Optimism returning to East Africa

By: RisCura

But infrastructure investment is vital

There is a returning sense of optimism in East Africa, and the investment community is gearing up to take part in the next chapter of the region’s blossoming.

“The substance and longevity of Africa’s growth story outside of the ever turbulent commodity cycle has been much questioned of late. With the commodity cycle now well into an expansionary cycle, optimism is returning and there is the possibility that in two years from now all doubts will be washed away by the everpresent wave of cyclicality,” says Heleen Goussard, private equity associate at RisCura“However, it will be investment in infrastructure, particularly transport infrastructure, that will decide if this is East Africa’s tipping point,” she says.

A recent report by Capital Economics brings a sobering view on Africa’s growth story, pointing out a couple of underlying structural features of African economies that will continue to shape the continent’s destiny. For example, Africa is not a single region as connectivity between the economies is limited, which limits the free movement of labour and goods.

East Africa has more links to India and China than the rest of Africa. In general, Africa does not trade with Africa. The reason for this is well-known, but hard to solve. Africa’s infrastructure both soft, in the form of government policy, and hard in the form of roads, rail and airports does not support intra-African trade.

Recently, African leaders signed the African Continental Free Trade Area, the largest free trade agreement since the World Trade Organisation’s establishment. The agreement aims to create a free trade area that allows for a single market for goods, services and investments in Africa that would enable intra-African trade. “Substantial investment in transport infrastructure is needed to address hard infrastructure challenges,” Goussard says.

The Capital Economics report also discusses the difference between China and Africa, pointing out that Africa’s renaissance cannot currently be fuelled by labour intensive manufacturing.  This is partly due to the decline of such manufacturing, but mostly due to the high cost of production in Africa. Although the cost of labour is comparable the other inputs are significantly more expensive. These include electricity, transportation, skilled labour and raw material inputs. Again, it is infrastructure that is the answer and key to unlocking sustainable growth.

With renewed interest in Africa, capital is being invested in the continent. So, if a problem can be solved by the private sector, it is being scrutinised with renewed interest, including some problems that are traditionally seen as infrastructure investment.  For example, intermittent, unreliable and expensive electricity supply is one of the problems that the private sector can solve on a micro scale by means of captive power plants. Similarly, private education is taking off all over Africa. Even though private education is not a universal solution, there is no doubt that this educational infrastructure produces skilled labour that is in turn utilised by businesses in the economy.

This leaves one other major infrastructure problem – transportation. This is the next frontier, and a good transportation system is a problem that can’t be solved in a decentralised manner by the private sector. “The private sector can finance specific projects within a structured programme, but the private sector cannot in its decentralised, organic and opportunistic manner solve the transportation problem.”

East Africa is making large strides in this regard. The region’s governments development Public Private Partnership frameworks represent the much-needed structured, centralised direction. And, now a pipeline of projects is coming on line. To date, the most advanced projects include the Nairobi-Nakuru Toll Road, a 600m bridge over the Nyali River in Mombasa, and a further 67 projects currently in development. This could be East Africa’s stepping stone onto the long-term growth path.