A growing market at the Gulf’s back door is giving companies a reason to map out a plan of action for tackling Africa
In the streets of Addis Ababa, Ethiopia’s capital, a young population are learning, earning and wanting more. In scenes played out across East Africa and the urban hubs of the wider continent, African cities are slowly becoming the economic powerhouses some say they have been destined to be for quite some time.
Improved education, greater levels of investment and government support for long-term development projects to improve infrastructure are boosting economies and creating opportunities.
“There is a lot of potential reward to be had for investors that are able to attract the right talent, hone their skills and develop market offerings to meet the increasing demand from many growing sectors,” says Oscar Wendel, event director for TEDx Addis Ababa, a conference organiser. “Booming right now and particularly promising for UAE companies is real estate development, agriculture, tourism and financial services for the growing middle class, are all expanding and open for foreign investment.”
While 30 out of 45 African nations have seen strong growth in from the services sector, according to recent statistics from UNCTAD, the strongest sectors with potential for construction expertise are transport, logistics and communication.
“This is also where the local job opportunities are,” explains Wendel. “A good example is Ethiopian Airlines that has had an annual growth rate of over 20% since 2005 and is now Africa’s leading airline.”
For businesses that venture from the Gulf into East Africa the challenges of getting started are likely to look familiar, with Wendel suggesting that finding the right partner and having stamina to take the long view is key.
“In Addis Ababa and Kigali – Rwanda’s capital – there is very little direct corruption or haphazardness when it comes to procedures and processes,” he says. “However, this cannot be said for all of Africa where corruption, safety and infrastructure are still major concerns. Yet, what is a universal hurdle important to overcome as early as possible is gaining a clear and correct understanding about what the requirements are at each stage to not make dire miscalculations of what is possible and when.”
The reward for patience and perseverance may take time to emerge but it could be worth it, especially in East Africa where observers believe there is no lack of either business and investment opportunities, or access to skilled labour.
“What is lacking however is both the in-depth technical knowledge and application in many high-tech areas, as well as access to capital to fund significant projects,” says Wendel. “Both these examples partly explain the recent success of Chinese businesses across Africa in how they offer knowledge transfer and capital infusion to win ground and competitive advantages over many other foreign investors on the continent. I see that this is a role that also Gulf businesses can take on to meet a need in market.”
These are views supported by numbers too. In Deloitte’s African Construction Trends Report 2014, the firm points to an active Chinese construction effort in the East African countries, where 31% of projects under construction are being worked on by Chinese firms. China also contributes some 16% of the project funding, but owns just 2% of the final product. While China has been working at developing business on the continent for years, the UAE is a relatively new entrant. That said, it too has staked a 2% ownership of projects in the East Africa region in just its first year of appearing in Deloitte’s figures. The country is provided 2% of the funding and has a similar amount of the building work under contract (in West Africa it has provided 5% of funding for current active projects).
“When we look at East Africa we see a lot of basic infrastructure being developed,” explains Mark Smith, a partner with Deloitte and head of Infrastructure and Capital Projects East Africa for the company. “What were tracking is more than $60bn worth of construction going on is in the transport area, such as highways and rail development.”
Across East Africa transport projects dominate the region, with a 59% share of the action, while energy and power projects are in a strong second place at 37%. The figures support the idea that the big investment is going into infrastructure development. Since 2013 the region has seen some key project milestones, including breaking ground on a Nairobi to Mombasa rail project and Tanzania refurbishing the Dar es Salaam to Issaka rail link.
Of interest to experienced Gulf contractors may be what Deloitte terms the region’s ‘intensive focus’ on road development as it seeks to link its cities with highways and develop public private partnership (PPP) projects to fund the development. Over the next 18 months projects that may come to market include the second Nyali Bridge PPP project. Elsewhere Kenya is in the process of developing an annuity finance project for a 10,000km road development and maintenance programme. In Uganda, the Nairobi Mombasa Railway is trying to raise capital amounting to $8bn for a standard gauge railway. One way into these projects may be the ability to provide creative financing options for delivery.
“If you look at the massive development of infrastructure going on, the cost of the finance cannot be borne by the East African governments alone,” says Smith. “They are definitely looking for creative or alternative financing mechanisms and quite a large number of PPPs are being used to fund the more critical infrastructure needs.”
One of the big projects getting under way that Smith notes could draw international attention is Lapsset, a multi-country transport corridor from Kenya into Ethiopia and through to South Sudan. The massive project will combine highway and rail developments with a pipeline and port facilities.
“The first two critical projects that are being looked at in terms of kick off, using alternative project finance is the port development in Lamu as well as the oil pipeline,” says Smith. “These are two critical infrastructure projects now being looked, specifically including how private development companies can help finance them.”
While Smith acknowledges the dominance of Chinese companies in the East Africa community of countries – a dominance in part facilitated by Chinese financial institutions – he suggests there is a change on the way, driven in part by a shift in the kind of projects being worked on. As the countries in the region are moving into more sophisticated infrastructure projects, such as alternative and distributed energy, or oil and gas developments, government ministries are widening their company searches looking to bring in more expertise in increasingly complex infrastructure works.
“A lot of the governments are now looking at alternative sources for how they want to supply and build some of these more sophisticated programmes,” says Smith. “They are looking at who they can bring in with some higher level of technologies, whether it’s in materials or alternative ways of construction, for these projects. I think there’s some real keen interest in looking at those kind of suppliers and construction contractors, who can bring in world-class expertise as it relates to these more sophisticated construction projects.”
Despite the wealth of opportunity, barriers to market entry appear relatively low. Smith suggests this is thanks in part to the sheer size of the programmes being planned and executed, with a number of mega projects easily exceeding a billion dollars in value.
“When you look at the competition and who is going to be doing this work, it’s unlikely t to be the local construction industry because they don’t have the experience,” says Smith. “So it clearly will be international suppliers and contractors who will be entering into the market because thats where the level of expertise comes from.
“The only matter [contractors and suppliers] have to consider is how can they do things differently with regards to integrating into not just construction or procurement strategy, but also how can they bring innovative project finance to some of these infrastructure programmes.”
It’s the kind of investment environment that has been attracting increased interest from public and private sector evictees based in the UAE. The private sector in particular has been looking to invest in areas considered the strong suits of the UAE, such as port developments along the trading coasts of Tanzania, Kenya and up into the Horn of Africa. Alternative energy projects, such as wind power and geothermal are also attracting attention of UAE investors as they have an opportunity to deploy energy expertise form a supplier point of view.
“I think [UAE investment] is likely to pick up,” says Smith. “UAE firms have tested the market and are finding some success: the trend will continue. If you look at the future for these mega infrastructure projects in East Africa they have a fairly long tail, with 10-15 year development cycles. For UAE firms that’s the kind of market they are going to pick up and accelerate with in terms of being a competitive player in the market place.”
Kenya is the primary target for many organisations looking to get a foothold in East Africa, with the nation’s vibrant economy and stable systems making it a strong gateway to the region for new arrivals. It is also home to the most projects in East Africa, a factor that contributed to the launch of The Big 5 Construct East Africa, which will run for the first time in December next year.
“As East African countries continue to witness rapid economic growth from increased revenues as a result of evolving market, there is a stronger demand for infrastructure development and suppliers for landmark construction projects,” explains Ashley Roberts, event director for The Big 5 Construct East Africa at dmg events Middle East and Asia.
“There will be a wider market gap for building products and construction solutions that address respective project requirements. As sustainability is a vital factor for consumers in the region, national policies and government support will cultivate the need for modern eco-friendly construction materials to meet unique demands, which will in turn draw new and innovative suppliers to the region.”
Roberts notes that there is work to do in getting the message across to the construction supply market about the potential of opportunities in East Africa. He suggests some companies do not yet have a clear understanding of the wide range of opportunities and the immense potential of countries within East Africa.
“They also have incorrect notions with regards to the stability of the region’s economies and political landscape,” he says. “However, the countries within this region feature very resilient economies as well as effective policy reforms. In addition the international community is becoming more enlightened with regards to the wealth of business opportunities that the region offers. Many countries are allocating funds in order to actively invest and penetrate in these respective markets.”
As awareness spreads more competition may gradually enter the East African market, but as it stands companies with technical expertise and project know-how are in demand. As East African countries continue to record a middle class growth rate stronger than other emerging markets their increased purchasing power will continue to drive demand for more of everything. There’s an opportunity waiting at the Gulf’s back door for those companies able to provide it.