West Africa is increasingly identified as an attractive destination for investors across all economic sectors. Its growing population of over 300 million and abundant resources continue to drive steady economic growth, as seen by a 6 percent average annual growth rate over the past decade. In addition, improved governance and political stability, institutional reforms, declining trade barriers, adoption of technology, and a re-emerging middle class attributable to an increasingly empowered and mobile workforce continue to contribute to the pace of development of the region.
Against the backdrop of continued economic growth in the region, the need for enabling infrastructure is clearly evident. Although requirements vary from country to country, a huge gap currently exists across key infrastructure areas such as power, transport, water and healthcare both within and across the countries in the region.
In 2014, PwC conducted a survey of key players in the infrastructure sector, including donor funds, financiers, government organisations and private companies across sub-Saharan Africa. The report, titled ‘Trends, Challenges and Future Outlook: Capital Projects & Infrastructure in East, South & West Africa’, indicates an opportunity-filled future for infrastructure development in sub-Saharan Africa. Infrastructure spend in the region is estimated to reach US$180 billion per annum by 2025.
While Africa’s infrastructure lags well behind that of the rest of the world, with over 30 percent in dilapidated conditions, there appears to be a renewed enthusiasm among leaders and civil society on the continent to improve the situation. There is widespread recognition of Africa as a growing consumer market, a future skills and innovation pool as well as an owner of abundant natural resources. This combination of factors is driving interests in infrastructure investment and development for both local and foreign players.
Articulating the opportunity
The impact that infrastructure development in West Africa will have on the growth of the region and its people is enormous. Transformation of natural resource-dependent economies into more industrialised regional and global trade partners, economic empowerment of a young and growing population, creation of new asset classes for investors, diversification of government revenues are a few illustrative benefits of developing infrastructure in the West Africa region.
To illustrate, the Nigerian power sector is undergoing a transformation which commenced over the last few years with privatisation and successful handover of government-run utilities to private sector investors. These private sector investors have returns objective that serve as strong incentives to make the acquired utilities substantially larger and more efficient. Over $3bn was realized by the government from the partial sale of generation and distribution assets. Furthermore, public and private agencies have estimated a yearly spend of $10bn over the next 10 years to “fix” the power sector. The ripple effect of getting this sector right in a country is huge. For example, it is estimated that about 40 percent of manufacturing costs is spent on power generation today.
The West Africa region has similar or more challenged infrastructure development statistics with the rest of sub Saharan Africa. In the region, only about 30 percent of the population have access to electricity compared to 80 percent in other parts of the developing world; transport costs are about 100 percent higher; road access rates are about 34 percent compared to over 50 percent; internet penetration rates of roughly 6 percent compared to 40 percent; and underutilized water resources, according to the Programme for Infrastructure Development in Africa (PIDA).
By developing infrastructure, countries in the region can diversify their natural resource-dependent economies and improve their balance of payments constructs. New linkages will be created to drive regional and international trade, which will drive industrialisation and the emergence of new global players in key industries. The population will experience substantial empowerment and employment from direct and ancillary industries that will be rejuvenated, while the governments will see an increase in tax revenues.
With the economic slowdown in the global market and key economies in the region feeling the strains of the recent oil price drops, the West African infrastructure sector provides the opportunity to create “new asset classes” for local and global investors and/or asset managers, with potential for relatively good returns.
Key challenges in delivering West African infrastructure
Infrastructure development challenges across West Africa are unsettlingly similar. Historically, these range across inadequate project preparation, unmitigated project viability/bankability gaps, inadequate governance frameworks and inadequate funding. A prominent view is that limited access to funding is perceived as the most significant challenge in delivering large complex infrastructure projects within the region. However, our examination of projects, interestingly, indicate inadequate project preparation/planning as the most significant factor in failed project delivery in the West African region.
Poor project planning consistently leads to project concepts that haven’t been adequately vetted coming to market. This, without doubt, results in bankability and viability challenges for the projects and ultimately access to funding becomes limited or non-existent. Recurrent characteristics of improperly planned projects that came to market and failed include nonexistent or weak infrastructure master planning frameworks; limited capacity to assess and identify technically feasible and economically viable projects; limited technical and commercial expertise incorporated into the project preparation phase; and no risk mitigation strategies to address a clear mismatch between the long-term nature of infrastructure financing and the traditional short tenure loans that local banks are accustomed to.
Robust and diligent project planning is perceived by project sponsors to be an expensive undertaking in the short run. However, the shortcuts taken by these sponsors consistently result in very expensive project failures as well as improperly structured and/or executed capital projects. These have substantial unfavourable implications for the project sponsors/investors, financiers and the public.
Several West African countries also have historically had challenges in taking projects through public procurement. Capacity/expertise issues in the public sector, a perceived lack of transparency or sound governance practices and protracted bureaucratic processes effectively reduce investor appetite and risk tolerance.
Another inherent challenge in West Africa infrastructure development is reconciling relatively shorter ‘political lifecycles’ with often longer ‘infrastructure lifecycles’. Few politicians/decision makers are selfless enough to plan for infrastructure projects the benefits of which may not be realised during their tenure. Furthermore, the risk of long-term projects being discontinued following a change in government further complicates the political versus infrastructure tenure challenge.
Finally, inadequate project monitoring and non-enforcement of performance contracts in West Africa also lead to significant infrastructure quality issues.
Priorities for improvement
Key select themes that will accelerate sustainable infrastructure development in the West African region include an enabling regulatory environment; developing and implementing robust infrastructure master plans; capacity building; harnessing the private sector; and expanding access for infrastructure finance.
IAN ARUOFOR
