Our efforts are focused in two geographic areas of demand for infrastructure which provide the ideal circumstances for both resource availability and infrastructure demand, the Asia Pacific region and Africa.
Governments in the Asia-Pacific (APAC) region are considered to be in a favourable position to invest in infrastructure with an eye toward boosting economic growth in the wake of the Covid-19 crisis.
Prior to the pandemic, APAC governments had been investing heavily in infrastructure. In the past five years, the value of global infrastructure construction grew by 3.2% on an average annual basis, driven by Asia with infrastructure construction in Northeast Asia growing an average of 5.4% per year and 6.8% in South and Southeast Asia.
But the Covid-19 crisis has created unprecedented economic disruption in the region, with containment measures stalling many economies and key sectors. Consequently, overall economic growth for the region (excluding China) will drop to just 0.5% in 2020, down from an average of over 7% in the past five years. As a result, investment will decline, notably hitting commercial, industrial and residential construction.
Governments and public authorities will likely be aiming to advance spending on infrastructure projects as soon as normality returns so as to reinvigorate the construction industry and the wider economy. This will spread across all areas of transport infrastructure and energy and utilities. Investment in infrastructure is generally considered to have a high multiplier effect, with the overall increase in economic value being higher than the value of direct investment itself.
With public funds not enough to meet infrastructure needs, European businesses are calling on governments in Southeast Asia to encourage greater private sector participation in projects.
In a report titled, “Bridging the Gap: Funding of Sustainable Infrastructure in ASEAN (Association of Southeast Asian Nations),” the European Union – ASEAN Business Council, which serves as the sole voice for European business in
Southeast Asia, offered recommendations on how to fund infrastructure projects in a sustainable manner. The council said the private sector could play a key role in financing infrastructure development in the region.
“There is no doubt there is a significant interest from both financial institutions, such as banks and insurance companies, and infrastructure construction and operating companies, to be more involved in the region. However, governments still need to ensure that the right conditions are in place to attract private sector support,” the council said.
Allowing private firms to build and operate the expressway under public-private partnership (PPP) mode is a key policy, especially at a time when the National Assembly is considering the Public-Private Partnership Bill, according to reports.
With interest rates falling to record lows, borrowing costs will be at a minimum, making it a relatively cost-effective period for governments to push ahead with investments, however, with most government prioritising direct support to businesses and households, their capability to invest in the infrastructure segment is likely to be constrained, especially in countries with high debt.
The long-term prospects for infrastructure investment in the APAC remain positive, reflecting the need to expand and modernise transport infrastructure and utilities to cope with the region’s demand growth amid rising economic prosperity and urbanisation.
Most of Africa lags the rest of the world in coverage of key infrastructure classes, including energy, road and rail transportation, and water infrastructure. Taking electricity as an example, entire communities across large swathes of Africa lack any connection to the grid. For households and businesses alike, work-arounds are expensive—in 2015, Mckinsey found that that by some measures, generator-based power in sub-Saharan Africa costs three to six times what grid consumers pay across the world. Even those who do have electricity generally use very little of it: in Mali, for example, the average person uses less electricity in a year overall than a Londoner uses just to power their tea kettle.
Closing this infrastructure gap matters greatly for the continent’s economic development, for the quality of life of its people, and for the growth of its business sector. The good news is that infrastructure investment in Africa has been increasing steadily over the past 15 years, and that international investors have both the appetite and the funds to spend much more across the continent. The challenge, however, is that Africa’s track record in moving projects to financial close is poor: 80 percent of infrastructure projects fail at the feasibility and business-plan stage. This is Africa’s infrastructure paradox—there is need and availability of funding, together with a large pipeline of potential projects, but not enough money is being spent.
Africa faces serious infrastructure gaps. For example, nearly 600 million people in sub-Saharan Africa lack access to grid electricity—accounting for over two-thirds of the global population without power. While significant progress is being made to close this gap, Africa still lags behind; for example India connected 100 million people to electricity in 2018, compared to just 20 million achieved in Africa. This has led to electricity consumption per person in Ethiopia, Kenya, and Nigeria being less than one-tenth that of the BRICs (Brazil, Russia, India, and China). Furthermore, the unmet demand looks likely to increase: McKinsey forecasts that Africa’s demand for electricity will quadruple between 2010 and 2040. The continent also trails the BRIC countries in other key measures, including rail density and road density.
Yet there is also no shortage of effort to close Africa’s infrastructure gaps. A 2018 report by the Infrastructure Consortium for Africa (ICA) found that between 2013 and 2017, the average annual funding for infrastructure development in Africa was $77 billion—double the annual average in the first six years of this century. Nearly half of the recent activity was in West and East Africa, with 27 and 19 percent of the total respectively. The transport and energy sectors together accounted for nearly three-quarters of the total investment.
The rising spend has come principally from African governments, which accounted for 42 percent of total funding in 2017. Chinese investment in particular has grown steadily: According to the same ICA report, Chinese infrastructure commitments grew at an average annual rate of 10 percent from 2013 to 2017 and have supported many of Africa’s most ambitious infrastructure developments in recent years. For example, China’s EXIM Bank financed more than 90 percent of the $3.6 billion Mombasa-Nairobi Standard Gauge Railway in Kenya. Opened in 2017, the railway cut travel time between the cities in half.
However, many more projects are needed. As a share of GDP, infrastructure investment in Africa has remained at around 3.5 percent per year since 2000—but the McKinsey Global Institute estimated in 2016 that this will need to rise to 4.5 percent if the continent is to close its infrastructure gaps. By way of comparison, China spends about 7.7 percent of GDP on infrastructure, and India 5.2 percent. In absolute terms, this would mean a doubling of annual investment in African infrastructure between 2015 and 2025, to $150 billion by 2025.
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