Unlocking Africa’s growth in energy and infrastructure deployment

Infrastructure and energy projects have long been a major part of the investment landscape in Africa. That is unlikely to change in the near future, if anything, such projects are likely to command an even larger share of African investment over the next decade.

Very few energy and infrastructure projects are purely private investments, even in the most developed markets, working with government agencies goes hand in hand with energy and infrastructure investment. But how does working in Africa create different risks and hurdles for investors? How can investors prepare to make sure their investments are successful?

A panel consisting of Matty Vengerik, Chief Executive Officer at Quantum Power; Murray Grant, Managing Director of Intermediated Equity, CDC Group; and David Ofosu-Dorte, Senior Partner at AB & David, discussed a broad spectrum of challenges facing investors in energy and infrastructure projects in Africa. The panel was moderated by Scot Anderson, Partner and Global Head of Energy and Natural Resources at Hogan Lovells.

Hurdles may not be unique, but are often harder to clear

Infrastructure and energy projects are never short-term investments. There is no quick fix when it comes to building transportation links or a reliable energy distribution grid. What makes Africa a particular challenge is that processes are often slowed down by government action (or inaction) which bring projects to a complete halt.

“Unfortunately, it’s the time delay, as opposed to the engineering, that I think is costing us the opportunity” said Grant. “One of the big issues that I look at in infrastructure is how do you speed up the whole process from end to end? That requires a much more proactive engagement from governments, which questions your ability to take time out of the equation. For example, it takes twice as long to build a power station in Africa as opposed to anywhere else in the world. Until you can fix that problem, investors will decide they are better off elsewhere”.

The panel was clear to point out that the fault lies on both sides – governments and investors. Ofusu-Dorte said that many investors fail to adequately prepare for projects in Africa, without giving due consideration to the differences in project challenges. “I would say [the most important thing in a project] is structure, structure, structure. There is a large amount of capital looking for infrastructure projects in Africa, but challenges can only be overcome by proper project structure and preparation”.

The panel discussed the changing and challenging role of government in African energy and infrastructure projects. Vengerik noted that “in a well-functioning government, there is no reason for government to own anything. The real issue is creating the market conditions for people to get access to services like electricity and water… right now, Africa has the highest cost of energy per kilowatt hour”.

Public Private Partnerships – a way forward?

The increased role Public Private Partnerships (PPPs) are playing in African energy and infrastructure investment is illustrated by the number of countries that have formalised legal structure in PPPs. Across the continent, governments have recognised that formal structure, secured by legal constraints, is key to attracting the investment they need.

Many African governments lack the capital and the experience to create a modern, accessible power and transportation infrastructure. “Even if money is available, the process of procurement and structuring are lacking”, says Ofusu-Dorte, “and PPPs are a way of solving this problem. If you look across Africa, at Nigeria, Ghana, Tanzania, and Zambia, all of these countries have PPP policies in place”.

Grant recognised the potential for PPPs to take on a larger share of African energy and infrastructure investment, but was also quick to point out that not all governments are willing to take a back seat. “You need government to roll back and be a good regulator not an interferer in the development process, but it gets tied up in politics”, he said. “A lot of time is spent in the development phase, and if you are from the

West you have to comply with tight regulations. It can take years to clear the runway just for a project to start. We are still in the process of educating governments and trying to get them to roll back”.

The increased role for PPPs may come at the expense of commercial banks, historically the largest investors in African energy and infrastructure projects.

The panel pointed out that increasingly, commercial banks have become more risk-adverse in Africa, with South Africa being the only African market where such investors are willing to take the long-term risk necessary to generate returns on such projects.

In the past, banks have invested in projects where the intention has been to keep projects off national balance sheets only to ask to be bought out at a later date.

Africa’s human capital is an underrated strength

However Africa and its investors tackle the continent’s challenges, there have been many investment successes. That has helped alter the investment outlook, and created more opportunities in the continent than ever before, and created a growing middle class, not necessarily something people think of when they think of Africa. But one look at African demographics tells another story, a middle class is emerging, and growing fast.

The panel reported good experiences in working with Africans on energy and infrastructure projects. “The idea that you can only do business by importing expats does not work anymore,” noted Vengerik. “There may be some roles where there is a capacity shortfall but working with a local community means working with people on the ground”.

The other panellists agreed and pointed to several recent successful investments that have relied heavily on local employment. Ofusu- Dorte used the Kenyan Water Resources Management Authority as an example “…so successful that it could act as guarantor for the government when the government borrowed money” to be continued “…and a mini reactor in Ghana run entirely by locals”. “The concept that [Africa] lacks capacity is one major misconception that is holding Africa back” he added.

The panel and the audience engaged in lively debate that highlighted both challenges and opportunities for African investors. The reality, according to Grant, is simple: “There is no magic bullet. We must get capital back to the bottom of the pyramid”.

“Many African governments lack the capital and the experience to create a modern accessible power and transportation infrastructure.”

FRANK UZUEGBUNAM