Published On: 29-9-2014

–      Telecommunications has been the most attractive sector to Gulf entities due to low risk, large population and upfront payment

–      US$30bn of funding by  Gulf entities to African infrastructure over the past decade, of which approximately US$15bn in loans and grants from Gulf development agencies and approximately US$15bn in direct investments

–      US$13bn is the value of Chinese investments in African  infrastructure in 2012

–      Annual Gulf investment  contributions are likely to average US$5bn in coming years

Dubai, UAE: A study by the Dubai Chamber of Commerce and Industry, has revealed that Gulf entities have provided at least US$30bn of funding, at current prices, to African infrastructure over the past decade, which amounts to between 7% and 10% of total inflows, of which approximately US$15bn in loans and grants from Gulf development agencies and approximately US$15bn in direct investments.

During a press conference held today at Dubai Chamber of Commerce & Industry to reveal the results of the study, which was developed in collaboration with the Economist Intelligence Unit (EIU) ahead of the Africa Global Business Forum on the 1st and 2nd of October, the study expected that annual contributions are likely to average US$5bn in the coming years, which equates to at least 10% of the total average annual inflows to this sector.

It also revealed that Gulf funding for African infrastructure has focused on North Africa, which has received the bulk of aid (about 65% of the total) and also a large share of the direct private investment (60%). There has been a focus on countries such as Djibouti and Senegal. However, there are increasingly exceptions to this rule, seen for example with the Saudi electricity company ACWA Power focusing its efforts mainly in South Africa and telecom companies exploring increasing swathes of East and West Africa. To date, there has been relatively little Gulf investment in the continent’s fast-growing economies of Angola, Ethiopia and Nigeria, which have attracted considerable infrastructure funding from Brazilian and Chinese entities, as well as—in the case of Nigeria—companies based in the US and Europe.

Gulf aid and investments are diversified among different infrastructure projects in Africa. According to the study, more than half of Gulf aid has gone to transport projects, mainly road building, with about 30% on power (ranging from hydroelectric dams to rural electrification) and 15% on water projects, but very little on telecoms infrastructure. By contrast, the telecoms sector has been the main infrastructure focus of the GCC private sector, followed by ports and, increasingly, power generation. Gulf investors have been less involved with roads and water infrastructure because of a lack of potentially profitable projects.

In 2012, Arab funding, both public and private, was equivalent to over 10% of total external funding. This was comparable to funding from European donors and more than the US$4bn from the World Bank. However, it was dwarfed by Chinese spending of US$13bn.

Yet while Chinese entities have invested far more in African infrastructure, a direct comparison is problematic. For Chinese companies, infrastructure deals in Africa are often part of broader commercial engagements with an eye on African resources. As such, the infrastructure is often a sweetener to win resource concessions. But Africa’s natural assets are not of such vital interest to Gulf countries (although some Gulf firms are investing in the sector).

H.E. Hamad Buamim, President and CEO, Dubai Chamber, noted this study highlights key facts about the economic reality in Africa and business opportunity. And due to cultural and historical ties to Africa, GCC investors are well positioned to invest in infrastructure in Africa.

Buamim said: “Opportunities are not limited to public and large companies, small companies are also well positioned to invest. Dubai Chamber’s study has revealed that given the perceived  risks associated with mega-projects in several African markets, smaller-scale projects have becoming increasingly more appealing, especially in the energy industry.

“Gulf investors must take care to differentiate between the region’s many countries, rather than view them as a homogenous “African” market. The Africa Global Business Forum, organised by Dubai Chamber will further highlight the economic and investment realities and opportunities in the different African markets,” he added.

GCC investments in Africa

Economic growth over the last decade has been robust, consistently surpassing 5%. Although this is welcome news, it is putting increasing pressure on infrastructure, evidenced by transport congestion, high logistics costs, inadequate asset maintenance and insufficient service provision in critical areas such as water and power.

Telecommunications

According to the study, the Gulf’s interest in investing in telecoms started with Zain of Kuwait and Etisalat entering the African market in 2005. This interest is largely a result of the sector’s relatively low risks compared with other infrastructure areas.

Gulf players have been successful in those sectors where consumers pay upfront and where the cost in physical infrastructure investments in advance is relatively rather lower contrasted with the amount of business they get.

The challenge is that, below the Sahara, markets look very different to the Gulf. Most Sub-Saharan African economies are low-income countries. They do have small elites with consumer demand comparable with those in the Gulf countries, but most people in Sub-Saharan Africa are not remotely in the same spending power bracket.

Gulf companies may need to partner, as Etisalat has, or  draw more from their own experience of serving lower-income customers at home, notably the significant African and Asian expatriate communities in the GCC region.

Different local market conditions need not necessarily be a disadvantage. It could give Gulf investors opportunities they may not have at home. If Gulf countries can master the art of operating in a low-income environment, the South African market still provides an environment closer to home conditions.

Transport

With regards to transport, Gulf investors are most heavily involved in ports, followed to a lesser extent, by airport and road construction and aviation. A landmark investment was DP World’s concession to manage the Doraleh Container Terminal in Djibouti. Awarded in 2000, this was DP World’s first investment outside Dubai and one of the first significant Gulf infrastructure deals in Africa. It has since invested around US$1.5bn and made Djibouti, the maritime gateway for Ethiopia, the third-largest container port in Africa and contributed around one-quarter of Djibouti’s GDP. DP World went on to invest in ports in Algeria, Egypt, Senegal and Mozambique, providing the company coverage across the continent, whilst at the same time boosting the integration of African economies into global trade.

Ports also proved a draw to the MENA Infrastructure Fund, a US$300m private-equity vehicle backed by three Gulf investors, which invested in Egypt’s Alexandria International Container Terminal. Another example is Agility, of Kuwait, which is involved in port projects and operates in 11 African countries,

In aerospace, while Gulf carriers such as Emirates have expanded in Africa, related construction projects are still small in number. The Kharafi Group of Kuwait, an early mover to Africa, built the runway for Ethiopia’s Addis Ababa airport a decade ago, and the Bin Laden Group of Saudi Arabia is nearing completion of a new airport in Senegal.

There is no direct Gulf involvement in the rail sector, although Gulf aid has been forthcoming.

Electric Power

Gulf power companies’ experience in implementing power projects, has helped meet rapid growth in Gulf power demand. Their interest is extending to Africa, and the first mover was Mubadala, which took a 25% stake in the development of a power plant in Algeria in 2006.

Today three big players, ACWA Power (Saudi Arabia), TAQA (Abu Dhabi) and QEWC (Qatar) have projects in Africa.

Although most Gulf funding of renewable energy projects in Africa has been for small aid-driven projects, commercially viable ventures are increasingly evident. Masdar has built the largest solar photovoltaic plant so far in Africa, a 15- mw facility in Mauritania, and has installed a wind farm in the Seychelles.

This study has also revealed that there are small and medium-sized Gulf firms working in the power sector in Africa, specialising in installing small-scale power generators in remote places and renting them out. Such low-cost distributed power solutions are popular in Africa where some industry experts are growing cynical of mega-projects, calling for more focus on smaller-scale, achievable ones.

Water

Water, one of the most pressing infrastructure deficits in Africa, has received little attention from Gulf investors. Most funding is coming from development agencies. Of the private companies in this sector, the largest and most interesting is Metito, a Dubai based firm.

Challenges

The study presented a number challenges which affect the investment decision in Africa especially when it comes to infrastructure.

Gulf investors continue to perceive Africa as a risky market. Risks from operational problems, non-honouring of contracts, currency volatility, political risks and change of government and policies, especially relating to long-term projects, are among the main concerns for Gulf investors.

However, Gulf investors particularly in sovereign wealth funds, which have done few major deals in Africa, could play a bigger role. One of the main factors preventing a more ambitious push is the high-risk perception of Africa among Gulf investors, particularly in the poorly understood countries across the centre of the continent, and it crucial to consider that each African country has its own risk profile.

Other investment challenges highlighted by the study include the availability of greater opportunities in home markets which affects the investment decision, high risk in a number of African countries and unfamiliarity with low-income environments.

Solutions

The study highlighted a number of recommendations to tackle the investment challenges in infrastructure in Africa and manage risks.

One way to better manage risk is through joint investment with global actors such as development banks and multilateral agencies.

African governments already partner with international institutions such as the African Development Bank or the International Finance Corporation, and investors have other options to protect themselves. The Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, offers political risk insurance in all countries eligible for World Bank assistance.

Moreover, a growing number of African states have ratified bilateral investment treaties (BITs) that provide investor protection and commit governments to an independent tribunal in the event of a dispute. Kuwait has entered into an agreement with Ethiopia, locking protections for an initial period of 30 years, compared with the average of ten years found in European BITs.

As more of these agreements are signed, such as the one between Qatar and Kenya in May 2014, Gulf investors can feel more comfortable about managing investment risk on the continent.

Another risk protection method is to ensure that investments have clear value to the surrounding economy, lessening the chances of backtracking on the part of government.

Islamic Finance

African regulators effort to deepening of Islamic financial systems created and opportunity to encourage Gulf investment in infrastructure.

The sukuk market in Africa is modest, accounting for just 0.6% of total global sukuk issuances outstanding. However, several institutions, including Standard & Poor’s and the Malaysia International Islamic Financial Centre have indicated potential for growth.

However, experience shows that between announcing an interest and the actual issuance there are often long time lags, partly because of political and legal hurdles and the costs of issuance. A second challenge is ensuring that regulators have the skills and resources to execute Islamic finance reforms. If the architecture is put in place, however, the impact on GCC-based financiers and investors would be salutary, owing to their familiarity and comfort with Islamic financial systems and the broadening effects of Islamic finance reforms on the infrastructure investment landscape.

Recommendations

Africa’s infrastructure deficit is an increasing constraint on growth. Yet investment, while short of the sums needed, suggests optimism about the sector’s potential.

As much as US$93bn is required annually to meet the continent’s infrastructure needs through to 2020, with half of that amount currently being met, according to the African Development Bank. That leaves a large gap for investors to fill, including sovereign wealth funds, multilateral lenders, individual companies and private consortia.

The following measures would give GCC investors a better understanding of these risks and encourage African governments to attract a wider range of players into the infrastructure space.

  • Pooling investments:

Joint investments bring together GCC-based companies with multilateral lenders, private investors and risk-protection bodies such as the MIGA, providing a more secure “investment club” approach that could entice conservative investors.

African governments can signal their intention to protect infrastructure investment through the active signing of bilateral, multilateral and regional investment protection agreements that would bind governments and investors to the ruling of an independent tribunal in the case of disputes.

  • Adding nuance to the risk map

Observers often group Africa’s diverse countries together when it comes to risk—and this is especially true of Gulf investors. While Africa’s strong economic performance over the last decade has gone some way to challenge negative stereotypes, greater efforts are needed to inform investors about each country’s distinct risk profile.

For African governments, implementing best practice on procurement, tendering, payment and contract stability will contribute to investor confidence—as will the communication of reforms to potential investors. Both African governments and those of the Gulf can work together to provide trade and investment fairs and information resources to increase awareness about the opportunities, and risks, of

Africa.

In the government-led economies of the GCC, personal relationships with decision-makers are important for boosting trade. Such a strategy will also help stimulate and encourage investments outside of the traditional aid programmes.

  • Diversifying financial sources

African governments have fruitfully tapped bond markets over the last two years, raising financing for critical infrastructure projects. Islamic finance products such as sukuk, sharia compliant bonds, remain somewhat nascent, despite their increasingly mainstream status globally and their natural fi t with tangible asset projects. This ought to be the next phase.

Promoting such instruments could widen the investor base for infrastructure and provide Gulf entities with new opportunities that could promote Africa’s infrastructure financing.

African infrastructure in numbers
  • Over 1bn people, with 41% under the age of 15
  • Africa’s population increases by 2.1% every year (1.1% is the global average)
  • Only 32% of population have access to electricity (74% is the global average)
  • Only 65% of the urban population and 38% of the rural population has access to improved water and sanitation networks
    • Just 19% of Sub-Saharan Africa’s roads are paved
    • Access to mobile is 63.5% (96.2% is the global average)