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Deloitte on Africa

African Construction Trends Report 2013

January 2014

Deloitte | South Africa


©2013 Deloitte Touche Tohmatsu Limited. All rights reserved. © 2012 Deloitte Touche Tohmatsu Limited

Infrastructure Requirements in Africa

Sources: African Development

Bank, Public-Private Infrastructure

Advisory Facility, World Bank,

International Energy Agency,

GSMA, World Bank, Africa’s

infrastructure: A time for

transformation

Implementing

regional backbone

infrastructure

across Africa by

2040 =

$360 bn

Water and Sanitation

Most successful sector,

attracting 76 % of

regional investment

or $60 billion

700m active mobile

phone subscriptions

84m Internet-enabled

mobiles

ICT

$41bn a year deficit

Electricity

Less than 40% of the

continent has access

Requires 7 000 megawatts

of new capacity each year

Only spends1/4 ($11.6

billion) of what is needed a

year

62 % have access

to safe water

60% have access to adequate

sanitation

The lowest rates

in the world

Lose over

$5.5bn a year

Transport

Costs in landlocked countries

= 70% of the value of

exported goods due to the

lack of infrastructure

Only 19% of roads are paved

$18.2bn a year deficit

$9bn a year deficit

$21.9bn a year

deficit


©2013 Deloitte Touche Tohmatsu Limited. All rights reserved. White markers indicate position

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This is the 1st edition of

the Deloitte on Africa,

African Construction

Trends Report

This is the 2nd edition of

the Deloitte on Africa,

African Construction

Trends Report

Methodology used in the

2013 report

Background

What were the findings

• A total of 322 projects qualified for inclusion

• Categorisation of regions follows that of the

African Development Bank and data

collected was limited to publicly available

information

• Identified who owns, builds and funds

African construction projects

• It is produced annually by Deloitte

Southern Africa

• In collaboration with Deloitte

African member firms

• Projects with a value > USD50m

• Projects that had broken ground as at

1st June 2013, but are not yet

operational

Approach followed in study




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African Opportunity

• Africa’s economy is forecast to grow by 7% over next 20 years (Standard

Chartered)

• Between 2001 and 2010 the continent housed six of the ten fastest

growing economies globally (IMF)

• Growing middle class = increased consumer spending

• Urbanisation is creating increasing demand for infrastructure (Africa had

51 cities > 1 million in 2010, 2040 = 100 cities)

• Unexploited resources (25% of bauxite, over 60% of diamonds, 50% of

cobalt, 80% of phosphate and more than 90% of platinum group metals)

• Recent oil and gas finds in East Africa

• Recent start of oil production in Ghana

• Africa has 60% of the world’s unexploited arable land (Sudan, DRC, Mali,

Zambia, Tanzania, Mozambique and Angola)

• Only 10% of trade currently takes place between African countries.



North Africa

West Africa

Central Africa

Southern Africa

Over $222.8 billion in

construction projects

underway

$

Southern Africa

Southern Africa had the highest number

of projects followed by East Africa and

West Africa

East Africa

29%

$67.7bn

Over 322 different collected construction projects are

underway

Southern Africa

38%

$83.2bn

North Africa

7%

$6. 7bn

West Africa

21%

$49.9bn

Central Africa

5%

$15.3bn

Regional analysis

54 countries #




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Energy/Power, 38, 31%

Mining, 24, 19%

Transport, 22, 18%

Real Estate, 21, 17%

Water, 11, 9%

Health Care, 2, 1%

Education, 2, 2% Agriculture,

1, 1%

Construction, 1, 1%

Oil&Gas, 1

Sector analysis – Southern Africa

124

Projects

• The Southern Africa region leads development

with 124 projects underway

• South Africa has three of the largest projects

under construction (by value) in Africa (Medupi,

Kusile, Mthombo refinery)

• Mozambique is set to benefit from significant

investment in port, rail and road infrastructure.

• National governments own most of the projects

• European and USA companies seem to be

doing most of the construction.

• Private domestic companies (followed by

African DFI’s) are funding most of the projects.

• Involvement of South African construction

companies may be understated (48 projects

silent on construction partner)

• The industries seeing the most activity are the

Energy and Power sector as well as the Mining

sector

Number of projects by sector




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Transport, 39, 42%


Water, 7, 8%

Real Estate, 4, 4%

Telecoms, 3, 3%

Mining, 2, 2% Health

Care, 2, 2%

Education, 1, 1%

Shipping and Ports,

1, 1%

Sector analysis – East Africa

93

Projects

• The region is becoming a strategic

hub for continental growth.

• National governments own most of

the projects.

• European and USA companies are

responsible for most of the

construction

• International DFI’s seem to be

funding most of the projects followed

by the Chinese

• Angola’s projects are predominantly

being funded by government

• The industry seeing the most activity

is the Transport sector whilst the port

sector is surprisingly small at present





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Sector Analysis – West Africa

Energy/Power, 16,

24%

Transport, 15, 23%

Mining, 13, 20%

Oil&Gas, 8, 12%

Social Development, 4, 6%

Water, 3, 4%

Real Estate, 3,

5%

Health Care, 3, 5%

Shipping and Ports,

1, 1%


66

Projects

• Nigeria and Ghana are primary

infrastructure development hot

spots in West Africa.

• Infrastructure construction

includes Ghana’s harnessing of

natural gas resources

• 5 of the 10 largest projects are

in Nigeria and 3 in Ghana

• National governments own

most of the projects

• Europe/US based stakeholders

seem to be doing most of the

building and the funding

• The industries seeing the most

activity are the Energy and

Power sector as well as the

Transport sector




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Real estate, 3, 14%

Transport, 3, 14%

Oil & Gas, 3, 14%

Water Infrastructur

e, 2, 9% Mining, 1,

4%

North Africa

Sector Analysis – North Africa

22

Projects

• The energy/power sector

accounted for almost half of

projects


most of the projects

• European and USA companies

seem to be doing most of the

construction

• Private domestic firms appear

to be doing most of the funding




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Mining, 5, 29%

Transport, 3, 18%

Real estate, 2,

12%

Oil & Gas, 1, 6%

Water Infrastructure, 1, 6%

Central Africa

Sector Analysis – Northern and Central Africa

17

Projects


most of the projects,

• Combination of European, US

and Private Domestic

companies seem to be doing

most of the construction.

• DFI’s and Chinese banks seem

to be funding most of the

projects

• The industries seeing the most

activity are the Energy/Power

sector as well as the Mining

sector (29%)




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97

82

45

33 24 21 20

0

20

40

60

80

100

120

Energy/Power Transport Mining Real Estate WaterInfrastructure

Other Oil & Gas

Sector analysis – across 54 countries

• Energy/Power sector had the most collected projects followed by Transport and

Mining



North Africa

West Africa

Central Africa

Southern Africa

Southern Africa

38%

$83.2bn

Project Equity Ownership

Most of the projects are owned by Government

(i.e. 181/222 or 56%)

European/US investors own 55

projects (i.e.17%)

1st

2nd

Private Domestic Firms own 33

projects (10%)

3rd

• Private investors own 39% of the projects. Of this privately held 39%, European and US

investors own 17% of the projects, with 10% having private domestic ownership

• Remaining 2% is owned by East and Intra African investors

• 4% of total projects collected are jointly owned between governments and Public Private

Partnerships (PPPs).

• There is limited ownership exhibited by BRIC countries

• Chinese owned projects accounted for only 1% of total projects




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DFI versus Government funding

• 36% of all funding on the continent is provided by DFIs

• International DFIs account for 16% and African DFIs for 13%

• About 7% of surveyed projects are co-funded by International

and African DFIs

Other major sources of finance are:

• Domestic governments (8%)

• Europe/US based stakeholders (15%)

• Chinese stakeholders (10%)

• Private domestic investors (11%)

• Foreign institutional investors (7%)

Funding Analysis




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Construction analysis

• European or US contractors are building 37% of

projects

• Chinese construction corporations are building 12%

• The balance of contracts are held by private domestic

companies and contractors from Japan, South Korea,

Brazil and Australia.



Macro and regional challenges include:

Lack of depth in local debt and debt capital markets to fund projects domestically

Lack of international investor and funder knowledge and comfort in the legal and regulatory

environment lengthens the approval process

Lack of long-term strategic planning & too much focus on four year political terms

o four years is not long enough to bring an infra project to market (eg Prisons PPP)

The prevalence of inefficient, state-owned, monopoly service providers

Shortage of skills within Government:

o Engineering skills and experienced project managers

o Inadequate local expertise to structure long-term project financing

o Result is often a reticence to take decisions to move the project forward (‘sometimes even a bad decision is better

than no decision at all’)

Absence of incentive mechanisms to encourage private infrastructure financing:

o Grants, tax incentives and other concessions for investors and funders

Lack of rail (guage) and road (left hand vs right hand side) standardization

Delays in border access (road and rail)

Practical challenges in getting projects to market

Challenges and Bottlenecks in African Infrastructure



Many of the challenges can be overcome with the right planning, skills and resources in place.

Some solutions to overcome the challenges:

Partnering with the private sector (additional skills) and private funders (additional cash) is imperative to

resolve the backlog in Infrastructure

Provide comfort wrt long-term policy stability

o Can only be done by example over the long-term. Cases like the Prisons PPP and the GFIP linger in the minds of

investors

o These are long-term projects (20-30 years) and cannot be accomplished in a four year political term, so a long-term

stable strategy is vital

Aggressive recruitment with effective partnering and knowledge transfer to capacitate and up-skill

government departments

o also consider a central PPP unit such as SA has

Maintain a stable and transparent deal-flow pipeline in line with long term strategy

o After the World Cup ramp-up, construction companies redeployed experienced workers offshore or retrenched as the

pipeline dried up

o Takes time and adds cost to upskill again, so remove volatility

There are solutions to the challenges




There are solutions to the challenges


Many of the challenges can be overcome with the right planning, skills and resources in place.

Some solutions to overcome the challenges:

Spend time and money upfront on proper project selection and pre-feasibility studies

o Use qualified and experienced consultants

o Tender scoring that over-emphasizes lowest cost at the expense of the best skills can be counter-productive in the

long-run

Package the deal attractively for private partners:

o Public Private Partnerships are complex but very effective if well managed

o Share the risk and reward openly and honestly – a PPP does not mean that the private sector partner takes all the

risk for limited reward

o A reasonable expectation from the public sector of the optimal level of service that must be provided by the private

sector

o Understanding of the risk that is assumed by the private sector in return for the perceived profit on the contract

(development risk, maintenance risk, etc)

o Clear implementation timelines that are honoured by Government



Is lack of funding a reality or a myth?

It is our view that there is adequate funding available for good bankable projects. The issue is a

shortage of bankable projects rather than a shortage of development finance and private capital to

supplement state expenditure for financing projects

The stumbling blocks to projects being bankable lie within:

Project selection & portfolio management - assessing which projects are economically feasible & can

carry private finance vs which are purely social & should be state-financed

Project viability and sustainability - detailed pre-feasibility studies

Project scoping and packaging – making a compelling business case

Policy Stability and Regulatory Environment - Commitment to see projects through once given the green

light (Prisons PPP, Gauteng Freeway Improvement Project)

Public sector capacity – engineering, financial structuring & project management skills and experience

Co-operation - between Public sector, Private sector and funding institutions

Transparency - understanding of the risk-return allocation

Involvement of senior management in project planning and implementation

Post-financial closure governance and monitoring




Lack of ongoing maintenance is a major issue for African infrastructure:

Maintenance needs to be built into the long-term project finance plan

Maintenance is as important as the initial project

o Maintenance delayed by one year can end up costing 2 – 3 times more the next year (SAICE report card 2011)

Routine proactive maintenance rather than reactive maintenance

It is essential to get properly qualified and experienced contractors

Possible solution to the maintenance issue:

Long-term operating concessions to a private partner with an associated maintenance

contract requirement and maintenance metrics with heavy penalties for non-compliance –

eg N3 toll road, Government Department head office buildings

The issue of maintenance





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Concluding remarks

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