MAKING THE MOST OF FINANCE FOR ROAD INFRASTRUCTURE - 3 WINS MODEL CONCEPT
The world will need to spend almost $7 trillion on new road infrastructure over the next 10 years, according to recent research by the Bitumen Exchange. That’s an enormous sum and clearly there is no shortage of capital to develop the most ambitious projects as is often cited. When you breakdown the sums, there will be more than enough as government stakeholders and multilateral investors increase their focus on road infrastructure.
In the context of Africa, there is an increased appetite for direct investing by international financers, and the entrance onto the scene of giant sovereign-wealth and pension funds such as South Africa’s Public Investment Corporation (PIC). A PIC executive told the Bitumen Exchange that they would in fact look to diversify further into this space as a way to deploy free cash flow from their huge property portfolio. This will bring more money into play.
Across mutual and pension funds, institutional investors, government treasuries and multilateral development banks, we estimate $16 billion of capital available for extensive for road construction in Africa. Yet, as we approach the Bitumen and Asphalt Leaders (BAL2017) summit next year in Kenya, the same message comes back to us – where is the money?
Our answer is simple. While capital is, of course, necessary, it is not sufficient to ensure success of road construction projects in Africa. Investment has to be focused on the right projects and then spent correctly. Often that capital is spread too thinly in Africa, or on marque projects that deliver good photo opportunities but little economic development.
The Bitumen Exchange has developed the 3Wins Model Concept that can help governments win infrastructure investment from multilaterals and drive their economies. It aims to provide a framework of discussion at BAL2017.
Clubbing infrastructure projects together to make private financing attractive
Focus investors on country specifics in Africa
Realize value from cash generating assets
Deepen partnerships among infrastructure-finance players
Looking at the 3Wins Model Concept in more detail
The scale of capital needed to develop road infrastructure in Africa requires attracting private investment. Without it, host government’s cannot carry the burden. This acts as a speed break on investment and development of bitumen and asphalt industries. Cash flow is king for private investors in road infrastructure. The industry needs to find an arrangement that makes provisions for the needs of investors and road users alike. Both need not overburdened. That bit we all know, the hard part is how?
1. The first part of our 3 Wins Model Concept is for host governments to consider packaging investments projects together. Clubbing more lucrative infrastructure projects together in the same investment opportunity can mitigate some of the political and economic pressures associated with road financing. A highway development project may be high-risk low reward for an investor, whereas a port facility the opposite. Why not club the investment opportunity together to minimise the risk? This can act as a mechanism to unlock investment
An understanding of countries, regions, and potential road projects is necessary to match investment with road developers, and government stakeholders with the best available infrastructure projects. Too often there is a disconnect between the two. This results is that many infrastructure projects are being held up, as investors are not happy to take on the risk associated with financing and developing the construction of various road projects in Africa.
2. It is well documented that even South Africa may have its debt status rated as junk as soon as December 2016. This may prevent some investors from deploying capital into the country. The same is true for many of Africa’s best investment opportunity. We suggest that this approach be realigned. The Bitumen Exchange for instance observes that some of these countries for instance may have a world class Public Private Partnership (PPP) regimes, despite at a state level being off limits on sovereign rating. The Bitumen Exchange believes this approach whilst time consuming, CAN allow investors to pursue higher returns safely, as typically Africa road infrastructure projects have fewer players bidding (and thus driving up the price). It can in short be win-win.
Finally, The Bitumen Exchange 3Wins Model Concept looks at communication channels. The road infrastructure-finance market is plagued by a lack of information. A simple Google search demonstrates a lack of clear information apart from pricing levels (useful for traders if and/or when accurate), but hardly something government transport heads sit waiting for each week!
3. It is time for the bitumen and asphalt industry to realise it is not a lack of capital holding back road projects in Africa. The real issue is too much capital is chasing too few bankable infrastructure deals. Yet they exist in there hundreds – the Bitumen Exchange project database is testimony to that. Marrying the right investors to the right road assets requires more effort. It requires better engagement with financers. Food for thought - does the bitumen and asphalt industries spend as much time directly engaging with investors as comparable infrastructure industries like real estate? If we are honest it doesn’t, and yet this is vital in order to ensure that there is sufficient dialogue and thus investment in road infrastructure.
The Bitumen Exchange is a different platform. We are the crossroads between investment, finance and road construction. This in turn drives economies, job creation and better standard of living for all! Central to our offering is that none of this happens without investment. This can’t happen in technical workshops, or via pricing reports about the spot price of bitumen (and what again do you do with that information unless you’re a trader!). Both online and offline at our live event Bitumen and Asphalt Leaders Congress in Kenya next February we look to tackle these problems head on. It will bring real investors and road agencies together for the first time. Our team has a background in investment, and it offers a platform to engage with stakeholders like never before. We hope to see you there.
The Bitumen Exchange Team