Interview: Stephen Jennings
How can local financing for large capital projects be improved in emerging and frontier markets?
STPHEN JENNINGS: It depends on the specifics of each market. If you look at places like Nigeria or Kenya, where the banking systems are quite developed, there is a good amount of financing available for large projects, much more than people realise. Once you can prove the robustness of a project, and all the issues dealing with licensing permits and land titles are in place, banks see that it is a good investment. The issue is the quality of the projects and the integrity of the legal systems.
To what extent is the current rapid rate of growth in many of Africa’s larger markets sustainable?
JENNINGS: Africa is going through the same kind of transition that Asia has been through over the last 30 years. The take-off in Africa only really started in the mid-1990s: due to the negative perceptions associated with the continent, a lot of people did not notice it until later. The current growth is not something that just started. We know that after the 2009 financial crisis, Africa was the only continent in the world that did not have a single quarter of negative growth, so it is quite robust to external shocks.
The continent is in a cycle of development. Growth creates a middle-upper class, which becomes more assertive and pushes for better policy. This gradually leads to what Ghana currently has – strong pluralism and strong democracy, which are accompanying economic growth. Of course, this varies from country to country, but this cycle of growth is very robust.
What risks are associated with investing in residential and mixed-use real estate in countries with poorly maintained infrastructure?
JENNINGS: The worse it is, the bigger the opportunity to create new solid real estate projects. The lack of infrastructure simply means there is more that can be done. The risk of frontier markets is generally more related with the legal environment. If global investors know that titles will be protected and regulatory processes will be efficient, people would just be flooding into African markets because the demand-supply gap is so massive. It is about clarity of regulations and political stability, as well as the perception of these issues. Perception is always worse than reality. Countries vary in terms of the quality of legal environment. We are carrying out large-scale projects in various countries, and Ghana is definitely on the top of the list regarding these issues. We have planned and received the approvals for two cities in 12 months. That is three times faster than it took us in other countries. This is because people were not trying to extort us and the government actually wants these projects to go through.
What are the primary factors you consider when evaluating the potential for returns on large-scale capital projects in Ghana?
JENNINGS: We are used to doing things where conventional measures of return cannot be used. If you were in Russia in 1992 and 1993, and trying to build a business, how would you quantify anything? You would be working with rules of thumb, not actual measures of return. The sort of things we look for when building these cities include very large rural-to-urban migration, as scale is needed, and high economic growth, because you want per capita income to be going up. We also look for legal environments that are either quite good or improving. These are big projects – you do not want to put hundreds of millions of dollars and then be held up by some crooked government. There are more and more African countries with these conditions.
We see scope for more of these projects in Ghana, because there is a housing deficit. We are just scratching the surface. Is somebody going to come in and carry out 10 more of these kinds of projects in the next three years? Probably not. The last thing we need to worry about is oversupply, particularly in an economy that has 14% GDP growth. In the take-off phase of an emerging market, people highly underestimate demand.
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