Infrastructure: A long road ahead more

Africa’s path to growth: Sector by sector Rod Cloete, Felix Faulhaber, and Markus Zils Between 1998 and 2007, spending on African infrastructure rose at a compound annual rate of 17 percent—up from $3 billion in 1998 to $12 billion in 2008, significantly outstripping the growth of global infrastructure investment.1 Africa accounted for 11 percent of total global private-sector and foreignfunded investment from 1999 to 2001 and for 17 percent from 2005 to 2007. This growth has been driven largely by increased funding from nonOECD2 governments—particularly China’s, which provided 77 percent of it in 2007. The private sector is still the largest single source of funds (45 percent in 2007). Rapid growth has attracted many multinational companies within and outside Africa. While this growth has been substantial, the size of the investment gap that must be closed if the continent is to realize the United Nations’ Millennium Development Goals is more than $180 billion for sub-Saharan Africa alone (2007–14). Governments and the private sector must therefore substantially increase their infrastructure spending. For Nigeria, which aims to be among the world’s top 20 economies by 2020, reaching the same infrastructure levels that Brazil has today would require investments in excess of $190 billion—60 percent of today’s GDP—or an additional 3 percent of GDP for the next 20 years. So the growth trend in African infrastructure is far from over, and several countries have already announced significant additional spending. South Africa, for example, will invest $44 billion in transport, fuel, water, and energy infrastructure from 2009 to 2011—a 73 percent increase in annual spending from the levels of 2007 to 2008. Since infrastructure investments also offer a high stimulus multiple in times of economic slowdown, Angola, Kenya, Mozambique, Nigeria, and Senegal have announced essentially similar programs, though on a much smaller scale. Examined at a more granular level, this remarkable growth has clearly occurred in a limited set of countries and sectors. Algeria, Kenya, Morocco, Nigeria, South Africa, and Tunisia were responsible for 75 percent of the investment from 1997 to 2007. Infrastructure spending, fueled by an oil boom, is also growing rapidly in Angola. Lying behind this unevenness are big variations in the size of African economies, economic volatility, political stability, and the quality of logistics, health care, and skills. Almost three-quarters of these countries do not have GDPs large enough to sustain projects of more than $100 million (a comparatively small budget for, say, a port, an airport, a major road, or a power project).3 Similarly, the quality of roads and the density of populations vary considerably. Fifteen African countries are landlocked, and African transport costs are up to four times higher than those in the developed world, complicating the importation of equipment and materials. © DP World The private sector, though well placed to lead or support most types of infrastructure development and operation, often needs some government participation. Mobile telephony Attractive for privatesector funding, plus privatesector construction and operating companies with government partnership Absolute profit potential Natural-gas distribution High Rail Fixed-line telphony Social infrastructure Low Attractive for privatesector funding, plus private-sector construction and Electricity generation operating companies with little or no Ports government involvement Airport Electricity distribution Water and waste Low High Attractive for privatesector construction companies, plus government funding and operation Speed to profit Infrastructure investment has been similarly concentrated in specific sectors. Mobile telephony accounted for more than 30 percent of it from 1997 to 2007 because this market was very attractive and the required infrastructure had a relatively short payback period. Electricity generation, distribution, and transmission accounted for 23 percent of investment as countries across the continent developed large-scale projects (for example, the Bujagali hydroelectric power plant, in Uganda). Infrastructure for natural-gas transmission made up a further 10 percent. Investments in rail, largely in South Africa, took 11 percent of the total. Those in other transportation assets, such as roads, ports, and airports, were limited by poor business cases and long payback periods. Likewise, investments in water and waste made up only 1 percent of the total, given the poor business case for private players. Yet investment in African infrastructure can be very profitable, with returns “up to twice as high as we get elsewhere,” according to one expert. We have identified five keys to success. Arrive early and take a long-term view. If a company is to offset short-term currency risks and create the sustained relationships critical to success in Africa, a long-term view is essential. The construction company Julius Berger Nigeria, for example, has more than 100 years’ experience in Nigeria, and the industrial conglomerate Mota-Engil first entered Angola in 1946. Both are now benefiting from the infrastructure booms in these two countries. Build relationships. The reality of Africa is relationships in quasi-monopolistic markets, as its most important asset classes require special and hence scarce skills, and the operators and project sponsors are typically state-owned monopoly players (for instance, railroads, airport companies, or road agencies). Finding the right local company to partner with gives multinational companies immediate access to excellent political and business relationships, as well as expertise in managing local labor and regulations. Both APM Terminals and DP World, for example, operate most of their African ports with local partners. In many countries, partnering with local companies is required (and where not required, usually favored) in the tender process. Be vigilant. While risk management is important in all infrastructure projects, it is especially so in Africa, where the range of potential issues is wide and often unpredictable. Equipment problems at Mombasa port, in Kenya, for example, have caused significant, unexpected delays in the delivery of equipment for infrastructure projects in Burundi, Rwanda, southern Sudan, and Uganda. Manage actively. Because Africa’s business environment is so volatile, active management through the entire project life cycle is essential. One company developing a power plant in the Congo, for instance, discovered through active risk management that significant absenteeism in the workforce could be traced to the local traditional leader’s dislike of the company’s agreement with him. It had to resolve the dispute quickly to prevent a shutdown. Diversify your project portfolio. No company can avoid all the risks associated with infrastructure in Africa. Successful companies therefore maintain a wide portfolio of projects. One approach is to diversify by geography: for example, APM Terminals operates ports in seven African countries. The other is diversification by sector: GE provides equipment for both power plants and railways; Julius Berger, construction services for transportation, commercial and residential property, ports, and the oil and gas industries in Nigeria. Fast-growing companies have used different strategies to combine these sources of success. Some go deep into one country and then proliferate across its business environment, especially if relationships and local understanding are critical. This approach is most important for construction companies and funders, since asset-specific expertise is not the most essential value driver for them. The engineering, construction, and petrochemical company Odebrecht, for example, entered Angola to develop the Capanda hydroelectric dam and has since expanded into residential and commercial construction, mining projects, and a partnership in a diamond exploration venture. Other companies do business in a broad range of geographies, but in a specific class of assets (for example, ports and airports). This approach makes sense, especially for operators. If there are network effects beyond an individual country’s borders, it is best to operate assets in a highly standardized way at a global level. DP World, for example, entered Africa through the Doraleh Container Terminal, located at the port of Djibouti, Somalia, in 2000 and has since expanded to six terminals across Africa. Rod Cloete is an alumnus of McKinsey’s Johannesburg office, where Felix Faulhaber is a consultant and Markus Zils is a principal. Copyright © 2010 McKinsey & Company. All rights reserved.