An edited version of this article appeared in the Opinions and Analysis section of Business Day (South Africa) on 23/12/2021: https://www.businesslive.co.za/bd/opinion/2021-12-23-george-philipas-infrastructure-spending-in-africa-is-at-a-crossroads/
The pandemic has certainly not been kind to investment prospects in Africa. Lead by a slowdown in infrastructure investment from China, foreign direct investment (FDI), already heading south before the onset of the pandemic, fell by 18% in 2020. More ominously, greenfield investment, investment in new projects, fell precipitously by 63% according to the Global Investment Trends Monitor released by UNCTAD in Jan 2021, the largest regional fall on the globe last year. The proverbial onslaught culminated with the announcement earlier this month at the recent Forum of China-Africa Cooperation conference (FOCAC) in Dakar, Senegal that plots Sino-African relations for the next three years, of a vertical drop in investment from China from US$ 60 billion to US$40 billion.
All this coming at a time when Africa as a whole is in dire need of a sizeable injection in investment if it is not to be left behind once again in the drive towards the 4th industrial Revolution, powered by renewable energy. According to a March 2020 McKinsey & Company report, a global consultancy firm, the continent needs to double its inward investment in absolute terms to US$ 150 billion if it is to have any chance of meeting these goals. It is unlikely that African governments, already squeezed fiscally by the pandemic, will be able to step up in any way either.
But despite the headlines, there are enough reasons to be cautiously optimistic. By October of this year, UNCTAD forecast a rebound to pre-covid investment levels on the continent by some time next year. This relatively quick reversal is remarkable on its own. It points to a long-term resilience and a more conducive investment environment than widely acknowledged. “The macro story for the continent remains sound,” assured Vuyo Ntoi, co-MD of African Infrastructure Investment Managers (AIIM), a private equity firm that manages long-term infrastructure investments on the continent, “Many countries have implemented fiscal consolidation measures that have gained credibility for these economies.”
And it is the sound fundamentals that have helped attract investors. Between 2007 and present, 21 African countries accessed foreign private funds, nearly all for the first time. This is especially true of the phenomenal increase in Eurobond lending (debt raised in foreign currency) that now stands at around US$136 billion for SSA economies. In 2021 alone, US$13.2 billion was issued, the majority by the likes of Kenya, Ghana, Benin and Senegal.
Growing post-pandemic confidence in Africa can be seen nowhere more than in a recent Nigerian US$3 billion Eurobond issue that saw over-subscription by a factor of four. It was eventually increased to US$4billion to accommodate investor demand. “If people don’t believe in the underlining policies of the government, will they come in?” Shuaibu Idris, a development economist and director of Time-Line consult, a financial consultancy firm based in Lagos, Nigeria asked rhetorically. “Even if you are being offered the best rates, you wouldn’t go in and invest. So, the fundamentals are right as of last count. “
Such confidence has been accompanied by direct private-sector investment in African economies such as Google’s mouth-watering US$1 billion investment. Mergers and acquisitions (M&A’s) by foreign companies seeking a foothold on the continent have also increased exponentially in the first half of 2021, and which South Africa has been a notable beneficiary.
The Chinese themselves appear to be trying to shift the relationship with the continent away from loans for large infrastructure projects and towards more trade-related investment. After years of inaction, President Xi promised to focus on increasing African imports into China to an eye-watering US$300 billion from current levels closer to US$72.7 billion.
Indeed, it has been criticism of China’s widening trade deficit with the continent and the worrying increase in African debt it holds, a lot at highly unfavourable rates, that it is said partly prompted its shift in focus. And while trade finance can never take the place of infrastructure investment, it is a move in the right direction in terms of helping Africa stand on its own two feet.
“It’s kind of moving to the next level,” Ntoi said. “The infrastructure that was put in place previously over the last ten years might be what allows for extractive industries to export their goods. It allows Africa to add value to its raw goods and beneficiate and export a higher-value product to China. So I think that’s in the continent’s best interest.” Idris on the other hand is far more pessimistic if the past trade relationship between China and Africa is anything to go by. “Do you see a situation where the Chinese will come to Africa and set up manufacturing concerns when they themselves need the manufacturing businesses in China for their labour to be employed?” He sincerely doubts it will change and appears to want to see proof of change.
At the very heart of the persistent investment drive is the perception that Africa is still the only game in town for significant returns in the long-run, in an otherwise low-growth, and potentially deflationary climate with a generally ageing populations in most parts of the world. “The continent has a young population, a growing population, one’s that’s increasingly urbanising. One that is resilient and entrepreneurial.” Ntoi pointed out. “Just from that, I think there’s enough macro impetus for infrastructure to be provided to those people.”
But even so, Africa remains blighted by age-old concerns, where there is genuine interest but a fundamental lack of investment-ready projects to throw money at. Much of this comes down to a lack of expertise in bringing projects to financial close. Karen Taylor, CEO of Invest Africa, a leading business and investment platform for the continent based in London, U.K, feels that there is a pressing need to address these structural issues coming out of the pandemic. “Chief amongst these are, a deficit in information sharing, navigating public-private partnerships, shortages and wastage in project funding and challenges around foreign exchange,” she reiterated.
With the increased engagement with the private sector, Africa becomes more vulnerable to the whims of the global financial markets and to increasing debt loads that have often become unsustainable in the past. This is why in the short-term, multilateral institutions will continue to play an outsized role. “During the pandemic development finance institutions and development banks have stepped up to fill the gap left by retreating capital.” Taylor pointed out. “If this mobilisation of blended finance vehicles can continue to be used at scale, we could see significant progress towards improving the attractiveness of African infrastructure projects over the medium and long-term.”
Ironically, Africa’s historic disadvantages might also prove to be one of its biggest benefits. The ability to leapfrog straight into new digital technologies and renewable energies at far lower costs, not having to upgrade old infrastructure, is proving to be a great advantage and helping to attract investment. According to a March 2020 Fitch Solutions, a credit risks and ratings agency, almost half of all power infrastructure projects in sub-Saharan Africa are currently in non-hydropower renewables, a trend set to continue.
The primary commodities that will drive the 4th industrial revolution have also been a principle driver for investment and will likely become super-charged as the decade progresses. It is telling that while FDI collapsed during the pandemic, in DRC, it actually increased by 95% in value in 2020 (albeit from a low base) compared to 2019. Nearly all this went into funding cobalt mining operations, a metal that is an essential component of electric car batteries and mobile phones.
In and amongst the doom and gloom in the current economic climate lies a second narrative for Africa that is gaining potency. As Idris reiterated. “Investors are realising that if they don’t get to Africa now, they might miss the bus. So, notwithstanding the challenges and policy restrictions, investors are still looking at Africa, being a continent, not just for the future, but for now.”