J-P LABUSCHAGNE The magnitude of African infrastructure development plans necessitates significant capital management skills
Transport infrastructure projects comprise 40% of the 482 infrastructure development projects surveyed in Africa, and represent a critical element for supporting further infrastructure development, says Deloitte Infrastructure & Capital Projects East and West leader J-P Labuschagne.
The ‘Deloitte 2018 Africa Construction Trends’ report shows that the transport projects included road, rail and bridge developments, and they are important because of transport costs on the continent.
A World Banks study of Africa shows that prices in landlocked countries are often 15% to 20% higher than import costs, which is about two to three times higher than in most developed countries.
“Transport is a critical factor for development because it reduces the cost of goods, and facilitates growth and development within a country and between countries,” he says.
It is reassuring that there is significant spending on transport infrastructure, he avers, highlighting how better transport networks can significantly reduce transport times, risks and costs.
Better transport networks also help to change the perception of distances, owing to reduced travel times, linking production regions and underpinning more efficient supply chains.
“Therefore, transport is a key driver of economic prosperity and can make a significant impact on economic growth and development,” he explains.
However, the infrastructure gap – the difference between existing infrastructure and the infrastructure needed as populations grow – persists worldwide, and governments alone, especially in Africa, are unable to provide the significant investments required to address this gap, says Labuschagne.
The positive impact of infrastructure on economies cannot be overemphasised, and the challenges facing governments providing and enabling private-sector development of and involvement in infrastructure are proportionally important.
The four main drivers of infrastructure development are population growth, and replacing and refurbishing existing infrastructure, as well as natural disasters, urbanisation and poverty. Urbanisation and population growth are the largest drivers of the infrastructure gap growth. The infrastructure gap includes the maintenance, refurbishment and the creation of new infrastructure.
Meanwhile, Chinese companies and investment financiers are becoming more active on the continent, in addition to the activity generated by the Belt-and-Road megaproject initiative, he adds.
“We see a maturation of Chinese investment and project development in Africa. While many of the projects over the past few years were ad hoc and opportunistic, there is greater understanding of African dynamics and returns by Chinese investors and development finance organisations.”
African governments and cities must ensure that they derive good value from projects, regardless of the developers, and focus on determining whether the returns will outweigh the costs.
“It boils down to how well the deals are negotiated. However, this is complex because it is often unclear what the scale of economic benefit would be and whether it would flow to the economy.”
Labuschagne adds that it is difficult to make long-term investment choices between social and economic infrastructure, and the return on investment can be slow or indirect, such as from greater economic activity resulting from better infrastructure.
Financial models to fund infrastructure, therefore, often leverage different funding sources, such as loans, user levies and, indirectly, taxes.
However, governments can use local economic empowerment and local-content percentages as valuable negotiating tools with which to gain local civilian and business support for projects and shore up the benefits to the local economy, he adds.
Crucially, the unprecedented magnitude of current African infrastructure development plans and private-sector growth initiatives necessitates significant capital management skills, concludes Labuschagne.