• Private parties

    Alternative sources of infrastructure funding will be needed to drive post-pandemic growth

    Private parties

    Even before COVID-19 halted major projects and bulldozed over the construction industry, Africa’s inadequate infrastructure was in great need of improvement. Investment is required across the board, from basic transport infrastructure such as roads, railways and bridges, to water and power, all the way to high-tech communication and broadband networks. In addition, social infrastructure, such as universities and student accommodation, healthcare clinics, prisons and sports facilities, also requires urgent attention.

    The gap between the infrastructure that Africa needs and what is actually being financed, could be as high as US$108 billion a year, according to the AfDB. The bank estimates that the continent will require infrastructure financing of up to US$170 billion a year by 2025. In 2021, the AfDB extended a US$75 million loan to the Ghana Infrastructure Investment Fund to finance critical national infrastructure projects in the West African nation.

    COVID highlighted the urgency of developing functioning infrastructure, not only to avert future public health catastrophes, but also to stabilise and grow the continent’s economies. ‘African governments have prioritised their spending commitment mainly focusing on vaccinating their population and building resilience considering the pandemic. This could impact the annual gap in infrastructure investment in the short to medium term,’ the AU said in the run-up to its seventh Programme for Infrastructure Development in Africa (PIDA) Week, which was held in Nairobi, Kenya, earlier this year to network, showcase and plan infrastructure delivery. ‘It is expected that once the pandemic is successfully contained, the focus will need to shift from crisis management to assisting to adequately invest in infrastructure for development, as well as preventing and mitigating the impact of future outbreaks.’

    Investing in infrastructure connectivity in Africa will improve intra-continental trade, lower the cost of goods and lessen the reliance on imports. It will also spur economic growth: the OECD estimates that, for instance, the infrastructure initiatives planned in South Africa could push the GDP up by at least 1.5% by 2025, if successfully implemented.

    South Africa, as with many other fiscally constrained governments, has realised that the traditional way of financing infrastructure through state-guaranteed structures is no longer sufficient. Instead, the emphasis has shifted towards multi-stakeholder partnerships with development finance institutions and the private sector. ‘Infrastructure projects by their nature are large, and no single funder can fund them in full,’ says Nina Yose, head of infrastructure at the Industrial Development Corporation (IDC). The state-owned development finance institution provides funding for industrial development projects in South Africa and the wider region, with its infrastructure unit focusing on water, telecoms and logistics. The aim is for projects to bring together different industries and value chains. ‘Increased industrialisation will allow the IDC to invest in the manufacturing sector, such as steel and cement, which supports construction, which has seen very low activity in the last few years,’ says Yose. ‘The private sector comes in with co-funding, which assists in leveraging IDC funding for large infrastructure projects. Multiple funders have the added advantage of assisting with risk mitigation on a project.’ She says the IDC wants to partner with the private sector, as early as the bankable feasibility study, to get infrastructure project development off the ground.

    South Africa and lately also Nigeria are looking to attract institutional investors to put their money into infrastructure projects. The long investment horizon of pension funds makes them particularly well suited to infrastructure investments. Nigeria recently appointed four private asset managers to run a state-owned US$36 billion fund, called Infrastructure Corp of Nigeria, with the aim to drive investment in roads, railways and power projects. The AU’s 5% Agenda has, meanwhile, been campaigning since 2017 for the continent’s institutional investors to increase their allocation into African infrastructure from its low base of approximately 1.5% to 5% of their assets under management.

    Retirement funds in the UK, Ireland, Canada and Australia are successfully invested in infrastructure projects, and this also holds opportunity for South Africa – provided the risk is managed in the right way, says Heleen Goussard, head of alternative investment services at Riscura. ‘Institutional investors are always looking for suitable investment opportunities that give them attractive market adjusted returns. With an economy with low growth and with the listed equity investment opportunities not growing, infrastructure represents one of the few such attractive opportunities, and with government driving an infrastructure-led recovery there could be significant advantage to both institutional investors and society.’

    However, to enable pension funds to participate in infrastructure investment in an appropriate manner in South Africa, changes in both regulation and risk-management processes are required, says Goussard. ‘To enable these regulatory changes, National Treasury released draft amendments to Regulations 28 of the Pensions Funds Act that, if passed, will enable retirement funds to invest up to 45% of their portfolios in local infrastructure projects. The [Treasury] alluded to a further 10% in projects on the African continent. This is a massive increase from most funds’ insignificant exposure currently.’

    She sees key opportunities for institutional investors in energy infrastructure, especially renewables, and expects a rise in logistics and transport infrastructure investment as the cross-border trade increases in the African Continental Free Trade Area.

    Currently there are no reliable benchmarks or indices reflecting Africa’s infrastructure performance, which hampers risk profiling and institutional investment allocations. There is also not much choice when it comes to infrastructure investment funds and listed securities, but this already changing. Global law firm Linklaters reports that 2021 saw the largest number of newly formed funds that specifically target Africa’s infrastructure needs – 10, up from an average of four per year over the past decade. The firm says that investors into Africa’s infrastructure-focused funds are predominantly development banks alongside European and African pension funds, such as the Government Employees Pension Fund (Africa’s largest pension fund). The latter could play a far bigger role, if the amendments to South Africa’s pension funds are approved.

    In the meantime, South Africa’s ZAR100 billion Infrastructure Fund is making headway with some major projects. In collaboration with state agencies, the fund is preparing six projects (with an investment value of ZAR96 billion) in student accommodation, social housing, telecommunications, water and sanitation and transport. One of these is the modernisation of six border posts shared with Zimbabwe, Mozambique, Botswana, Lesotho and eSwatini, excluding Namibia.

    Infrastructure is directly linked to economic growth, making it a key area of focus for African nations

    The SA Infrastructure Fund uses a blended financing model that secures funding on a programmatic approach as opposed to considering individual projects, according to Mohale Rakgate, CIO of the fund, which is managed by the Development Bank of Southern Africa. ‘The co-financing mechanisms adopted will ensure the achieving of appropriate risk sharing between the public sector and private-sector funders. The Infrastructure Fund will leverage its relationship with Infrastructure South Africa to unblock and unlock any policy, regulatory or legislative hurdles in order to speedily bring projects to close.’

    To mitigate the risk of assets falling into disrepair, more efforts go towards ‘life-cycle’ financing of infrastructure. South Africa’s National Infrastructure Plan 2050 (approved by Cabinet in March 2022) promotes this holistic approach rather than exclusively focusing on the design and construction. ‘It’s about time that we do so, as it creates the base for ensuring that the capital investment process is not considered in a piece-meal fashion but as “total cost of ownership”,’ says Chris Campbell, CEO of Consulting Engineers South Africa (CESA). ‘Often we tend to run things to failure and then hope to rehabilitate and repair the infrastructure. This is very costly and, at that point, funds may be better spent on building new.’

    He explains that the life-cycle approach means upfront budgeting for everything from planning, design and construction through to operation and maintenance. ‘There will be no excuse for the deterioration of infrastructure that should last for at least 30 to 50 years,’ says Campbell, highlighting the importance of procuring quality services right from the start. Simply accepting the lowest bid may risk poor construction execution and inferior materials being used, which could lead to untimely asset failure later on. ‘The capital budgets spent on consulting engineering fees make up only 3% and the construction execution only up to 15% of the total cost of ownership. But they have a major impact on the more than 80% long-term costs of operation and maintenance of the project.’

    Decisions on infrastructure investments are always complex, due to the massive capital outlay, the long-term nature of the asset life and the importance for people’s lives and the economy. It’s now up to African governments to re-risk infrastructure investments by reducing red tape and regulatory uncertainty, and making it more appealing for private investors to come to the table. The appetite, it seems, is certainly there.

    By Silke Colquhoun
    Images: Gallo/Getty Images