The 29 May announcement of the South African Government’s USD20.5bn infrastructure recovery plan marks a turning point in the COVID-19 crisis. With on average 20% of Sub-Saharan African (SSA) countries’ GDP spent annually in the sector between 2010 and 2017 and an estimated need for USD130bn to 170bn of further investment per annum, the infrastructure sector appears to be a key driver for Africa’s growth. COVID-19 has adversely impacted a significant number of infrastructure projects across the continent as a result of the decline in both demand and supply. China’s Belt and Road Initiative, a multi-billion dollar programme to connect Asia, Europe and Africa, was halted due to disrupted supply chains and construction contracts. Port closures and manufacturer shutdowns affecting Africa’s key trading partner, China, led to a decrease in demand for African commodities and the purchase of Africa’s oil and natural gas, the effect of which is felt across gas-fired and oil-fuelled African projects. The pandemic has shed a light on some of the structural issues in the traditional economic approaches and economic models of SSA countries which tend to be reliant on fossil fuel revenue, foreign trading partners and external debt.
Encouragingly we have seen a number of immediate global responses, such as the relief offered by global financial institutions to tackle Africa’s immediate financial hardships. Examples of this include the G20 offer to suspend on a short term basis some of Africa’s external debt repayments whilst international organisations such as the World Bank and the IMF granted special loans (e.g. as part of the IMF’s Catastrophe Containment and Relief Trust, the World Bank’s USD12bn support package and the African Development Bank’s COVID-19 social bond listed on the London Stock Exchange) to the poorest of SSA countries.
Debt relief and financial support may provide quick-fix solutions, however any post-COVID-19 economic recovery will require business-driven and future facing strategies. As countries around the world, including in Sub-Saharan Africa, focus on how business will be conducted in light of COVID-19, the focus, in particular in the Energy and Infrastructure sectors, must shift to the implementation of innovative strategies to address the current economic challenges, embracing technology and the move to digitalisation.
Beyond the obvious challenges that SSA countries are currently facing, the consequences of the global response to COVID-19 are likely to give rise to compelling investment opportunities. Here we explore what we anticipate will be the key drivers towards post-COVID-19 recovery, namely (i) the acceleration of energy transition, (ii) the spur of digitalisation and (iii) the reshaping of supply chains.
Accelerating Energy Mix
Pre-COVID-19 many SSA countries had already started considering their approach to building and maintaining sustainable infrastructure and achieving greater energy security against the backdrop of both the Paris Agreement and more generally wider concerns about the adverse impacts of climate change. COVID-19 and in particular its negative impact on SSA economies to date has accentuated the importance of achieving energy security to be able to respond to pandemics and to achieve post-crisis recovery. Increasing access to electricity in Africa through ‘on-grid’ and ‘off-grid’ renewable energy presents a major opportunity in the context of national recovery programmes. It also would help secure reliable sources of energy for local populations and essential commodities/services such as medical facilities.
As the economies of some of SSA countries still rely heavily on conventional energy (e.g. 99% percent of South Africa’s electricity is generated by coal fired power stations), achieving an “energy mix” as opposed to a wholesale shift may be more realistic in the short to medium term, bearing in mind that any change in the energy framework of a country required overcoming a number of political and other external inhibiting factors.
Whilst before the pandemic many SSA countries were actively investing in renewable energy, the COVID-19 crisis is likely to result in fewer public resources being allocated to the ‘green energy’ sector. In this context, integrative models such as C&I solutions pursuant to which creditworthy commercial and industrial off-takers use renewable energy resources to power their sites, may constitute a pragmatic solution to both economic recovery and energy transition. The use of clean energy technologies is more likely to grow when looked at as part of a holistic approach to the generation of power, for example when incorporated into existing infrastructure such as the supply of power to coal fired power plants. The success of C&I solutions is however dependent on the existence of a transparent and enabling regulatory environment, which in turn is dependent on political goodwill and stability. According to BloombergNEF, Ghana and Kenya are amongst the SSA countries with the most favourable chances to see C&I solutions turn into a long-lasting business model while Nigeria’s efforts might be slowed down by regulatory burdens and grid reliability concerns.
Implementing efficient health and safety measures during the crisis has proven difficult in some SSA countries lacking adequate health care resources and reliable data. Similarly, while countries currently advocate that social distancing measures should be put in place, this only seems practical where the infrastructure and technology permit such measures. Some SSA countries have therefore started to embrace the opportunity to move towards digitisation. From COVID-19 tracing apps to mobile money and food delivery services, SSA countries are experiencing a real “e-[re]volution”.
For example, following encouragement by Kenya’s President to shift to cashless transactions to limit the spread of the disease, Kenya’s M-Pesa mobile money platform has proven increasingly popular with half of the country’s population already making use of the platform. M-Pesa’s telecom providers have also responded by waiving fees on payments through the platform and increasing transaction limits. Similarly, South Africa’s Nedbank recently announced that it will accelerate the rollout of its digital strategy across Africa to limit face-to-face banking in light of COVID-19.
In Nigeria, the free online application COVID-19 Triage Tool was developed to enable individuals to assess their risk category based on their symptoms and their exposure history while South Africa's government is also using a WhatsApp chatbot to provide information on COVID-19. Confronted with high demand for, and scarcity of, ventilators, some SSA countries have started developing their own prototypes. Uganda’s Market Garden and Zimbabwe’s Fresh in a Box mobile applications have helped implement social distancing by enabling women to safely sell and deliver fruit and vegetables and be paid through the platform, avoiding the need for physical exchanges of cash.
The development of certain digital financing solutions has also provided a positive response for some Sub-Saharan SMEs in the Energy and Infrastructure sectors. Whilst supply chain disruption led to an increase in SMEs’ operating costs and the need to diversify their customer bases and suppliers, the rise in digital transactions and access to credit fintech solutions have been helping some SMEs to mitigate COVID-19 economic side-effects on their businesses.
Renewable energy is the next sector likely to see a digital revolution in SSA countries. In addition to high demand in, and scarcity of, electricity throughout the continent, many businesses across SSA countries experience frequent power outages due to unreliable power supply. This is contributed to by insufficient and ageing power infrastructures often characterised by complex networks. The fast development of mini solar kits, portable battery storage solutions and small wind power plants in East and Southern Africa are all positive signs of change. Increasing the use of smart solutions will bring more flexible and connected solutions which in turn will help improve the transmission and distribution lines and eventually help meet energy demand in SSA countries. Whilst there is a question as to whether existing business models in the Energy and Infrastructure sectors will remain as economically viable as a result of the change it is clear that the move towards digitalisation has started and should be encouraged.
Re-thinking Supply Chains
The COVID-19 crisis has highlighted the weaknesses of global value chains and is likely to lead to an increased reliance on regional value chains and digital processes. The successful implementation of electronic cargo tracking (which reduces transit time) in SSA regions illustrates how digitalisation can positively impact supply chains.
The implementation of the first continent-wide African trade agreement, the African Continental Free Trade Area (AfCFTA) signed in March 2018 by over 40 African countries, may well be the catalyst for this most needed pan-African reorganisation. By creating the trade area, the trade agreement is likely to encourage people to rethink their infrastructure and energy supply chains and look at regional and local supply chains more. With just 16% of total trade volumes going to internal trade, Africa is one of the least integrated continents. SSA countries heavily reliant on external markets were therefore most affected by the disruption of supply chains. The main rationale for having AfCFTA is to make the continent less reliant on export of primary commodities and import of manufactured goods and supplies from overseas partners by removing internal trade barriers and tariffs. Strengthening Africa’s internal market could help mitigate COVID-19’s impact in SSA countries.
Although AfCFTA’s implementation initially scheduled for 1st July 2020 has been delayed due to COVID-19 disruptions, signatory governments should maintain the momentum. AfCFTA has the potential to strengthen regional value chains, reduce dependence on foreign partners, advance the digital transition and create more resilient economies against future crises. This should apply equally to the Infrastructure and Energy sectors in Africa and no doubt the move to digitalisation will force a rethink as to the structuring of the typical supply chain for businesses in the Energy and Infrastructure sectors.
Since the beginning of the health crisis SSA countries have demonstrated their ability to embrace structural changes and turn challenges into tangible opportunities. Now more than ever is the time to invest and explore innovative solutions in order to participate in, and contribute to, reshaping the Energy and Infrastructure sectors across the continent.