Insufficient capacity and lack of expertise within the regional infrastructure and engineering sector in West Africa means that foreign contractors still dominate the competitive landscape. The infrastructure needs in the region are significant - the African Development Bank estimates a yearly investment deficit of US$90bn - which requires complex, large scale and sophisticated infrastructure to operate. Cultural and historical ties with European states are evident in West Africa's infrastructure industry competitive landscape, with French, Italian and other European majors active in the markets. Chinese contractors are the ones, however, that over the last decade has penetrated the West African markets the most and now dominates in terms of volume, value and number of projects they are involved in.
However, though China and its liberal lending policy is unlikely to be crowded out of the market any time soon - especially while credit conditions remain tight in the commercial space - we do highlight an increasing grass-root resistance towards China and its quasi-sovereigns operating in the region. In fact, anti-Chinese protests have occurred across the continent, and the hearts and minds problem that China faces in Africa is a very real one. China is criticised for poor quality, scattered and expensive infrastructure builds, as well as falling short in its regard for local employment (both number of employees and treatment of those workers). As a result, we are now seeing a growing tension between locals and Chinese companies that could hamper China's efforts - and as a result infrastructure financing - on the continent.
|Domicile and Number of Contractors In West Africa, 2011|
|Source: ENR, BMI.|
|Spain||France||Italy||Other Europe||China||North America||Latin America||Middle East||India||# Major Intl Contractors|
Sustained Interest In The Extractive Sector
The persistent interest in the potential of West Africa's oil and gas sector has arguably been critical in unleashing the strong presence of international infrastructure and construction companies in the region. Cases in point are Angola and Nigeria which have the largest concentration of foreign companies in their infrastructure space.
|Oil Rush For Infrastructure Companies # of Major International Contractors In The Market|
Both Angola and Nigeria are the largest and oldest oil exporters in Africa and the largest infrastructure markets in the region. Their oil wealth and flagging infrastructure made them prime targets for China's 'Africa strategy': cheap credit in return for favourable access to natural resources. The 'generous' lending policy was followed by cheap Chinese labour and equipment, and over the past decade Chinese contractors have cemented their presence in the two markets. Chinese contractors make up 50% and 35% respectively of Angola's and Nigeria's international infrastructure contractors according to data compiled by ENR. Amongst the plethora of China's state-owned companies it is the largest ones that have spearheaded entry into these markets; companies such as Sinohydro, China Communications Construction, China Railways Construction, and China Civil Engineering Construction Corporation.
|China In Majority|
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Angola however has been a major source of overseas revenues for Portuguese construction companies and (due to the linguistic aspect) increasingly Brazilian firms with global ambitions. Companies like Soares da Costa and Mota Engil have been in Angola for decades, while Brazilian companies taking their first strides are conglomerates Camargo Correa and Odebrecht.
Though there is a highly opaque veil surrounding the specifics of deals with the Chinese companies and Chinese Export Credit Agencies, the presence of the Portuguese companies in Angola sheds some light on the reality of the competitive landscape and operating environment. A major row broke out in 2010 when it emerged that the Angolan government owed Portuguese contractors billions of Euros for projects. Though there has been some resolution in the matter since, the fact that one of the largest oil producing countries had trouble paying their construction bill again highlighted the highly precarious operating environment for foreign companies in Angola.
Easy Access To Easy Money
However, one of the main reasons explaining China and its corporation's current comparative advantage is its thus far unrivalled lending policy, on the back of a debt-ridden Western world and a still low level of risk tolerance for emerging market infrastructure.
Hence, financing these necessary projects remains the biggest hurdle to their implementation. The sheer size and therefore price tag of the game changing projects is currently prohibitive. Indeed, many of the flagship infrastructure projects which have success fully taken off have been reliant on some form of development bank funding or risk guarantee. But, not only is that a long-term unsustainable way to build infrastructure, for many it remain a red tape-ridden and burdensome process, if even available in the first place.
BMI's new Project Finance Ratings quantify the omnipresent risks throughout a (privately procured) project's lifecycle. The low scores that all the markets receive for financing suggest that the project financing operations carry a great deal of risk - making them almost impossible throughout the region-, without the argued reliance on aid and other types of foreign, government-backed credit.
Nigeria nevertheless appear to be the strongest market to raise financing, though its score is still 11 points less than the global average according to our ratings. Pertinent risks are also flagged during the construction phase, with Nigeria the only market whose score is above that of the global average of 47.3. Naturally, the operating phase is the least risky for sponsors payback, though security and political risks as well as volatility in forex and lack of hedging platforms makes West African markets amongst the riskiest in the world.
The smaller francophone states in West Africa, Gabon, Cameroon and Cote d'Ivoire offer fewer opportunities for large scale infrastructure projects and therefore foreign presence is limited. French companies dominate the market, with Vinci and Bouygues having a long standing presence in all three markets. That said, we would like to bring forward the Cote d'Ivoire public-private partnership (PPP) toll bridge project which we believe could set a precedent for the model, as well as increased foreign presence, in the region. The Henri Konan Bédié Toll Bridge, the third bridge crossing the Ébrié lagoon in Cote d'Ivoire's commercial capital Abidjan, was successfully tendered and secured financing earlier in 2012. The project has been in the pipeline for 15 years; however, political paralysis has delayed progress. Bouygues was awarded the 30-year concession under a Build Operate-Transfer (BOT) model.
|BMI Project Finance Ratings by Phase. Scores out of 100.|
Ghana Pushing Its Frontier
We once again highlight Ghana as the market to keep watching. We believe that its positive investor climate credentials combined with the oil and gas prospects, are going to make Ghana the most competitive market in sub-Saharan Africa. As such we anticipate a growing influx of European players to counter the rising presence of Chinese contractors, as more competitive bidding allow for a more transparent procurement process.
Ghana has a nascent oil and gas sector and we argue that the infrastructure sector growth will be driven by the demand for auxiliary infrastructure. BMI also holds a bullish outlook on Ghana's macroeconomic prospects. The country's objective of securing a middle income level by 2015 (predicated on successful oil windfall management) suggests that Ghana is likely to rapidly outperform, if it keeps on the 'straight' path. Indicative of its status as a foreign direct investment (FDI) outperformer in the region is the plethora of major foreign companies already operating in the energy and infrastructure space. While there are players from emerging markets, and also the strong presence of Chinese state-owned engineering companies, there are also some companies from developed states that have ventured into Ghana, possibly in anticipation of rising activity in construction and infrastructure.
Abu Dhabi's energy company TAQA is active via its ownership and operation of the combined cycle Takoradi plant - in which it is investing to expand capacity. Spanish Abengoa has signed an agreement with the Ghana Water Limited Company to build the country's first desalination plant, under a 25-year design, build, operate and transfer (DBOT) concession, one of the few in SSA. French-based oil and gas engineer Technip has won a contract from the state-run Ghana National Petroleum Company ( GNPC) for the first phase of the Natural Gas Transportation and Processing project.
Last but not least, the number of Chinese companies active in Ghana is not as high as in other markets in West Africa, but the scale of the few projects they are undertaking is nevertheless significant. China's Hasan International Holding Group is planning an investment of over US$4bn in the Sekondi Industrial Free-zone. Meanwhile, the China National Machinery Import & Export Corporation ( CMC) is contracted to build a railway line in Ghana. The US$6bn project involves the construction of a railway connecting Nsawam, running through Kumasi to Paga, and from Tamale to Yendi.
We anticipate that as the oil exports increase and the oil windfalls accumulate, the checks and balances already in place to manage the oil wealth will pay dividends for Ghanaian economic development, including the development of infrastructure. Provided that our bullish scenario for Ghana plays out (in terms of oil revenues, but also in terms of management of those revenues), we anticipate that Ghana will continue on its positive growth trajectory and expect a rapid rise in investor perception with regard to the country.