AFRICAN BITUMEN INDUSTRY: DEVELOPMENT FINANCE INSTITUTE'S ROLE IN DEVELOPING THE CONTINENT'S
Road development as we all know is vital in order to support the rapidly expanding economies of Africa. Yet, existing transport infrastructure is still grossly underfunded and is hindering regional economic integration and private sector development. This was one of the key findings of the recent Bitumen Exchange annual members survey. Annual spending on African road infrastructure currently stands at US$12 billion but is expected to double over the next decade. However, a predicted annual financing shortfall of $4bn in the region puts this growth in jeopardy and leaves unanswered questions for bitumen suppliers.
Serious constraints on public finances in Africa make unlocking private investment a priority. To date, such investment has mostly concentrated on projects in Southern and West Africa. The survey found that for the African bitumen industry to thrive it needs to develop a better understanding of what drives inward road investment decisions. Forging new vertical relationships directly with the investor will allow them to make informed decisions (quality and security of product), and spur the industry forward.
Click here to download the 2016 Survey
The bitumen exchange annual survey highlighted that Development Finance Institutions (DFI), can play a more critical role in helping host governments leverage private funding. These organisations fund over 35% of investment decisions in Africa. Yet not one DFI surveyed had direct monthly contact with a single bitumen supplier. What other comparable industries have discovered is that intervention from DFIs can significantly improve the bankability of road projects. They increase the flow of private funding into infrastructure. Tapping into them is of the utmost importance to developing the African bitumen industry.
The value DFIs can bring to a project and how they drive bitumen demand can be broken down into three different categories:
Project Acceleration: They increase both the quantity and quality of investment by creating an “enabling environment” that is attractive to other private investors in financing road infrastructure in low-income countries. We saw this with AfDB involvement in the Eti-Osa Lekki Toll Road Concession Project. Their US$85 million investment was soon supported by local and international banks. Their presence also had a notable positive contribution to the development of local government capacities.
Financial Accessibility: Infrastructure investment banking teams are competing internally for finance against different divisions (Energy and Natural Resources in particular). The survey highlighted that the presence of a DFI raises the perceived quality and quantity of investment. DFI resources (equity, mezzanine debt, long-term loans, etc.)are used by investment bankers to ‘sell’ the merits of such investments past their loan committees.
Technical Design Environment: They stress development impacts and longevity of the projects they invest in. Many are government funded with key quotas around knowledge sharing, local content (staff training) and technology transfer. DFIs are known to stress the highest level of technical expertise and have in-house technical engineers looking at the quality of bitumen used.
The positive impact DFIs can have is especially pertinent during the initial feasibility study. In Africa, many Greenfield projects are characterised by a high level of risk and uncertainty. Developers and private investors are often reluctant (unable) to invest – the role of the commercial banks own investment committee being paramount. The presence of a DFI who are able to provide lower interest bearing loans over longer terms is often a key determinant of new road developments viability.
One of the key drivers of the Bitumen Exchange is to help bring private investment closer to suppliers around the world. The industry is characterised by a lack of information flow upwards when compared with sister downstream businesses. A more positive flow of information can help attract more notable investments in low-income countries and drive bitumen use. The two can no longer be disconnecting. The annual Bitumen and Asphalt Leaders Congress (BAL17) aims to create an enabling environment where such high-level debate can foster. It has been developed on the premise that DFIs need to be at the centre of all bitumen debates, and can no longer be merely distant participants at such forums.
We hope to see you next February in Nairobi at BAL17, for what promises to be two days of world-class content, in an independent member led environment. For more information click here.
The Bitumen Exchange Team