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In My View

February 27, 2015

African Infrastructure – riding out the oil crisis

The fall in oil prices has no doubt caused concern for many oil producing African nations. The question is how will these nations continue to invest in the kind of infrastructure they need in order to maintain economic growth?

The scale of investment needed is huge. The World Bank in 2014 noted that sub-Saharan Africa’s annual financial infrastructure requirement is approximately US$93bn, covering both capital expenditure and maintenance. After accounting for the portion paid by African governments, multilateral and bilateral donors and the private sector, an annual financing gap of US$50bn still exists. Which is why oil money – at $140 a barrel – was so useful.

The fact is that oil prices are likely to remain ‘low’ – although history shows us that ‘low’ is actually typical. Between the end of World War Two and 1973, oil prices (inflation-adjusted) remained consistently between $15 and $22 per barrel. Since then and ever since the Arab Petroleum Exporting Countries (OAPEC) proclaimed an oil embargo in 1973, prices have remained cyclical with peaks and troughs over a roughly fifteen year period. $50 a barrel is a sensible assumption over any cycle.

So how are African nations intending to deal with this? I don’t believe that the oil crisis will retract from infrastructure development because it is critical to economic diversification. The recent MOU between China and the African Union to invest in the ambitious cross-continental road, rail and air transport links is a strong indication that Africa has no plans to pull back on its infrastructure spend. It also demonstrates the confidence that foreign investors have in Africa, they are prepared to dig deep.

The involvement of the private sector is also likely to grow. Angola’s first public-private-partnership (PPP) project is currently under construction in the Cabinda province, a deep sea port that features 775 meters of reclaimed land and 31 hectares pf developed land – a major piece of infrastructure that will transform the country’s import and export capabilities, and create immediate jobs for locals.

The combination of public and private money alleviates some of the immediate financial pressure on the public purse, allowing the government to press ahead with major infrastructure projects. In January 2015 Kenya’s leading mobile operator, Safaricom, announced a new infrastructure deal with Nokia Networks to modernize and expand its 2G and 3G network infrastructure. This will see Kenya benefit from its first Long Term Evolution (LTE)-advanced network.

Nigeria, despite its current turmoil, already has a number of large-scale projects underway. These include the rehabilitation and upgrade of the Murtala Muhammed Airport road, a 2nd Niger Bridge, hydro power projects, the Kiri Kiri port rehabilitation project and a number of urban development’s comprising roads, bridges, water distribution, lighting, power and telecommunications.

The continent’s infrastructure deficit is therefore clearly not owing to a lack of financing. There are however capacity constraints in developing and implementing projects, that can only be overcome by tightening regulatory frameworks, controlling fiscal risks and maintaining debt sustainability. These are variables that African governments are already cognizant of, and are prepared to tackle.

With continued interest from foreign investors and the regional appetite for PPP’s, Africa is poised to ride out the oil crisis and meet its infrastructure development goals. It can do so knowing that future spending plans are based on oil prices of around $50 p/b that are, historically, normal.

The way I see it, the first wave of Africa’s infrastructure development has been spurred largely by foreign investment. The second wave will be different. I expect that continued economic diversification across the continent will give rise to an African-style industrialization phenomenon that will render the necessary cash flow to support the continent’s immense infrastructure potential.