic awakening and growing role as a raw materials provider to resource-hungry emerging markets such as China and India have given rise to steep demand for efficient transport links. Consequently, after decades of neglect, Africa’s governments are beginning to wake up to the fact that the continent needs to mobilise huge amounts of money to fund the construction of these links.
“Heads of state are committing more to the development of infrastructure,” says Ralph Olaye, manager of regional infrastructure and Nepad at the African Development Bank (AfDB).
“There are better development strategies in each country; there is now an economic vision and there is also better governance in terms of channelling finance or fiscal receipts to investments. Everybody has realised that infrastructure really is the bottleneck to economic growth.” He adds that the AfDB estimates that the state of African infrastructure currently costs an annual average of 2% of GDP growth.
Perhaps unsurprisingly, China has been heavily involved in road and railway financing across the continent, as it lends at below-market rates to fund infrastructure projects to cement its relationship with resource-rich Africa.
In September, for example, Nigeria agreed on terms for a US$600mn loan from China’s Export-Import Bank, most of which will be used to build a railway.
“Chinese companies have been most aggressive in bidding for projects in the continent and it’s therefore not surprising that Chinese banks are among the most active financiers of infrastructure projects in Africa,” says Humphrey Mwangi, senior credit and political risk underwriter at the African Trade Insurance Agency (ATI).
Not to be outdone, the Indian government is also getting in on the action. It recently extended a funding grant through the AfDB’s Indian Fund Trust for the modernisation and development of railways in East Africa.
While in rosier times, European banks would play a large role in financing Africa’s burgeoning transport infrastructure needs, today is a very different story.
Jean-Louis Ekra, chairman and president of the African Export-Import Bank, explains: “As a result of the global financial crisis, and the ongoing eurozone sovereign debt crisis, some international banks have pulled out of African deals, including African trade finance deals to focus on their national economies.”
In August this year, a year and a half after being brought to market, financial close was reached on a US$105mn deal for South Africa’s rail company Transnet. Unusually, only one bank – Nedbank – funded the transaction, after pricing turned out to be too low for other banks to follow. In another recent South African deal for aviation company Comair, which went to market to seek finance for three Boeing aircraft, one source close to the deal tells GTR that a lot of banks simply declined to bid because the client was not on their core client list, a further indication of the growing trend for international banks to pull back from non-core business.
“There is a lot of syndication and down-selling among banks even for mid-size deals,” says ATI’s Mwangi. “ECA and multilateral guarantee activity is also increasing. For instance, ATI grew its commitments by 54% in 2011 and expects to keep the trend in 2012.”
The ongoing sovereign debt crisis has also loosened European banks’ colonial ties with the continent. As an illustration, French bank Crédit Agricole sold its Banque Indosuez Mer Rouge unit in Djibouti in 2010 to refocus its international retail operations on Europe, while BNP Paribas sold its Madagascan unit last year.
“Most global banks, especially European banks, that were very active in Africa are battling difficult economic situations in their domestic markets,” says Mwangi. “A number of them have been downgraded by rating agencies, forcing them to go back to the drawing board. As if that is not enough, there is Basel III to worry about.”
This is creating the right conditions for South African banks to strengthen their foothold in their own backyard, although they still as yet lack the capacity to advise their clients on how to tap into international ECA programmes.
“We’re seeing the emergence of South African banks going out into the rest of the continent,” explains Olaye at the AfDB. “When there is a financing shortfall on one side, it makes more space for the others.”
“In times of crisis everyone must go back home to re-strategise,” adds Mwangi. “Some of Africa’s large banks that had moved aggressively internationally are re-focusing on Africa – the market they understand best. Here they find opportunities left by the exiting internationals.”
But it’s not just the South Africans; Togo-based Ecobank has now moved into 32 countries, making it Africa’s biggest lender by geographic reach, with expectations to increase its asset base tenfold in the next decade.
Because of a shortage of long-term financing instruments from local banks, due to the short-term nature of their deposits, the development banks still play a leading role in meeting Africa’s annual transport investment needs of US$18.3bn between now and 2020.
“We development institutions have a different raison d’être in this architecture and the commercial banks have other issues to overcome right now,” says Olaye.
“The tenures of the loans that infrastructure investments require are different from the saving profiles that Africans currently have. When Africans themselves invest in longer-term instruments, then the commercial banks will be able to turn around and look more seriously at some of these infrastructure projects,” he adds.
Countries seen as low-risk are also tapping international capital markets to raise funds for road, railway and port projects. In September, Zambia joined Ghana, Senegal, Nigeria and Namibia in doing so. The southern African country’s oversubscribed maiden 10-year US$750mn eurobond was issued at a 5.625% yield, lower than both the Spanish and Italian 10-year papers at the time.
Meanwhile, the AfDB is working on the development of an African infrastructure bond, leveraging its AAA rating to channel funding from dollar-denominated bonds to infrastructure projects, and not necessarily ones led by the bank, either.
As African central banks generally invest their foreign exchange reserves into developed markets, where they earn very little return, the AfDB hopes to persuade them instead to commit 5% of their reserves to this initiative.
The African Union’s programme for infrastructure development in Africa (PIDA) was ratified by heads of state in January 2012. “We’re looking at US$360bn of investment up to 2040,” explains Olaye. “At the shorter horizon, up to 2020, we’re looking at US$68bn, so around US$7.5bn for the next eight years.”
He estimates that while some 50 to 75% of the funds required will come from domestic sources – be that fiscal revenue, domestic private sector contribution or the mobilisation of resources available to each government – the aim is to also attract the sovereign wealth funds in Asia, the Gulf and Latin America that used to invest in US and European bonds.
“We have the projects, the real trick is in being able to market those projects and package them in a way that they are interesting for the sources of financing. And the Africa infrastructure bond is a vehicle to channel some of these funds,” he says.
As such, despite the pullback of traditional financiers from the sector, Africa’s transport infrastructure funding needs will be met through either development finance, sovereign debt issuances or local banks stepping up to the plate.
As long as funding for oil and gas and mineral extraction, for example, is available, then there will be financiers interested in related transport infrastructure. But for the rest, for linking city to city and town to town, one of the taboos needs to fall: “Infrastructure service needs to be paid for,” says Olaye.
“You can’t have bridges or roads and not pay for them either directly through a toll or indirectly through mechanisms such as fuel levies.” Today, users, whether private citizens or firms moving goods across transit corridors, are ready to pay to be linked to each other through new transport infrastructure.
Africa’s growth forges ahead
The World Bank recently concluded that Africa “could be on the brink of an economic takeoff, much like China was 30 years ago, and India 20 years ago”. Bankers, analysts and politicians have never been so bullish about the continent, which has seen vast and rapid improvement across a number of industries due to the efforts of its governments, who have increasingly adopted policies to energise markets.
In terms of bureaucracy, the World Bank’s most recent Ease of Doing Business rankings now ranks 14 African countries ahead of Russia, 16 ahead of Brazil and 17 ahead of India. The Economist Intelligence Unit’s Democracy Index 2011 pegs African countries such as Cape Verde, Mauritius and South Africa ahead of not only all of the Bric countries, but also developed European countries such as France and Italy – illustrating the continent’s shift to a new, emerging democratic reality.
Despite perceptions of the continent as rife with corruption, Transparency International’s most recent Corruption Perceptions Index shows that 14 African countries are less corrupt than India and 35 less corrupt than Russia.
Given these positive indicators, and with little to cheer in Europe and the United States, businesses and investors worldwide are flocking to Africa.
According to Ernst & Young’s annual Africa attractiveness survey, FDI projects into the continent have grown at a compound rate of almost 20% since 2007, and by 153% in absolute terms since 2003. 60% of the survey’s respondents say that their perception of Africa as a place to do business in has improved over the past three years.
While global GDP is expected to grow at a relatively weak pace of 2.3% in 2012, the World Bank Africa’s Pulse report says that Sub-Saharan Africa is projected to grow by 4.8%. Excluding South Africa, this figure rises to 6%, making it one of the fastest growing developing regions.