Last month’s announcement of a partnership between Africa richest man Aliko Dangote and private equity fund Blackstone Group to invest to the tune of $5 billion exclusively in energy infrastructure represented a significant moment in African investment. As it stands, there is a massive infrastructure shortage in Africa.
Erika van der Merwe, chief executive officer of the Southern African Private Equity and Venture Capital Association, would probably agree. “Infrastructure is the backbone on which economies hang,” she says. “All growth prospects are enhanced if infrastructure is made more efficient.”
According to the World Bank, electricity is the major weak point: power output for the 800 million people continent is “roughly the same” as Spain’s, which is home to just 45 million. Measures of consumption and supply security are similarly underwhelming.
From that perspective alone, the prospect of more energy investment is promising. But there are other benefits as well.
In a World Bank paper studying the long-term economic effects of infrastructure investment, economics and political economy professors David Canning and Esra Bennathan find that infrastructure can raise the productivity of human and physical capital, “giving it an important role in a process of balanced growth.”
Not to say that there aren’t returns on investment for the investors themselves. Chief among them is the potential for healthy returns on investment, especially if Blackstone/Dangote can develop infrastructure more efficiently than local governments.
Van der Merwe also points out that the size of infrastructure projects are potentially compelling for private equity partners. “Infrastructure assets in Africa still offer private equity-style returns, and moreover enable private equity to invest in scale on a continent where there are limited investment opportunities of sufficient size.”
But there are other externalities as well. If, as suggested by Canning and Bennathan’s long-term study, infrastructure can spur greater economic growth, there could be ample opportunity for private equity to participate in the development of other sectors, both in the short run and across time.
“It is an avenue for opening up opportunities for add-on or related investments,” van der Merwe says.
Investment Opportunities
And indeed, Canning and Bennathan find that the long-term economic returns to increased electricity generation are highest for poorer countries, and that returns to infrastructure in general are highest in places where there are shortages.
Numerous African nations meet both criteria, meaning that getting in on the ground floor of infrastructure projects could set the stage for numerous investment opportunities later on.
However, the question of risk remains.
Is it a good thing for natural monopoly goods, like power, to be funded by private firms? What if the rates of return that these investors demand is far beyond what is reasonable for the economic health and development of a particular nation?
It seems, at the moment, that this is unlikely. If history is any guide, it’s not easy to set up a power plant of any kind without the cooperation and participation of other parties.
Blackstone’s Uganda energy project, the Bujagali Hydroelectric Power Station, was funded by a consortium of investors that included the World Bank, the Ugandan government, the Aga Khan Fund for Economic Development, the African Development Bank, and the European Investment Bank.
Presumably the participation of such bodies would serve as a check on the returns characteristics of a given project. Collaborations could also lower the cost of financing, and, as van der Merwe mentions, “provide the basis for more complex financial structuring.”
In addition, exploiting the revenue potential of these projects at the expense of longer-term growth would probably be a rather myopic approach.
If infrastructure, particularly energy, can be a powerful driver of growth in other business activities, then it follows that private equity funds should attempt to boost its growth potential in any way possible.
Growth in other areas means more investment opportunities across a more diversified range of activities. To shortchange oneself for a bit of extra yield in the short run would only be shortsighted.
Of course, there are also risks facing the investors themselves. The key risks identified by van der Merwe include illiquidity, counterparty risk, country-specific risks, currency risk, and the ability to enforce contractual rights. These would obviously arise on a case-by-case basis, and all would require careful navigation of the local investment landscape.
It seems, however, that Blackstone believes that these risks are well worth taking on. The result could be a growth spurt in energy output — and its attendant economic growth — in the coming decades.
