April 14, 2011

The ‘Infrastructure Tinted Lens’

Early in the first day of Institutional Investor’s Africa Conference Jay Ireland, the President and CEO of GE Africa (a recently created position), noted that he views opportunity in Africa through “infrastructure tinted glasses.” As Jay sees it, the opportunities for investment in Africa are largely driven by the Continent’s infrastructure needs. We had previously written about this issue as addressed by the World Bank’s Dr. Shanta Devarajan (read here), who noted that Africa would require an additional annual investment of $48 billion per year to bring Africa’s infrastructure to the level of Mauritius. We concur that investment in firms which operate in the African infrastructure space present a number of compelling opportunities.

Infrastructure in Africa can be perceived as both a challenge and an opportunity. As one of the conference’s other panelists noted, road density in Africa is about1/8th what it is in the BRIC economies (McKinsey’s Global Institute claims it is about 1/5th, but regardless, Africa is a clear laggard). McKinsey also notes that power generation in the BRICs is 2.4x that of Africa, and rail density is 2.3x higher. In addition, these numbers also don’t take into account the relative difference between South Africa and the remainder of the continent, for which the gap is significantly wider. Phone and cellular networks – although in many cases improving – remain spotty, and many Africans carry multiple phones in hopes of maintaining service from one place to another.

In addition, urbanization and population growth is putting a strain on many of Africa’s urban centers, where affordable and effective access to housing, water and sanitation, energy, and transportation remains a challenge. Also, the ability for countries to capitalize on natural resources and manufacturing is hampered by poor infrastructure networks. Even if an investor is looking at Africa from a traditional resource-based perspective, the cost of bringing goods to market – and therefore profitability – is directly linked to infrastructure networks that in many cases have not been adequately supported. Also, as African countries attempt to move into more manufacturing and intermediate or finished goods, access to the resources necessary to operate machinery will be a critical factor.

Presumably it is clear that investment in infrastructure is sorely needed on the African continent. However, in stark contrast with previous decades, a significant (and rapidly increasing) amount of capital is being put towards solving Africa’s infrastructure challenges. Perhaps it is not surprising to learn that, according to McKinsey, growth in transport and telecommunications grew by an annualized rate of 7.8% from 2002 until 2007, and construction grew at 7.5% annualized over the same period. For example, according to McKinsey, from 1991-2005 only about 1% of resource deals in Africa had an infrastructure component included. In contrast, that number had climbed to an average of 23% for the period between 2006 and 2010. In fact, McKinsey also predicts that between 2008 and 2020, revenue for infrastructure companies will grow by an annualized 9% rate, reaching over $200 billion by 2020, from approximately $72 billion today.

So what does that mean to us, who invest exclusively in opportunities in Africa? We have been adamant that infrastructure was a huge play for investors. We see great opportunities in many of the sectors mentioned above, as well as the companies which provide them with financing. In fact, we consider infrastructure companies to be one of the three key themes of our strategy, and actively position ourselves to seek companies that we believe will benefit from this trend. We absolutely understand why GE would see Africa through infrastructure tinted glasses – we do the same.

For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or info@nilecapital.com.

We know Africa - from Cairo to Capetown.

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