From a global perspective, Africa does not face the same challenges as the rest of world in terms of infrastructure development and financing
Africa’s infrastructure has lagged behind compared with other developing countries in the world. On the one hand, it is the world’s second largest and second most-populated continent—covering 20% of the global landmass, accounting for 17% of world’s population (estimated to reach 25% by 2050) of which 7.2% are middle class (11% estimated for the horizon 2037). In a decade, the continent will have the largest workforce in the world.
On the other hand, statistics reveal that two-thirds of Africans have no access to power, and the road access rate in Africa is only 34%, compared with the 50% in other parts in the world.
Africa only accounts for 3% of the world’s GDP (estimated at in 2050); and more than half of the 20 least competitive countries in the world are found in sub-Saharan Africa, mainly due to the region’s deep infrastructure deficit.
Freight costs in Africa per tonne range between USD 0.05 to 0.13, a considerably higher cost than the USD 0.01 to 0.04 of developed countries, which makes African markets less competitive at international level. The situation is even worse in the 16 African Landlocked Developed Countries, where trading costs are 50 times higher than in African coastal countries.
Africa’s annual infrastructure needs are estimated at USD 93 billion (i.e. 15% of Africa’s GDP). The cost of implementation of the PIDA (Program Infrastructure Development for Africa) program requires approximately USD 7.9 billion annually until 2020 for the 51 projects included in the Priority Action Plan. The implementation of the remaining projects will require an additional USD 300 billion through to 2040. According to the NEPAD Agency, the funding gap accounts for USD 31 billion per year (i.e. 5% of the GDP).
Africa’s governments are well aware of the infrastructure shortcomings, but lack the financial resources and technical capabilities needed to close the gap by without external help. Therefore, private capital and expertise must be mobilised:
- Government-related issues include limited public-sector capabilities to develop strategic foresight and planning, insufficient political will, policy uncertainty, corruption and lack of transparency, weak regulatory environments and law enforcement, and a shortage of people who have the required technical skills.
- Financial-related issues include the fact that Africa holds narrow financial markets, higher actual and provisional risks, longer project durations, significant cost overruns, and currency mismatches; which make financing issues far more complex.
In most emerging economies, public budgets and skills are insufficient to deliver the infrastructure projects needed to sustain economic and demographic growth. That is why most countries in Asia and South America already have substantial private investment in infrastructure, as well as substantial project development and execution experience.
Overall, Sub-Saharan Africa has a very modest presence and level of experience in this area, with only $77 billion in invested PPP projects, compared to the $124 billion in Turkey alone, or the $658 billion in South America (Brazil alone accounts for $433 billion). Between 2003 and 2013, Sub-Saharan Africa inked 158 project finance deals with a debt amounting to USD 59 billion, only a very small portion of the global project finance market (between 2003-2013, over 5,000 projects were closed worldwide with a total debt of USD 2 trillion). These figures highlight Africa’s enormous potential for growth going forward.
Airports are not facing the same challenges as other transport infrastructure on the continent
The African airport network has already raised the appetite of both private investors and lenders. Gateway airports have an inelastic international demand that is growing circa 5% per year, and the development of secondary airports and emergence of a new passenger demand segments will be a reality thanks to SAATM (Single African Air Transport Market). The annual growth of Intra-African traffic is expected to be higher than 6.5% in the next 20 years.
The airport business becomes a profitable investment when certain levels of traffic are reached. In fact, the profitability of African airports with sufficient traffic levels has proven to be comparable to that of global private airport operators; and EBITDAs of 50-60% as % of revenues can be reached.
Airports with appropriate tariffs in place are bankable and feasible, provided the CAPEX is kept at acceptable limits. Therefore, it is essential for African airports to develop realistic and plausible expansion plans based on reliable traffic data, which supports their infrastructure development project. The enhancement of the African airport network capacity should prioritize, as far as practicable, Brownfield expansions over Greenfield investments, in vision of reducing the required resources and overall risk of the investment.
Furthermore, in Africa there is a large share of small airports, whose profitability is currently constrained and might not be interesting for private investors. It is relevant to finance remedial investments at these airports, so that they can have an active role during the liberalisation process. When structuring airport PPPs (usually focused on the gateway airports), African States must ensure the sustainability of those secondary airports and the alignment of airport fees and charges with industry requirements, as it is a main constraining element to the air transport development.
Major challenges and opportunities of boosting non-aeronautical revenue generation in Africa
African fees, charges and taxes are considerably higher in Africa than in other world regions according to a recent IATA study; charges in a typical turnaround of a Boeing 737 in West Africa can be circa 3 times higher than in Europe and circa 4 times higher than in Asia. Therefore, these high airport charges end up being transferred to the passenger and increasing the airfares. Non-aeronautical revenues are therefore a vital lever to reducing fees and charges in a competitive environment in which reducing airfares is key to airlines’ competitiveness.
Comparing the revenue per passenger in Africa to the world average reveals that most of the sources are below world average, except for advertising (+29%) and utilities (+19%). The largest differences could be noted in Food and Beverage (-85%) and car parking (-65%). Duty free (most of the airports below 1 USD/dep pax) and rental car concessions also show differences larger than 50%. An average income for ACI Airports between 1 and 5 Million is circa USD 10 /dep pax, while in Sub-Saharan Africa is 5 USD/dep pax.
The potential for improving the commercial performance is there, however benchmarking is not enough to find the code: higher demand figures and an improvement of the commercial strategy are required.
In Africa, only 10 Airports accommodate traffics above 5 Mpax, and the demand in most of the secondary airports do not justify an investment in commercial development. The average size of the African airports with scheduled passenger services—with an average estimated capacity for 250,000 passengers—is far from that of other Regions: 450,000 pax in Latin-America, 1,000,000 in Europe or USA, or 1,750,000 in Asia. SAATM is a key opportunity for boosting overall traffic in the African airport network.
Airports that manage a critical mass with the potential to attract leading retail operators and commercial investors have multiple terminal constrains that affect the passenger experience. In particular, several bottlenecks at the landside reduce the time available in the commercial area in the airside and the average ticket per passenger. In this sense, Airport authorities have additional challenges to improve the non-aeronautical revenues:
- Identification of target operators and standardisation of commercial contracts; the large number of different commercial contracts under very different economic conditions—and not related to the situation of the premises in the terminal—are synonymous of management difficulties
- Incorporate the “commercial concept” in the designing phase of the renovation of airport infrastructures
- Definition of a product mix and commercial layout, according to the behaviour of passengers and “stress curves”, focusing on their needs, identifying the strategical commercial locations according to the passenger flows and concentrating the commercial spaces to stimulate overall spending.