Manufacturing starting to pick up in Africa

Effect of insufficient infrastructure on the African economy

The Infrastructure Consortium of Africa (ICA) believes that 40 billion potential work hours are lost each year owing to people being unable to open a tap in their homes for water and instead needing to fetch water from another source. From the perspective of land transport, roads account for 80% of goods and 90% of passenger transport on the continent.

African governments have historically relied on donor aid and external borrowing to finance their fiscal deficits. At the same time, many states have financed infrastructure spending out of their fiscal budgets, resulting in fixed capital growth being dependent on available government finances. The KPMG Africa 2015 Construction and Infrastructure in Africa Survey highlights the following issues across Africa:

  • Emerging trends that will change the world of Infrastructure – The African Context
  • Building Time and Costs
  • Countries With Significant Construction & Infrastructure Opportunities
Uganda

The Ugandan industrial sector is dominated by construction, which, in turn, is primarily driven by large infrastructure investments by the government. Current infrastructure projects include work related to oil production (refinery, pipelines, access roads, and water and electricity access) as well as a standard gauge railway to facilitate access to the sea. In addition, social expenditure on education and healthcare will put further pressure on the fiscal account, while spending related to the electoral cycle could result in further expansionary fiscal policy. The industrial sector as a whole will become an increasingly important contributor to economic growth in coming years due to the development of the country’s fledgling hydrocarbons sector. Uganda is expected to maintain a healthy inflow of foreign direct investment (FDI) going forward, with the extractive sector anticipated to remain the country’s main FDI drawing card. The slump in international oil prices during H1 of 2014 and early-2015 could have a negative impact on investment decisions in the energy sector, but this will be highly dependent on the specific circumstances of each project, and the medium- to long-term outlook for energy prices of each oil company. There is little doubt that oil exploration budgets will be cut globally, as energy share prices drop and expected revenue figures fall. However, some projects in Uganda are beyond the exploration phase, with both Tullow Oil and Total having submitted their field development plans to the government for approval, and they are expected to receive their production licences this year.

Zambia

The rapid expansion seen in the mining sector since the turn of the century and resultant increase in downstream activities have boosted the industrial sector’s contribution to Zambia’s economic activity to 26% of GDP. Robust performance by the construction sector (accounting for about an eighth of GDP) has been underpinned by largescale mining investments and developments, the domestic production of cement, as well as strong infrastructure spending by the government. Zambia has a structural fiscal deficit due to the high pressure on fixed capital formation in order to address the gaping transport and power infrastructure shortfall. Infrastructure-related projects account for 60% of the World Bank’s portfolio in Zambia and the average life of a project is 3.8 years. Geographically, Zambia is favourably located as a regional hub and entry point into the SADC and close to the fast-growing EAC region, a position which could only firm up with the completion of the country’s ambitious road, rail and freight transport and power infrastructural programme. The outlook for the construction sector remains robust, and favourably positioned to take advantage of the prolonged energy (and to a lesser extent, base metal) slump. The industrial sector is forecast to continue growing in coming years on the back of on-going mining-related investment, although downside risk pertaining to proposed changes in the mining fiscal regime and current opacity in the political arena are expected to introduce short-term impediments.

Tanzania

Cement imports by the EAC’s second-largest economy increased from 92,400 tonnes during 2006 to 101,400 tonnes in 2012. According to the US Geological Survey (USGS), Tanzania’s domestic cement production also increased almost two-fold during the period to 2.58 million tonnes in 2012. However, despite higher production and increased imports, cement demand remained higher than supply at an estimated 3.5 million tonnes in 2012. Deputy Trade Minister Janet Mbene expects the country’s cement output to double to six million tonnes in a few years’ time, as seven new factories are expected to commence with production. The country’s industrial sphere is amongst its strongest growing sectors, driven especially by construction, mining and manufacturing. The industrial sector’s contribution to GDP will rise in the long term as the country’s deposits of coal, natural gas, and uranium are mined, while the manufacturing sector is expected to gain further in importance. The country also has a lot of untapped potential in the tourism sector, which could be utilised if the necessary tourism infrastructure is put in place and/ or upgraded. The nascent gas industry will be one of the key focus points of construction activity in coming years. Already the region’s largest market for gas consumption, Tanzania’s possible gas reserves are in the region of 43 Tcf, according to the Tanzania Petroleum Development Corporation (TPDC).

Final Thoughts

Africa’s largest, most vibrant and fastest growing economies are offering significant opportunities for companies in the construction business and with interests in infrastructure development. However, these countries are far from homogenous, and present diverse bureaucratic requirements, construction costs, levels of industry transparency, foreign involvement, and financial market development. Africa’s construction and infrastructure landscape is certainly full of challenges – as are many other sectors. The continent is said to have a significant handicap in terms of economic development potential due to its infrastructure deficit. Even when excluding profit and loss considerations, the infrastructure issue is at heart also a humanitarian and socio-economic issue. In the case of some 40 billion potential work hours lost each year to African people being unable to open a tap in their homes for water, the issue of infrastructure expands into areas of health and education as well. However, with the rapid expansion in infrastructure seen over the past decade, the growing interest in non-African companies in partaking in this immense growth, as well as the evident positive outlook for construction in many African states, the opportunities presented by the continent cannot be ignored. This document incorporates an overview of several countries’ current activities surrounding oil and gas, shipping, electricity, retail, ports and railway. Africa is evidently firmly on the radar of major construction multinational companies with hundreds of large projects already underway on the continent. These initiatives are no longer limited to mineral resources, as many still believe, and have diversified into other sectors.

Read about recent infrastructure developments in other African countries, download the KPMG Africa 2015 Construction and Infrastructure in Africa Survey

David Okwara

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