EM infrastructure: money to be made
September 28, 2011 8:22 pm by David Keohane
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Airports, roads and railways may be the most visible elements of emerging market infrastructure investment. But they are all dwarfed by spending on electricity generation and transmission.
Electricity investment already counts for nearly half of EM infrastructure investment. And if a study published on Wednesday by Cambridge University and the Royal Bank of Scotland is correct, it will amount to around two-thirds of the total over the next 20 years. That’s a lot of power – and a lot of contracts.
RBS is forecasting a doubling of EM infrastructure spending between now and 2030 from $7,500bn in the last twenty years to $19,200bn (+158%). As the chart below shows, electricity investment will quadruple from $3,600bn to $12,700bn:
The vast majority of spending will continue to be concentrated in Asia which was responsible for over two thirds of total EM infrastructure spending between 1991 and 2011- RBS is predicting a further $15,800bn, a 207 per cent increase from the previous two decades. However, the report predicts that Africa will benefit from the highest growth rates ( helped in no small part by Chinese investment) as its urbanising population grows. Nigeria, in particular, is expected to see the highest demand for infrastructure globally between 2011 and 2030.
The report notes that central and east European countries, bar Turkey, will probably not see an increase in infrastructure spending (due to established infrastructures and declining populations) but that Latin America and the Middle East (which is the only EM region creating “infrastructure overcapacity”) will both push ahead quickly.
The report expects electricity to continue to dominate investment with spending forecast to quadruple over the next 20 years, from $3,600bn to $12,700bn. China, unsurprisingly, towers above other EM countries in terms of electricity capacity and investment and should remain the global heavyweight.
That said, RBS expect high rates of growth in electricity spending from underdeveloped nations in Asia and Africa.
Nigeria’s compound annual growth rate (CAGR), for example, needs to reach 5.9 per cent in order to meet demand, while Angola needs 5.8 per cent and India 7.7 per cent. Vietnam (6.9 per cent), Indonesia (5.7 per cent) and the Philippines (3.9 per cent) all also need to invest to keep up with demand.
By contrast, RBS expect flat or marginal growth in electricity spending in Central and Eastern European economies which already benefit from good infrastructure and have slowing population growth which will retard demand. By way of contrast, Ukraine enjoys almost 8 times the electricity capacity of Nigeria, despite Nigeria being a larger economy.
Surprisingly, while the report sees a fall of 60 per cent in fixed line investment it still expects a not insignificant amount to be spent, some $200bn, particularly in Africa and Asia. Vietnam, the Philippines and Kenya are expected to need CAGRs of 3.9 per cent, 3.1 per cent and 2.8 per cent. RBS believe that the growth of broadband technology, which “to date still requires fixed telephone lines”, will drive investment. Whether this is true or not remains to be seen.
Mobile phone use is the reason behind the fall in fixed line investment and it’s easy to see why. The technology has only been present in EM markets for 15 years but its uptake in that time has been phenomenal. RBS note that many countries now boast more subscriptions than citizens with the UAE counting 208 mobile subscriptions per 100 people in 2010 while Hong Kong and Bahrain counted 177 and 190 per 100 people in the same year. Even countries nearer the bottom of the pile like India (46 subscriptions per 100 people) and China (73 subscriptions per 100) record high numbers.
However, this penetration is not uniform and RBS expects high growth in Africa with Nigeria, Kenya, Egypt and Angola seeing the highest growth over the next two decades with CAGRs above 6.5 per cent.
Railroads aren’t as necessary as they used to be and, while predicting an increase in spending, the report notes that many EM countries, mainly in the Middle East, have chosen not to invest in them. However, RBS do see future spending in some countries with the fastest growth being seen in Peru (1.1 per cent CAGR), Angola (1.1 per cent CAGR) and the Philippines (1.1 per cent CAGR).
Investment in roads meanwhile is expected to nearly double, from $2, 200bn to $4,200bn. And some of the increases will be dramatic. According to RBS, India will need to double its road network over the next 20 years, from an already enormous 2.3m km to near 5m km. The highest growth after India will come from Vietnam, Thailand and Kenya. |
