Impact of the epidemic, long-term still positive: Outlook for Chinese enterprises in the fields of electricity and infrastructure in Africa in 2020

Over the past decade or so, China's investment in Africa has grown rapidly. Since 2003, the average annual growth of China's investment in Africa has exceeded 45%. In 2017, China's direct investment in Africa reached US\$3.1 billion, nearly 40 times that of 2003. Chinese investment is found in almost every country in Africa. By the end of 2018, China had established more than 3,700 enterprises of various types in Africa, with a total stock of direct investment in all sectors reaching US\$46.1 billion, 70 times that of 2000.

The sudden outbreak of the novel coronavirus pneumonia epidemic has impacted Chinese investment in Africa. Standard Bank Group believes that the epidemic will have a short-term impact on Africa's power and infrastructure construction. Although the specific depth and breadth of the impact remain to be seen, it will not change the fundamental need for infrastructure in Africa The huge demand gap means that Chinese companies still have great opportunities in Africa.

1. The epidemic will not change the long-term direction of long-term China-Africa investment

Currently, most power and infrastructure projects built with the participation of Chinese companies are operating normally and the impact of the epidemic on construction progress is not yet obvious.

It is particularly important to note that as the economic impact of the epidemic deepens, currency fluctuations in African countries will increase significantly.

However, the epidemic will not change the long-term trend of rapid growth in Chinese investment in Africa.

The rapid growth of Chinese investment in Africa is determined by a number of factors.

First, China and Africa are at different stages of development. Africa's accelerated industrialization process coincides with China's need for capital and technology to "go global," creating huge opportunities for win-win cooperation.

Second, China-Africa relations continue to warm High-level exchanges and top-level design have provided a good environment for investment cooperation between China and Africa.

Third, the "Belt and Road" initiative is developing in depth Improved infrastructure, trade, and close personnel exchanges have boosted investment cooperation between China and Africa.

2. The African infrastructure construction market remains vast

Standard Bank Group believes that there are still vast opportunities and a huge investment gap in African infrastructure construction. The governments of most African countries have made infrastructure development a key policy goal. More and more African countries recognize the importance of self-sufficiency and are vigorously promoting industrialization. Infrastructure construction, as a prerequisite and important foundation for industrialization, has become a focus for many African countries to attract and support foreign investment. Even South Africa, the most developed country in Africa, is calling for "looking east" to attract more Chinese investment.

A report released by the Global Infrastructure Hub under the G20, "Global Infrastructure Outlook: Infrastructure Investment Needs in G20 African Partner Countries," points out that by 2030, the ten G20 African countries will need a cumulative investment of US\$621 billion in drinking water, sanitation, and power infrastructure to achieve the relevant UN Sustainable Development Goals (SDGs), with a shortfall of US\$415 billion (Note: In March 2017, the G20 Finance Ministers and Central Bank Governors meeting approved the "Africa Compact," encouraging private sector investment in Africa, including infrastructure investment. The ten African Compact countries include: Morocco, Tunisia, Egypt, Ethiopia, Senegal, Guinea, Côte d'Ivoire, Ghana, Benin, and Rwanda.)

To maintain economic growth and continuously narrow the infrastructure gap, then by 2040, these ten African countries will need a cumulative investment of US\$2.4 trillion in energy, communications, airports, ports, railways, roads, and water infrastructure, with a shortfall of US\$1 trillion 。

Looking at the whole of Africa, based on current trend predictions, by 2040, total infrastructure investment in Africa will be US\$4.3 trillion, or US\$174 billion per year. If African economies hope to improve their performance, the total investment needed will reach US\$6.0 trillion, or US\$240 billion per year, a gap of nearly 40%.

As Chinese companies shift from simple investment to deep roots, their investment intentions become more proactive and positive, and their ability to adapt to and meet changes in African investment needs is enhanced. Chinese companies will be able to present a larger scale and higher level in various sub-sectors.

3. Power and transportation remain the focus of infrastructure

Among the huge infrastructure needs, electricity remains paramount Since 2007, about 38% of infrastructure investment in Africa has been in the power sector, with 20% in hydropower. Although Africa's proportion of investment in electricity is comparable to the world average, its investment in water infrastructure is more than double the world average. Under current trends, electricity will receive about US\$1.6 trillion in investment between 2016 and 2040.

Africa's development of clean energy has unique advantages and is expected to achieve self-sufficiency in electricity through clean energy construction. Its water, wind, and solar energy resources account for 10%, 32%, and 40% of the world's total, respectively, with huge development potential.

It is expected that by 2050, Africa will be able to provide 3.3 trillion kilowatt-hours of clean energy electricity per year, reducing carbon dioxide emissions by 2.8 billion tons, and the scale of intra-continental cross-border electricity trade will exceed 500 billion kilowatt-hours. The investment scale of the entire African energy network will exceed US\$7 trillion. Currently, China-Africa cooperation in this area is progressing well, and it is believed that more Chinese companies, equipment, technologies, designs, and standards will play a major role in the construction of clean energy in Africa.

Another point that cannot be ignored is the huge investment gap in transportation in Africa. Africa's investment in the transport sector is lower than the world average (27% from 2007 to 2015, compared to the world average of 45%). This gap is particularly prominent for railways, which account for only 3% of Africa's infrastructure investment (the world average is 12%). In road investment, the gap between current trends and investment needs is the largest, with projected investment needs almost double the current trend.

In short, in the coming years, investment opportunities will be prioritized in power, water, communication infrastructure, roads, ports, railways, and airports etc.

4. Making full use of the public-private partnership model

Government public funds remain the main source of infrastructure funding in sub-Saharan Africa. Of the approximately $45 billion in annual infrastructure investment, more than half is provided by governments. However, by global standards, sub-Saharan African governments are still far from sufficient in their infrastructure spending.

Currently, countries such as South Africa, Angola, Zambia, Botswana, Kenya, Uganda, Nigeria, Ghana, and Mozambique are actively exploring public-private partnership models (PPP).

While PPPs account for a small percentage of the sub-Saharan African infrastructure market, they are an effective solution for improving infrastructure development in Africa and an effective model for Chinese investment. The construction of independent power plants (IPPs) by private investors and commercial banks is already quite common in many African countries, with particularly active development in South Africa and Kenya.

Whether the potential of PPPs can be fully unleashed depends on whether the government can provide strong support, effective cooperation, and active participation. For less developed African countries, the government needs to provide "supporting infrastructure" to incentivize private investors. These supporting measures include: legal and tax frameworks, tariff policies that can reduce costs and other direct or indirect government support etc.

5. Six suggestions for addressing potential challenges

In addition to opportunities, Chinese companies in Africa also need to understand geopolitics, government policies, laws, taxes, foreign exchange, and localization and other potential challenges. The following six suggestions can be used for reference:

First fully understand the local country conditions, foreign exchange fluctuations, market competition, legal and tax systems, government policies, and other macroeconomic conditions.

Second For companies that have many years of operating experience in Africa, it is best to choose to conduct investment pilot projects in markets where they have been operating for many years. For companies newly entering Africa, it is best to choose to cooperate with Chinese companies with localization experience.

Third Find reliable projects and partners.

Fourth Invest in business areas you are good at.

Fifth Cultivate a professional investment and financing team and an international talent pool.

Sixth Establish cooperation with strong African financial institutions, legal, tax, and insurance institutions, and listen to the professional opinions of professional teams.

Source: Standard Chartered Group