Why private capital can bridge Africa’s infrastructure gap – RMB

JOHANNESBURG — It’s well known that Africa has serious challenges when it comes to sufficient infrastructure. In fact, it presents both a challenge to the continent’s growing economies as well as an opportunity to leapfrog the rest of the world. To date, African nations have relied overwhelmingly on public funding to build their current infrastructure layer. But if Africa ever hopes to bridge its massive infrastructure gap, it needs to let in more private investment. This is the view of RMB Africa Analyst Celeste Fauconnier in this interview on RMB’s latest ‘Where to invest in Africa’ report. – Gareth van Zyl

It’s a pleasure to welcome RMB’s Africa Analyst, Celeste Fauconnier. Celeste, thank you for joining us once again.

RMB is unveiling its latest report on ‘Where to invest in Africa’. Can you tell us more about the focus and background of this report?

This is the eighth edition. It was released at the end of last year to Rand Merchant Bank clients and is now being made available to the public. The document focuses on the attractiveness of potentially investing in 54 African countries: where the opportunities as well as where the challenges are. Every year we choose a theme for the document. Last year we focused on liquidity in the market (currencies and how they’ve been acting). This year’s theme is infrastructure.

Essentially, we rank all 54 countries, according to a certain methodology. It focuses on the growth potential of each of these economies over the next few years and then also on the market size, because we believe that the bigger the market, the more opportunities there are for trading. Then we also look at, and probably the most important aspect, the operating environment –  basically how easy it is to do business in a particular country. We then incorporate all three aspects to formulate our ranking.

This year the theme of the report, as you mentioned, focuses on infrastructure. In fact, it highlights how a lack of infrastructure is both a challenge and an opportunity for growth. Can you tell us about the importance of this theme?

The reason why we looked at this theme this year is that it follows from last year’s theme where we focused on the most problematic factor for doing business in Africa namely, access to financing. Infrastructure is the second most problematic factor for doing business in Africa – and is also probably the biggest inhibitor for Africa’s growth rate. We know that’s an age-old problem and if we can sort that out, we can see improvement in the structure of all 54 economies on the continent.

We also looked at it because the African Development Bank has updated its numbers on the actual deficit of infrastructure in Africa. A few years back they came up with a number of US$90-bn that is needed annually to be able to cover this deficit. This number has increased to between $130bn and up to $170bn needed every year. Unfortunately, the current spending is about $45bn a year. So, we can see a stark deficit in terms of power, water, sanitation, ICT, road networks etc. across the board. We thought it was very important to discuss this deficit to highlight the challenges to our clients. But also, to show that this is an opportunity for investment. It’s always been an opportunity – albeit slow on the uptake. We’re hoping that this will spur more private and public investment into this sector.

Getting into the details of the report, which countries in Africa have the best quality infrastructure?

We have to take into consideration hard infrastructure and soft infrastructure. Soft infrastructure refers to education, health, logistics etc., while hard infrastructure refers to electricity, road networks, transport, etc. We’ve considered the number of indices that are available on Africa as well as the quality of this infrastructure. The most important information we received was from the African Development Bank – specifically their Africa Infrastructure Development Index. We then overlaid that data with the Human Development Index. What we have found was that the North African, Southern African and island economies were ranked the best in terms of quality infrastructure in Africa.

In fact, Seychelles is number one. If you combine these indices it then becomes clear why these island economies are doing so well. The main reason is because their biggest revenue earner is tourism. One has to of course get tourists from point A to point B very comfortably. You want strong ICTs so that they can connect with the rest of the world. If you look at North Africa, Egypt is the frontrunner in terms of infrastructure development. From a Southern African region perspective, South Africa is still in the lead with the best quality infrastructure.

Where does SA fit overall within the rankings? You’ve mentioned they were top in Southern Africa. Within Africa as a whole, I think a lot of people still regard us as having the best infrastructure in Africa. Is that still the case or are we being overtaken?

We’ve been overtaken already. We are only fifth in the rankings out of 54 countries. But if we look at the sectors that we are doing well in, it is predominantly the likes of road networks. We also have some of the best ports in Africa. If you however look at electricity – we are clearly lacking, compared to countries in North Africa that have 100% electrification rates. In terms of transport though, we are one of the top performers. So, it’s not something to be dismayed about that we’re not top in the rankings. I think it just gives us the opportunity to build on what we have.

Another country that has overtaken us is Libya. That is very interesting, because if you look at the indices, they are doing very well. But unfortunately, in recent times with the Civil War, some of the infrastructure has actually been affected by the tensions. I think in next year’s indices we’ll see Libya falling down these rankings. This leavers South Africa in fourth position from a quality perspective.

You spoke earlier about the importance of soft infrastructure. Can you explain what that means and how it can actually interplay with hard infrastructure, because I guess if you have a better educational system you can ultimately create more engineers, more accountants etc. who can handle the bigger infrastructure projects, right?

As you’ve mentioned, education is a key part of our document and we also look at healthcare. We also have a section where we look at the ease of trade between countries. Even though it doesn’t sound like soft infrastructure, it’s the regulatory environment that determines how easy it is for goods to be imported and exported between countries etc. What is so important about soft infrastructure is that it actually improves the quality of economic growth in Africa. While hard infrastructure will help with growth rates as it gets people and goods from point A to point B, it’s the quality of this growth (inclusive growth) that is supported by soft infrastructure. That refers to how the man on the street benefit from investment into soft infrastructure.

Out of all aspects of infrastructure, governments surprisingly spend the most on education. This is surprising because unfortunately we still have very low levels of education compared to the rest of the world. But we are improving. We are seeing enrolments improving. We are seeing an increase in the number of private schools, as well as an improvement in the actual infrastructure to get to school. This is all very promising.

From a health perspective – we basically look at people’s life expectancies. It’s probably one of the easiest indicators to look at. Unfortunately, even though the numbers appear to be improving we’re seeing that the quality of health is still low. That means we still need to build on education to train and employ more doctors and invest in more clinics.

What is the role of the private sector in infrastructure development in Africa, and could it have a bigger role to play, especially in partnership with the public sector?

I think that the private sector’s role is pertinent, especially over the next few years. We’re definitely seeing some increase in private sector investments into big infrastructure projects across Africa. Public Private Partnership (PPP) programmes are improving. Now, more than ever it is critical for private sector investments, because governments are starting to take strain with their fiscal spending. They’ve spent too much over the past few years and unfortunately revenues are not catching up with that. We are therefore going to see significant fiscal consolidation across Africa – similar to what we’ve seen over the past two years.

Unfortunately, in Africa, the place where governments cut first, is capital expenditure such as infrastructure spending. Governments would rather cut there than on recurrence spending, for instance public sector wages. That is why I believe it’s important now more than ever that the private sector needs to come in. Unfortunately, at the moment, it’s the public sector that invests the most – 90% of all projects are from the public sector – notably municipalities and only 10% from the private sector.

If you look at the sectoral split, for instance, public funding goes more into transport and energy, while private funding goes towards construction because it’s less capital intensive. These are short-term projects because the risk is still very high to invest in Africa. We need that split to change along with a change in sectoral investment to be able to build on infrastructure developments.

Celeste, I think you’ve given a very balanced view of where Africa stands at the moment with all of this. Are you optimistic or pessimistic when it comes to the future of infrastructure development on the continent?

I’m very optimistic. Just the fact that the private sector is increasing their investment is a key finding that shows that there’s opportunity and an appetite for this. Even though it’s in its infancy stage, we are starting to see more innovative areas of financing which will help the private sector, whether it’s through pension funds, project financing, or through infrastructure bonds. We are starting to see different avenues – not just from the traditional banking sector, but financing for investing in infrastructure.

I’m very excited about the growth rate in Africa for which we will need more infrastructure development. Unfortunately, the biggest problem and the biggest hurdle for infrastructure investment is weak institutional frameworks. What is needed is government’s’ political will to be able to build on infrastructure development.

Celeste, thank you so much, once again for chatting to us and telling us more about what’s going on in the African continent.