In Africa, strategically important assets with strong defensive characteristics have continued to display robust revenue and returns for investors even while the COVID-19 crisis raged. In the past three years, an average of 68% of African infrastructure transactions have been into thermal power and renewable projects, the majority of which are contracted assets. The projects also have hard currency-linked revenues, given almost 60% of projects are financed in U.S. dollars, which offers protection to investors.
In projects where cashflows are in local currency, risk is often managed by utilizing local currency debt facilities and applying lower gearing — a small proportion of debt to equity — as well as building in conservative currency devaluation assumptions.
GDP-linked assets in Africa have been the most exposed, and across the transportation sector, toll roads, ports and airports have been the most significantly affected by the abrupt shutdown of international travel and subsequent local and regional restrictions. African airlines operating in an already fragile market, and with heavy reliance on intercontinental traffic, will be hard hit. Unlike Europe and U.S. markets, where domestic flights account for 85% of seat capacity, overseas flights account for 55% of African airlines' market share.
The most resilient African airports are in capital cities that are critical transport hubs, holding strategic importance for sustainable economic growth.
During the virus outbreaks, some airport investees have invoked economic equilibrium clauses built into their contracts to secure 'holidays' in concessionaire fees while COVID-19 restrictions were at their height, thus protecting the business.
Some sectors, like digital infrastructure, will come out of the pandemic stronger due to increases in data usage as people seek to remain connected remotely, making their operations more sustainable and more attractive for future private investment.
Availability of public funding for infrastructure is under more strain than it has been in the past so a slowdown in new public-private partnership deals is to be expected. Private-sector investment is critical with the African Development Bank estimating that pre-COVID-19, there was already an annual infrastructure investment gap of around $62.5 billion.
There is evidence to suggest a wider interest in emerging market infrastructure from private investors looking to diversify their portfolios beyond their traditional markets. We are likely to see greater engagement in countries traditionally less open to private-sector investment with these countries easing regulations to become more investor-friendly. We are seeing this trend develop across sectors with a number of African sovereign wealth funds looking to partner with the private sector to build agriculture capacity in countries like Egypt, Morocco and Nigeria and help bolster domestic food security in line with their strategic investment priorities.
These are the types of trends we expect to see across the board in post-COVID Africa — accelerated conversations around how public-sector entities can partner with private financing to deliver critical infrastructure projects.
Olusola Lawson is managing director and co-head at African Infrastructure Investment Managers, (a member of Old Mutual Alternative Investments), based in Lagos, Nigeria. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.