Author: Clyde Oakes, Head: Public Sector at Absa Regional Operations
The development of infrastructure on the African continent is a crucial driver for sustainable economic progress. Africa’s ailing infrastructure deficit has hampered its growth compared to other economies. The flipside to this challenge should allow African countries the opportunity to advance to new, and more efficient methods to remedy infrastructure challenges. Fundamental opportunities for infrastructure investment will be to supply the increasing demands of expanding populations with reliable electricity, affordable housing, water, sanitation and transport infrastructure. The resultant value of this activity will create new jobs, industries as well as innovative technologies.
Across the continent, many governments were still re-building their balance sheets post COVID when events in Ukraine disrupted the global economy driving up dollar-based lending costs and inflation. This has meant that many countries have had to look to the private sector for financial support for infrastructure investment. This has created a narrative – particularly in places like South Africa – where government services are being privatised for profit.
Across the continent, banks are seeing an opportunity to fund rail infrastructure projects but the key question they are all focusing on is: “Rail infrastructure should last for 20 years – what is the maintenance plan for this infrastructure?”
For many African countries who depend on State Owned Entities as part of their developmental mandates, this immediately creates distrust between the public and private sectors. Government and public sector stakeholders in turn try to drive local procurement requirements which result in many projects becoming commercially unviable. This results in an unnecessary impasse as we fail to bring together different investment ideologies and this is perfectly highlighted in the situation around electricity infrastructure in South Africa. Compare this to the situation in Kenya where Independent Power Producers (IPPs) have democratised access to electricity and concentration risk around a single supplier has been alleviated.
For South Africa to meet its lofty development goals, the country needs in excess of R4 trillion investment by 2030 and to lift infrastructure investment to nearly 30% of Gross Domestic Product (GDP). While there is a clear and present opportunity for infrastructure spend, it can no longer be business as usual.
According to a document prepared by National Treasury, between 2009 and 2019, public‐sector capital investment averaged 6.7% of GDP, while private capital investment averaged 12.8%. These are clearly well behind targets and it is important for sector participants to start re-imagining the infrastructure ecosystem and for role players to adopt long-term thinking to ensure sustainability of the projects.
Whether it is electricity, water, rail, road or housing infrastructure, the average South African cannot escape the fact that our infrastructure is crumbling around us. If we consider that 73.8% of all infrastructure projects are funded by government, we need to re-build the social contract between public and private sector stakeholders. A mammoth task definitely not for the faint hearted.
It is not enough to simply say “We can build this project!” if there is no consideration given to the ongoing maintenance and sustainability of the projects. Rail infrastructure in both South Africa and Botswana are perfect examples of this. Due to a lack of ongoing maintenance of railway fleets and tracks, the government is losing out on billions of Rands of revenue and the knock-on effect is that more goods are being moved via road infrastructure, which in turn is less efficient and not designed for the current volumes.
In South Africa, we have reached a point where if we don’t get rail infrastructure right, we won’t have road infrastructure in the next decade – and this comes at a cost throughout the value chain.
Where banks, Development Finance Institutions (DFIs) and Export Credit Agencies (ECAs) can play a key role is in changing the lens through which these projects are viewed – specifically around how the right public-private-partnerships can significantly reduce the cost of funding for many projects. This can be achieved by driving discussions around downstream activities such as job creation, off-take agreements, maintenance and Environmental, Social and Governance (ESG) related elements.
Across the globe, infrastructure investment is incredibly topical and the relationships between public and private sector stakeholders will be key for success. There are billions of dollars of investment spend earmarked for transformative projects across the spectrum, but we need to invest with a multi-decade mindset that focuses on sustainability rather than short-term profits. This creates a whole new playing field and calls on the brave to participate in innovative sustainable public-private partnerships.
As a bank, we have a proud history of being associated with large-scale infrastructure projects. We are calling the brave to pick up the mantle and we look forward to bringing our financial and technical skills to the fore and ultimately unlock the potential of the continent.