Good morning Ladies and Gentlemen,
Thank you very much for hosting me in Mombasa today.
I have been invited to talk to you all on the importance, and status, of infrastructure development in East Africa and the opportunity for the private sector to share this monstrous responsibility.
Researchers from the World Bank recently investigated the impact of infrastructure development upon economic activity and arrived at two conclusions:
1. Firstly, that the economic gains from infrastructure development will be greater the smaller the initial stock of infrastructure
2. And secondly, that infrastructure development, both in terms of quantity and quality, tends to reduce income inequality
More simply, the less infrastructure a country has: the less energy capacity or access to electricity, the lower the access to high-speed phone and internet networks, the smaller or less efficient the road, rail, port or air transport systems or the lower the access to clean water sources and sanitation, the more the total population has to benefit from infrastructure development.
The benefits of organised and efficient infrastructure networks are enormous: generous and efficient infrastructure provision has the ability to reduce business and production costs, to increase both human and technological productivity, to increase regional and international trade and ultimately to provide Africa with a competitive business environment.
However, Sub-Saharan Africa, including East Africa, suffers an enormous infrastructure deficit.
Only 35 per cent of the population in Sub-Saharan Africa have access to electricity, compared to 85 per cent globally
Only 71 per cent of the Sub-Saharan population have mobile phone subscriptions, whilst only 19 per cent have access to the internet, compared to a 97 per cent mobile phone penetration rate and a 41 per cent internet penetration rate globally
A World Bank Logistics Performance Index, that rates the quality of trade and transport-related infrastructure on a scale from 1 (which is very poor) to 5 (which is excellent) rates the quality of transport infrastructure in Sub-Saharan Africa at 2.3, compared to a global average of 2.8. Meanwhile, the AfDB indicate that transport costs tend to be 100 per cent greater in Sub-Saharan Africa, due to poor transport infrastructure, than is the global norm.
Finally, the proportion of the population with access to clean water stands at only 68 per cent in Sub-Saharan Africa, compared to 91 per cent globally. Furthermore, perhaps only 5 per cent of agriculture in the region is irrigated.
Although, Sub-Saharan Africa has demonstrated outstanding growth since the turn of the millennium, the growth figure might have been 2 percentage points higher per year under improved infrastructure.
East Africa tends to perform below even many of the Sub-Saharan averages for infrastructure quality. However, whilst the East African infrastructure deficit has most certainly contained economic growth even more severely, it also presents an opportunity to raise productivity and long-term growth to a greater level. Happily, infrastructure development is exactly what many of the East African governments are undertaking.
So now let me delve into this presentation and focus specifically on infrastructure development in East Africa, with regards to energy, information and communications technology, transport and water and sanitation, and assess the role for private pension funds.
Figure 1: Access to electricity
Figure 2: Private sector energy investments
As I mentioned earlier, only 35 per cent of the population in Sub-Saharan Africa have access to electricity, compared to 85 per cent globally. Taking a simple average across East Africa, only 16 per cent of the population have access to electricity, ranging from 7 per cent in Burundi to 23 per cent in Kenya. You can see on the bar chart here, that this average figure has doubled from 8 per cent in 2000, due to enormous capital investments, yet it remains obstructively low. Furthermore, as the region expands demographically and as industrialisation and urbanisation continue, energy demand will extrapolate, exacerbating the current deficit.
Improved energy infrastructure in East Africa will bring greater and more reliable electricity generation and provision and more efficient solutions to exploit the regions new oil and gas discoveries, including pipelines, terminals, refineries and storage facilities. Ultimately, this should reduce production costs, allow for enormous efficiency gains and improve the competitiveness of the regions industrial sector.
Within electricity generation, renewable sources are growing in popularity. Renewable energy is more sustainable than traditional sources and is in line with current global climate change policies. Furthermore, renewable energy projects are benefitting from enormous cost reductions in the initial construction phase under technological innovation, whilst their operational costs has always been naturally lower.
In this respect, East Africa may really boast impressive investment in renewable energy infrastructure since 2000. The second graph on this slide, the scatter graph here, presents all energy infrastructure investments in east Africa that have a private sector financing component since 2000. The total investment figures from Kenya and Uganda since 2000 are enormous and way beyond the rest of East Africa at USD 1.8 billion and USD 1.4 billion respectively. Although the 2007 Bujagali Hydropower Project in Uganda and the 2014 Lake Turkana Wind Power Project in Kenya contribute significantly to the total investment figure; you can see the two large investments on the graph.
So if you’ll let me, I’ll go into a little more detail on Bujagali. Bujagali Hydropower project is not the only hydro-power project in Uganda and there are numerous other renewable energy projects including Access Uganda Solar, which is due to start supplying the national grid this month, Kalangala Renewables, which will supply Ssesse’s largest island with solar powered electricity and many more. However it is the largest privately funded energy investment project and so an interesting case.
Bujagali Hydropower Project
The Bujagali Hydropower Project is located in Jinja, where the Nile meets Lake Victoria, and one of the many sources of the Nile within East Africa! The project was initiated in 2007, as the financial scatter graph highlighted, and by 2012 was supplying 250 MW of hydro-powered electricity to the Ugandan grid. The project is praised for relieving the Ugandan government of USD 110 million annually in subsidies, which it was previously distributing for less efficient diesel generation, for reducing the cost of electricity to consumers, and also for increasing Uganda’s electricity generation from renewable sources to 90 per cent, which is one of the cleanest energy systems in the world. Indeed, the Bujagali Hydropower Project has reduced Ugandan carbon emissions by an enormous 900,000 tons per year.
Now, let me go into a little more detail on the agreements and structures underpinning the Bujagali Hydropower Project, in particular for financing the project. I hope that the flow diagram here will help to explain the structure with a little explanation. The project is co-owned by the Government of Uganda, who own USD 20 million in equity and are 10 per cent shareholders, and Bujagali Energy Limited, a company co-owned by Sithe Global Power LLC and the Aga Khan Fund for Economic Development, who jointly own USD 180 million in equity and are 90 per cent shareholders.
Figure 3: Bujagali Hydropower Plant
So a total of USD 200 million of the project cost is equity financed. The remaining USD 700 million is financed through two long-term loans: a 20-year loan from various Development Finance Institutions and a 16-year loan provided by Development Finance Institutions and commercial banks. However, the commercial bank loans are supported by partial risk guarantee from the International Development Association, which in turn is supported by an indemnity agreement from the Government of Uganda.
To minimise project risk, the Government of Uganda has also provided an implementation agreement with the project owners: Bujagali Energy Limited, and a guarantee that underlines a power purchase agreement from the hydropower project to Uganda Electricity Transmission Company Limited (UETCL).
Finally, the hydropower project also owns contracts for engineering, procurement and construction and for operations and maintenance, which you can see here.
The project has been an enormous success, encompassing a spectrum of financial instruments and lenders and de-risking instruments to facilitate effective financing, construction and eventual power distribution. Indeed, the project is the largest privately financed hydroelectric plant in Sub-Saharan Africa and the largest ever power related investment in East Africa, and in 2007 was awarded the ‘Africa Power Deal of the Year’ by Euromoney’s Project Finance Magazine.
Figure 4: Mobile phone subscriptions
Figure 5: Internet users
Figure 6: Private sector ICT investments
The ICT sector is perhaps the most dynamic of the infrastructure sectors, both in East Africa and globally. In East Africa, mobile phone and internet penetration has extrapolated from a simple cross-country average of less than 1 per cent in 2000. Nonetheless, East African connectivity remains below both the Sub-Sahara African and global averages. The proportion of the population with mobile phone subscriptions stands at 97 per cent globally, 71 per cent in Sub-Saharan Africa and 57 per cent taking a simple average across the East African countries. Similarly, the proportion of the population with access to the internet stands at 41 per cent globally, 19 per cent in Sub-Saharan Africa and 16 per cent across East Africa.
However, Kenya outperforms the region dramatically in terms of connectivity. The graphs here show that with 74 per cent of the population owning mobile phone subscriptions, Kenya’s mobile phone penetration rate stands above the Sub-Saharan average; whilst with 43 per cent of the population having access to the internet, Kenya’s internet penetration stands above even the global average.
Reliable and efficient ICT infrastructure should provide enormous economics gains through better connecting individuals, markets and economies, through fostering learning and communication, which in turn will enhance labour productivity, through improving supply lines and by encouraging innovation.
The benefits of ICT infrastructure can be observed in the region already. Kenya boasts a high internet connectivity rate and consequently may also boast numerous internet-related innovations and apps, ranging from apps offering timely transport updates (Ma3Route), systems that offer children school lessons and quizzes via text message (Eneza), solar powered Wi-Fi routers for rural areas (Mawingu) and apps that inform farmers of the market price for their crops (M-Farm). All of the above offer significant advantages to economic development in easing transport routes, improving education standards and expanding rural connectivity, both of which enhance total labour productivity, and in facilitating trade. As the Government of Kenya and the Kenyan Ministry of ICT enact a program to offer free internet nationally, Kenya will undoubtedly profit from further innovation and productivity gains.
ICT infrastructure offers more rewards to the private sector, alongside lesser start-up costs, than any other infrastructure investment and therefore has received more investment with private participation than its counterparts. As before, the scatter graph here illustrates all investment into ICT infrastructure with private participation in East Africa since 2000. Predictably, Kenya has received by far the most private ICT investment, amounting to USD 6.6 billion since 2000. Yet Tanzania and Uganda have also attracted an impressive amount of private ICT investment: Tanzania has attracted USD 3.8 billion and Uganda USD 2.8 billion since 2000.
Figure 7: Logistics Performance Index
Figure 8: Private sector transport investments
In terms of transport infrastructure, East Africa does not fare badly when compared to Sub-Saharan Africa, yet there is still ample space for improvement. I mentioned the World Bank Logistics Performance Index earlier, the Index rates the quality of a country’s trade and transport-related infrastructure from 1 to 5, whereby 1 is very poor and 5 is excellent. Sadly, even the global average score for the Index is below the mid-point at 2.8. The Sub-Saharan average is 2.3 and the East African average is 2.4, with all countries scoring largely equally and all above Sub-Saharan Africa. Perhaps most notably, you can see on the graph here, Rwanda has achieved a drastic improvement in its Logistics Performance in a very short space of time.
However, I think it is worth noting that the quality score may overlook the efficiency of East Africa’s transport infrastructure. I have mentioned that transport costs are on average 100 times greater in Sub-Saharan Africa than globally, which presents a vast barrier to economic development given the smaller incomes in the region.
Improved transport infrastructure offers better market linkages, more efficient supply lines and lesser production costs, and therefore offers the potential to drastically improve regional and international competitiveness.
Yet transport infrastructure tends to be a public good: whilst the benefits are enormous, they are shared throughout the population and thus it is difficult to persuade the private sector to invest in a shared good. Furthermore, transport infrastructure tends to have a very long profit horizon. For example, it is estimated to take 30 years before the cost of a road has been countered by economic dividends. Whilst large-scale transport infrastructure investment is unattractive to the private sector, its cost is colossal and would weigh heavily upon already strained fiscal budgets.
The scatter graph here illustrates investments in transport infrastructure with private participation since 2000. You can see that there has been much less private infrastructure investment in transport infrastructure than in energy or ICT. By far the largest investment is this blue cross: a USD 404 million investment in Uganda in 2006, which was a public-private partnership (PPP) between the Kenyan and Uganda governments and the Rift Valley Railways Consortium (RVRC) to enhance the Kenya-Uganda railway, which I will now give you more detail into.
Rift Valley Railways Consortium
The Kenya-Uganda railway connects Eastern DRC with Uganda, through Kampala, and Kenya, to the port of Mombasa. As such it is seen as critical in regional integration, but is vastly underutilised. Indeed, in 2006 Rift Valley Railway accounted for only 5 per cent of all traffic at Mombasa Port; most containers were carried by road. Furthermore, railway traffic had steadily fallen from an average of 4 million tonnes per year throughout the 1980s to less than 1 million tonnes by the turn of the millennium.
Yet, it should theoretically be much more efficient to transport heavy containers via rail than road and consequently the Rift Valley Railways Consortium was established in 2006 to rejuvenate the regional railway system. The flow chart you can see presents the financial agreements underpinning the Rift Valley Railways Consortium and so please let me explain it a little.
First, the Rift Valley Railways Consortium is a consortium of four international companies: Sheltam Rail Company, Trans-Century Ltd., Babcock and Brown and ICDCI Investment Company Ltd, that all own different stakes in the consortium. In return for a 25-year concession agreement, where the Kenya and Uganda Railway Corporations leased all equipment and machinery, the Consortium paid the Kenya and Uganda Railway Corporations one-off concession fees of USD 3 million and USD 2 million respectively and agreed to pay the Kenyan and Ugandan governments 11 per cent of their annual gross revenues. Finally, the consortium also invested USD 28 million in equity towards the Rift Valley Railways, which was supported by an IDA partial risk guarantee, protecting against government and political risk. As with the Bujagali Hydropower Plant, the International Development Association (IDA) were able to provide Partial Risk Guarantees (PRGs) as the Governments of Kenya and Uganda had in turn provided them with an indemnity agreement.
However, the previous slide clearly highlighted the project cost at USD 404 million, whilst the Consortium only provided USD 28 million in equity financing. The International Finance Corporation (IFC) and KfW also provided debt financing, amounting to USD 64 million, again insured by an IDA PRG. The remaining financing was expected to originate from internal cash flows.
Figure 9: Rift Valley Railways Consortium
Unfortunately, the initial capital investment was insufficient to trigger a significant and immediate increase in rail freight and therefore inadequate internal cash flow was produced to finance the remaining capital expenditure. As I mentioned earlier, transport infrastructure has a particularly long timeline before it becomes cost effective.
In 2009 the PPP was temporarily suspended as the Consortium had not met government targets for an increase in rail freight. However, following a change in some shareholders and an increase in both shareholder equity financing and debt financing (the IFC offered a USD 164 million loan in 2011), the Rift Valley Railway Consortium seems poised to achieve an impressive increase in rail freight in the coming years, from less than 1 million tonnes still in 2011 to 4 million tonnes by 2017.
Water and sanitation infrastructure
Figure 8: Access to clean water
Figure 9: Private sector water investments
Finally, let’s have a quick look at the often overlooked sector of water and sanitation, where East Africa fares in line with the Sub-Saharan standards, yet inevitably below global standards. 91 per cent of people in the world have access to clean water, yet in Sub-Saharan Africa this figure stands at only 68 per cent. Taking a simple average across the East African countries, the proportion of the population with access to clean water is 70 per cent, but this masks much lower rates in Kenya and Tanzania, the two countries with the biggest populations. Indeed, in Kenya only 63 per cent of the population have access to clean water, most likely a result of the larger prevalence of slums.
Furthermore, the ongoing demographic expansion in East Africa is likely to exacerbate the demand for clean water sources.
If transport infrastructure suffers from being a public good, than infrastructure providing water and sanitation suffers even more so. Water and sanitation infrastructure indirectly boosts economic growth through enhancing labour productivity. Quite simply, a healthy labour force increases labour productivity, which in turn increases economic output.
Yet, there is no incentive for the private sector to invest in water and sanitation that will benefit the entire population when they may only employ a small amount of people and they cannot guarantee that their services will even affect their direct employees. Consequently, if you look at the scatter graph here, you will see that there has only been one private investment in water and sanitation throughout the whole of East Africa since 2000; that is the short-lived and disastrous privatisation of Dar es Salam’s water supply by City Water in 2003.
So, excluding water and sanitation, there is definitely space for the private sector to support infrastructure development in East Africa. In particular, the rewards from investing in energy and ICT infrastructure are relatively quick and easy to retrieve, making these two sectors highly attractive for the private sector.
Furthermore, the actual cost of all necessary infrastructure investments are beyond the capability of most governments and donors. The African Development Bank (AfDB) estimate that closing Sub-Saharan Africa’s infrastructure deficit by 2040 will cost USD 360 billion. To put USD 360 billion into perspective, this is the one quarter of Sub-Saharan Africa’s GDP in 2015. The private sector therefore needs to be welcomed and encouraged to participate in infrastructure investments. For many players, public-private partnerships are an optimal solution to address the deficit and the funding gap, whereby private entities take over the operations of a public good in return for a capital investment, tax break or similar from the government, who will also act as the regulator.
However, since we have been invited here today by PineBridge Investments, I would like to focus a little more on the role that pension funds may undertake in infrastructure investment.
Perhaps rather surprisingly, infrastructure and pension funds are rather well suited. Infrastructure has a rare cash-flow profile in that its immediate costs are high and typically short-term, yet its dividends are low and more long-term. Indeed, for exactly this reason, infrastructure development requires long-term debt, which is especially expensive and lacking in East Africa. By comparison, as many of you here know, pension funds receive small imbursements over the long-term and then experience a high cost at the end of the contract cycle. Thus, pension funds desire long-term investments, whilst infrastructure demands long-term debt.
It would be extremely unusual for a pension fund to lend directly to a project, especially a high-risk infrastructure project. However, there are ways in which pension funds can indirectly finance infrastructure development, including through purchasing infrastructure bonds and securitised debt.
At present, Kenya is the only East African country to issue an infrastructure bond. In fact, Kenya has successfully issued numerous infrastructure bonds since 2009, typically with a yield of 11 to 12 per cent, including the world’s first ever infrastructure bond that can be traded on a mobile phone, via the M-Akiba platform.
Although securitised debt became unpopular following the global financial crisis, it remains a valuable tool that is growing in popularity with donors, such as the World Bank. In the case of the World Bank, if their sister institution at the Multilateral Investment Guarantee Agency (MIGA) can partially de-risk private infrastructure debt through offering political guarantees, various Funds may then be able to re-package the debt as a relatively safe long-term asset. Securitised infrastructure debt remains a relatively unexplored territory, yet certainly an attractive option for investors seeking long-term assets.
Thank you for listening this far. Let me quickly summarise with a few key points that I would like you to remember from my presentation today:
Infrastructure development is critical to economic development. This statement rings true globally, but particularly so in East Africa where the infrastructure deficit is vast.
Government and donors cannot afford to finance the necessary infrastructure deficit alone, the private sector must be welcomed to the infrastructure space.
Pension funds are particularly well-suited to finance infrastructure. Indeed, infrastructure financing offers an opportunity for pension funds to balance their long-term liabilities with long-term assets.