Uncharted Opportunities

Christopher Healy, Counsel, Hogan Lovells on why Australia and Africa are becoming PPP bedfellows

Exploring opportunities in Africa is a well-trodden path for Australia's mining sector and the importance of this market is well understood: recent reports indicate that there are 170 active ASX listed mining and resource companies operating across 35 African countries.

Over recent years, the Australian infrastructure market has matured and delivered a number of large-scale projects. The African continent is in desperate need of infrastructure development and investment has been flowing into the continent from the world over. But what can Australian infrastructure interests make of this opportunity?

Australia is at the forefront of infrastructure development. Its location, geography, natural resources and mineral deposits and population distribution (among others) are all factors which contribute to Australia's infrastructure story.

This story has encouraged many local enterprises to transform themselves into developers and delivery vehicles for some of the most ambitious infrastructure projects the world has seen while at the same time attracting international players to Australian shores.

The May 2017 Budget saw the federal government commit to investing A$75bn in infrastructure in Australia, funding several large-scale projects across the nation, including $10bn toward the National Rail Programme, $8.4bn for the Inland Rail Project, and $5.3bn toward the construction of a second airport in Sydney. Australia is also a market leader in the renewables sector, with the Australian Renewable Energy Agency granting almost $100m to new solar projects in Australia in 2016 alone.

The need for infrastructure development in Africa is well documented and has been the topic of much discussion over recent years. According to some sources, average yearly infrastructure financing needs in Africa are estimated at US$130bn through to 2025. Even more startling is the Global Infrastructure Hub's call for African countries to invest US$240bn per year (or US$6trn by 2040) to match infrastructure spending by other countries.

There is a strong drive among African governments and international institutions to bridge this infrastructure gap. Initiatives are being introduced to provide new sources of finance (such as the Africa50 Infrastructure Fund) and many African governments are in the process of establishing regulatory frameworks that will facilitate private investment in infrastructure.

While the number of projects coming to market in Africa falls a long way short of addressing the continent’s needs, the mood in Africa is changing. Stagnant project pipelines are starting to move and major projects are gaining traction with roads, rail, ports, airports and oil pipelines all in the planning/procurement stages.

In addition, the need for power is recognised as the single main barrier to sustained economic growth in Africa and while traditional methods of energy production remain firmly in the mix, it is to renewables that many governments are looking to solve this issue.

International focus on Africa

Many countries have been investing in African infrastructure markets. In December 2015 for example, China announced a US$60bn African investment package (much of which will be dedicated to infrastructure development) and more recently, in July this year, Japan and the African Development Bank (AfDB) launched the Japan-Africa Energy Initiative, under which Japan's government will provide up to US$6bn in both concessional and non-concessional finance to support the New Deal on Energy for Africa, financing all the activities associated with energy projects. This is on top of the US$3.7bn invested by the AfDB itself in Africa's energy sector over the last two years.

Are there opportunities for Australian infrastructure in Africa?

The answer to this question is undoubtedly yes. African governments are developing PPP regulatory environments to encourage private sector investment and investment by foreign governments. Programmes being led by institutions such as the Africa Finance Corporation, the African Development Bank and the World Bank are all aimed at enhancing Africa's ability to deliver successful infrastructure pipelines. However, these positive soundings also come with some words of caution.

Africa is not a single market, but rather 54 separate markets, each operating with its own systems and idiosyncrasies. One of the major challenges for Australian interests looking to do business in Africa is being aware and having an understanding of the African business environment – or rather the particular business environment in the country under consideration.

It should be kept in mind that it's not just the building of the infrastructure itself which needs to be considered. Many African countries also need help with planning and developing projects, developing the associated skill sets required to deliver a final product and managing assets once they have been procured. Australian companies are well placed to provide these skill sets.

Government procurement agencies are keen to understand where things have gone wrong and what can be done to ensure past mistakes are not repeated. Some in Africa are aware that Australia has had its issues with project implementation (a number of failed toll road projects, for example), and the ability of Australian companies to demonstrate what was learned from those experiences, as well as what was done in more recent projects to avoid repeating the same mistakes, will be highly valued.

There are a range of factors which point to Australia being well placed to deliver services, expertise, learning, skills and projects themselves in Africa. As one of our mission heads put it, it's all about finding the right opportunities and having a sensible approach to managing risks. It also requires taking a long-term view.