Southern Africa Infrastructure Report Q3 2012

Botswana BMI View: We have upgraded our outlook for Botswana’s construction industry growth over the medium term, based on exceptionally strong growth seen in 2011. Real growth of 25.4% is estimated for the year, driven primarily by ongoing investment into the electricity sector. In light of this, we are pricing in the upside potential, with annual average growth between 2012 and 2016 forecast to come in at 10.8%. A project pipeline with significant potential to create value in the industry is driving this optimism. .
The biggest source of value creation is likely to remain electricity investments. The country is working hard to reduce its reliance on South Africa, which has proven to be an unreliable source of electricity, and cater to growing demand domestically from its mining sector. There are a number of ongoing projects in the sector and we anticipate investments in this area will buoy construction sector growth. In general, Botswana is a fertile ground for construction industry growth and our medium-term outlook is optimistic for a number of reasons:
?? Botswana has an attractive business environment. The country ranks second in BMI's Sub- Saharan Africa (SSA) risk/reward ratings (RRRs) and has the most attractive risk profile in the region. Most sectors are open to foreign investment and, while there are some restrictions on investment in transport infrastructure, Botswana has a relatively transparent operating environment and suffers from only limited corruption.
?? Strong economic growth is expected to continue. This is driving GDP per capita growth, which is leading to greater demand for infrastructure. Rising demand for residential electricity and water supply will see added pressure placed on utilities and lead to additional investment. Roads and railways will have to expand in order to meet rising demand from passengers and freight as consumer purchasing power grows.
?? One of the government’s key goals is economic diversification. The government wants to ease its reliance on mining and channel investment into other sectors. Demand for infrastructure should therefore increase, with projects to build access roads, railways, electricity generating capacity and water facilities (particularly important in the energy intensive mining sector) all set to benefit.
?? Coal mining is driving investment into Botswana's infrastructure sector, with freight transport and access to ports both designated as high priority areas as coal production expands. Coal mining also provides a cheap and readily available source of fuel with which to generate electricity, and is prompting investment into coal-fired power plants in an effort to diversify the power mix (away from hydropower) and boost capacity. At the same time, the development of a new railway linking the country to either the Atlantic Ocean through Namibia, or the Indian Ocean through Zimbabwe or Mozambique, will be crucial if Botswana is to secure an efficient export route that will allow it to price coal competitively when selling it in the global market.
Mozambique BMI View: Mozambique’s construction sector is the most dynamic in the southern African region and the country’s huge mining and export hub potential is driving investment into transport and electricity infrastructure. Projects are being developed by deep-pocketed mining companies, meaning they are more likely to progress than in other parts of the region that are dependent on development funding or government backing. With projects worth a combined US$25bn planned or under way, we are forecasting average annual growth of 7.7% over the medium term (2012-2016).
A strong medium-term project pipeline will sustain strong growth. A number of projects were announced in late 2011 and early 2012, which will drive expansion into 2012 and 2013. The industry will benefit from sustained demand for Mozambique’s exports, primarily coal demand from India. However, with Mozambique's infrastructure sector so directly linked to mining activity, our forecasts are predicated on a number of factors:
?? The primary driver of growth in Mozambique's infrastructure sector has been coal mining, with Indian demand sustaining significant investment. Insatiable demand for electricity in India is leading to huge investment in coal power plants, and Indian power companies are looking further afield for coal resources. While we expect demand for coal across the developed world to decline over the medium term, we do not anticipate a slowdown in India's consumption of thermal coal, which should sustain investment in Mozambique.
?? Transport infrastructure has benefited from a number of investment pledges, with efforts concentrated on the Nacala and Sena transport corridors (linking the mining regions to the ports of Nacala and Beira). Mining companies are leading the way in terms of investment in railways and ports; this was demonstrated in January 2012, when Vale signed a US$1bn agreement to build the Malawian section of the 900km Nacala corridor (which links the Moatize mines with the Nacala Port).
?? Electricity generation has also garnered considerable investment, with mining companies once again taking on an active role. Vale, Riversdale Mining and Jindal Power & Steel have all announced one gigawatt (GW) of coal-fired power plant projects in an effort to tap the growing domestic market. At the same time, Mozambique is planning to expand capacity at the Cahora Bassa dam. Eletrobras announced plans to build a 1,500MW hydropower plant in the country, as well as two 1,500km transmission lines, worth a combined US$6bn.
?? A major threat to our forecast comes in the form of government revenues, which are insufficient to meet the infrastructure funding gap, and thereby highlighting the importance of external financing. Consequently, multilaterals like the World Bank and African Development Bank (AfDB), as well as state credit agencies, remain an important source of funding for infrastructure in Mozambique. Increasingly, investment into freight transport and electricity infrastructure is being supported by private finance, with cash-rich mining companies executing a build-yourown strategy with regard to infrastructure. Private finance has therefore become crucial to investment, and any threat to corporate financing or mining companies’ profitability could dent investment in infrastructure.
?? While infrastructure investment is primarily focused on supporting the mining sector, demand for passenger transport projects and residential and commercial utilities should lead to rapid expansion – with real GDP growth expected to average 7.5% between 2012 and 2016, and GDP per capita expected to increase from US$628 to US$972. This should generate a rise in electrification and water access rates over our forecast period, necessitating new transmission and distribution infrastructure. Investment into roads will be strong under the second phase of the Programa Integrado do Sector das Estradas (PRISE) Road Sector Integration programme (2010-2014), which is overseeing planned investment of US$1.5bn to improve the quality of the country's road network. Funding has been pledged by a number of development banks.
Namibia BMI View: Namibia’s construction industry value real growth is expected to post 9% growth in 2012. It is then expected to maintain this strong growth trend over the medium term, reflecting the scale of investment pledged to the sector. The government's TIPEEG programme – aimed at boosting GDP growth and creating jobs – has a strong focus on social and economic infrastructure investment, and we therefore believe it will lead to a spike in growth over the 2011/12-2013/14 period.
The anticipated growth of 9% for Namibia’s 2012 construction industry value is in line with the official estimate from the Bank of Namibia (BoN), and reflects a continuation of the strong growth seen in 2011. Growth is anticipated to average 8.6% year-on-year (y-o-y) between 2012 and 2016, driven by investment in transport infrastructure, oil and gas exploration and improvements in social infrastructure – especially housing development.
Key factors behind our optimistic outlook are: • The Targeted Intervention Programme for Employment and Economic Growth (TIPEEG) economic growth and job creation package will raise NAD18.7bn from private investors, stateowned companies and government funds. The programme has a heavy social and economic infrastructure focus. Plans involve investment in transport, water infrastructure (for agricultural purposes), tourism, housing and sanitation and public works (primarily social infrastructure). The programme should promote a sharp increase in investment between 2011/12 and 2013/14.
• The number of building plans that won approval in 2011 grew by 7.6% y-o-y, according to data from the BoN, indicating strong growth in 2012.
• Oil and gas exploration could open up a new sector for the construction industry, with energy infrastructure potentially receiving a huge boost if oil exploration is successful and the Kudu gas field is developed.
• Poor electricity capacity and an overreliance on hydropower and imports should drive investment into the electricity sector. A couple of sizeable projects are planned; however, little progress has been seen, with financing proving the biggest hurdle.
• Expansion of Namibia's export sector, which is already a major source of revenue and economic growth, is placing pressure on transport infrastructure. Investment in the Port of Walvis Bay is in the pipeline, as are improvements to the road and rail network, with the US$7bn Trans-Kalahrai railway making some, albeit slow, progress.
Zambia BMI View: Zambia’s construction industry is to experience strong growth over our forecast period, driven by investment in the mining sector, a growing economy and rising per-capita wealth. Between 2012 and 2016, annual average growth of 7.8% is anticipated, slightly below the historic trend seen (an average of 15.3% between 2000 and 2010), with inflation and financing placing downside pressure on our growth outlook. However, the importance of the construction industry to the economy is increasing, with the sector contributing around 20% to annual GDP over the next few years.
We are confident growth will remain consistently high over the coming years. In 2012, 8.6% year-on-year (y-o-y) real growth is expected – a slight expansion on the 8.4% estimated for 2011. However, this is contingent on a number of factors:
?? The biggest threat to our forecast remains financing. Government revenues are insufficient to meet the infrastructure funding gap, highlighting the importance of external financial support. Consequently, multilaterals like the World Bank and African Development Bank (AfDB), as well as state credit agencies, remain the biggest and most important sources of funding for infrastructure in Zambia. The resumption of European Investment Bank (EIB) funding for Zambia in late 2011 is an encouraging sign. The bank froze funding due to concerns over transparency, but has been sufficiently encouraged by President Michael Sata’s anti-corruption agenda to resume funding, starting with a EUR80mn loan approved for the Great East Road. A EUR64mn loan for the EUR175mn Itezhi-Tezhi Hydropower Project is expected to follow.
?? Closely linked to financing is the government’s plan to attract infrastructure operators under public-private partnerships (PPPs). This is a good idea in theory, as Zambia needs to ensure comprehensive and transparent regulations are in place, and while its high score for country risks in BMI’s Infrastructure risk/reward ratings (RRRs) bodes well for stability and policy, a lack of financial instruments, illustrated in very weak scores for country rewards, will be an obstacle as it attempts to attract partners. At the same time, the lack of progress on PPPs indicates that the country is struggling to get off the starting blocks.
?? Inflation has been a major source of real growth erosion and this presents a significant downside risk to our real growth forecasts, as well as an upside risk to nominal value expectations. Either way, this has negative implications for the industry, with high costs making projects more expensive and leading to difficulties when provisioning for construction work.
?? Construction industry growth will also be based on the performance of commodity prices. With government revenues generated via the mining industry, funding for projects is contingent on consistently high prices and demand. Mining activity also has a more direct impact on construction growth, with construction necessary to establish support infrastructure at mines, transport infrastructure to facilitate the export of goods, and power and water infrastructure to support mining activity. Consequently, any expansion in mining activity will also indirectly boost construction activity. With copper prices forecast to weaken slightly, but still remain high by historical standards, we are maintaining our positive outlook. At the same time, despite an economic slowdown in China, we do not believe demand for copper will be damaged significantly.
?? Demand for infrastructure is also tied to economic growth. With real GDP growth expected to average 7.1% between 2012 and 2016 – and GDP per capita expected to increase from US$1,367 to US$2,572 over the same period – we anticipate significant growth in demand for infrastructure.
Zimbabwe BMI View: Zimbabwe has the potential to become a very attractive frontier market. Since reforms were implemented in 2009, the country has witnessed a construction boom, driven by a pressing need to improve infrastructure as the economy returns to growth following a lost decade. At the same time, the economy is seeing rising demand for commercial and residential real estate. Both trends are expected to continue over the medium term; however, there are strong downside risks, with limited access to financing and political risk the most pressing.
Key developments in the sector include: ?? In January 2012, Zimbabwe announced it would be drawing US$40mn from an emergency IMF fund to invest in urgent water and electricity upgrades, as a major typhoid outbreak plagued Harare. Investment will be channelled into upgrading access to potable water and sanitation.
?? Construction of a US$3bn coal-fired power plant moved a step closer to realisation in January 2012, after the unnamed French consortium that proposed the project, to be located near the Lusulu coal fields in Binga, Matabeleland North, had the project approved by the government. The 2,000 megawatt (MW) is to be constructed over a four-year period and once completed, will almost double the country’s generation capacity.
?? Plans to establish the Zimbabwe Construction Industry Council (ZCIC) were progressing in January 2012, with a draft bill proposed in 2011 having been examined by the Public Works Ministry’s legal department. Establishing a council would significantly improve the structure of the construction industry, with the implementation of legal procedures and a code of conduct to ensure adherence to health and safety standards and quality of work. Capacity utilisation has increased dramatically in the country’s construction sector, which has suffered from a lack of finance and raw materials. The matter is even more pressing after concerns were raised over Chinese labour practises in the country, which are attracting international attention.
It is estimated by African Development Bank that US$5bn needs to be invested in Zimbabwe’s infrastructure by the private sector in order to rehabilitate the country’s infrastructure. However, major improvements in the business environment are needed to attract international investment. Some interest has been registered and we are seeing a slow trickling through of private investment, which is creating signs of life across various sectors:
?? Zimbabwe's economy is experiencing a boom in economic growth. This is placing increased pressure on existing and already outdated and insufficient infrastructure. Electricity supply is the most pressing concern, with capacity trailing peak demand by at least one gigawatt (GW). The World Bank estimates US$13bn is needed to upgrade the system; while this is unlikely to be realised, projects to expand capacity and upgrade transmission and distribution systems are progressing.
?? In terms of the two sub-sectors that comprise the construction segment, residential and nonresidential building is likely to outperform infrastructure – as the real estate market benefits from substantial demand. Residential real estate is supported by growing demand from a population seeking to invest as the country benefits from economic expansion. At the same time, businesses are looking for new office space, and rising consumer spending power is driving demand for retail space, with a US$1.5bn mall planned in Harare and Anhui Foreign Economic Construction Company (AFECC) building a US$98mn national defence college, also in Harare.
Given these trends, Zimbabwe's construction sector is forecast to record strong growth over the medium term, with real growth estimated to average 9.3% per year between 2012 and 2016. This is in significant contrast to a prolonged period of mostly negative growth up until 2008. However, pertinent risks to our optimistic outlook remain:
?? The primary risk to the construction sector is a shortage of finance. International lenders, investors and donors are all steering clear of Zimbabwe, due to concerns about political risk. This is inhibiting the flow of capital and could impact planned projects.
?? Political risk concerns should come as no surprise to investors looking to Zimbabwe. Concerns over a successor to Mugabe and the timing and political climate in the run up to elections are causing investors to hold off on entering the sector.
?? The indigenisation law is a major deterrent for investors looking to establish themselves in Zimbabwe, and some have already left the country. Although the law has been implemented arbitrarily, the threat is enough to deter many, leading to an absence of crucial funding and industry capacity growth.