Gulf investors increasingly looking to African infrastructure

Gulf companies are increasing their exposure to African infrastructure projects and are reaching out to unfamiliar sub-Saharan African markets, according to a new report published today by The Economist Intelligence Unit, and commissioned by the Dubai Chamber.

The Gulf push into African infrastructure shows that Gulf investors have focused predominantly on telecommunications and ports and are now investing more heavily in power. Their activities follow a decade of oil boom-driven infrastructure expansion in their home markets. During this period many state-owned companies were corporatised and part-privatised, and are now increasingly looking abroad for profits.

Gulf entities have provided at least US$30bn of funding, at current prices, to African infrastructure over the past decade, which amounts to between 7% and 10% of total inflows.

This includes approximately US$15bn in loans and grants from Gulf development agencies and their shares in regional multilateral bodies such as the Islamic Development Bank, and approximately US$15bn in direct investments.

“Gulf infrastructure funding has in the past focused heavily on North Africa and a small selection of sub-Saharan countries with which Gulf countries share historical and cultural ties. This is shifting as Gulf firms broaden their involvement to parts of southern and eastern Africa,” said Adam Green, the editor of the report.

“Many are still deterred by political risks associated with large public infrastructure projects — and with good reason. Yet Gulf investors must take care to differentiate between the region’s many countries, rather than view them as a homogeneous African market.”

The report also finds that while investors are engaging in unfamiliar countries across the centre of the African continent, their exposure to the large infrastructure markets of Nigeria, Angola and Ethiopia remains modest.

Strengthening regulation of Islamic finance could catalyse infrastructure funding from the Gulf, says the report. While Africa’s interest in Islamic finance is growing, in both Muslim and non-Muslim countries, there are long time lags to implementing enabling reforms, partly because of political and legal hurdles, and the costs of issuing new instruments.

A second challenge is ensuring that regulators have the skills and resources to execute Islamic finance reforms. If the architecture is put in place, the impact on Gulf Cooperation Council (GCC) based financiers and investors would be salutary, owing to their familiarity and comfort with Islamic financial systems and the broadening effects of Islamic finance reforms on the infrastructure investment landscape.