Investing in cities: an investor’s guide

You don’t need to be a rocket scientist to figure out why Aliko Dangote is building a 400,000 barrels per day oil refinery in Lekki, Lagos, why he is partnering with two private equity firms, Blackstone and Carlyle, to invest billions of dollars in power and, oil and gas projects, why GE wants to invest $2 billion in Africa by 2018 or why Jim Ovia is investing $1.5 billion in a petrochemical plant in Ibeno, Akwa Ibom state.

The reason is simple: the world turned urban in 2007. And the fastest growing cities are in Africa and Asia. Both are urbanising faster than other regions of the world and are home to 90 percent of global rural population. Global urban population will triple by 2050 and Africa is expected to be the fastest urbanising region from 2020 to 2030.

Minting cities

Thirteen of the fastest growing cities are in emerging economies – eight are in the Brics: two in Brazil and three each in India and China while among the Mints: Mexico, Nigeria and Turkey have one each.

India, China and Nigeria will account for 37 percent of the world’s 6.4 billion urban dwellers by 2050 i.e. 404m, 292m and 212m people respectively, according to data from the UN.

“In 2050, most of the urban population of the world will be concentrated in Asia (52 percent) and Africa (21 percent).” Medium-sized cities and cities with 500,000 to 1 million inhabitants located in Asia and Africa are the fastest-growing agglomerations.

India, China and Nigeria are already home to megacities – Delhi, Mumbai, Shanghai and Lagos. Beijing, currently the eighth-largest city in the world, is growing fastest, followed by Lagos which jumped 14 places to join the league of 20 in 2014. Shanghai and Chonqing, two other Chinese cities, rose faster by 17 and 27 places respectively.

In addition the economies of India and China are expected to see an increase in their share of global output and contribute the most to global GDP growth. Though Nigeria’s share of and contribution to global output is still miniscule, it accounts for over half of West Africa’s 151m urban population.

A little over one-quarter of Nigeria’s 84m urban population live in pacy and populous Lagos. This explains why the world woke up when Ebola jumped borders from Freetown, Liberia. Nigeria’s urban population is 9x the size of the total urban population of Guinea, Liberia and Senegal put together.

The containment of Ebola is thus good news. It shouldn’t deter attention from the opportunities that urban Africa offers. Analysts contend that the rapid rise of working age population in sub-Saharan Africa is expected to spur growth through a population bonus. But it can be a burden.

Burden or bonus

While the surge of investment dollars into infrastructure is not rocket science, the politics of ensuring basic energy security – making commercial energy available and accessible at reasonable prices – is a different kettle of wahala.

A combination of corruption, mismanagement of the oil and gas sector, oil theft and oil spills limit Nigeria’s economic potential. And it’s doubtful that the political elite realise the consequences: it has become a national security issue.

Politics in Nigeria is literally war for oil and gas revenues by other means. We are seeing Nigerians, disconnected from the grid, disenfranchised, disgruntled and distrustful of government, turning to or instigating armed insurrections either because they are neglected or don’t benefit from wealth and power that accrues from oil.

In its revised 2014 edition of World Urbanisation Prospects, the UN says “As the world continues to urbanise, sustainable development challenges will be increasingly concentrated in cities, particularly in the lower-middle-income countries where the pace of urbanization is fastest.” (The World Bank defines countries with a gross national income per person of $1,045 or less in 2013 as lower-middle-income economies. Nigeria is among these countries.)

Stephany Griffith-Jones, an economist, reckons that emerging economies need $1 trillion a year to fix their infrastructure (1.4 billion people have no access to electricity, 0.9 billion people do not have access to clean drinking water and 2.6 billion lack access to sanitation).

Demand for infrastructure investment is largest in East Asia and the Pacific, in absolute terms while sub-Saharan Africa’s demand is the biggest, as a share of GDP. Electricity (generation, transmission and distribution) is the sector that needs the largest amount of finance with the rest going to the construction of roads, rolling out telecommunications and piping water to homes. Energy demand is set to rise as a middle class emerges.

The rise of consumers, from lower to upper middle income classes, demanding televisions, fridges, phones and cars, is often the anecdote for telling the story of urbanisation. The energy intensity of consumers and industries, too, is a major consequence of urbanisation. And it is the driving demand for natural gas for generating electricity. Though demand for natural gas is growing in all regions of the world, China’s appetite for it is so immense it will account for 24 percent of gas produced in 2035.

Oil, coal and gas 

Oil, coal and gas, all underground resources, will be in high demand as Asian and African cities and their economies grow. The International Energy Agency projects that by 2035 China and India will respectively account for 30 and 20 percent of the 17 billion tons (oil equivalent basis) of the world’s primary energy demand.

As electricity supply and consumption increase consumers will demand better prices, as the new owners of distribution companies (Discos) in Nigeria are already discovering. The type of fuel and technology used to generate electricity affect cost and efficiency. Even though most of Nigeria’s electricity is gas-powered, generation companies (Gencos) with single cycle plants have to transit to open cycle plants which have a higher thermal efficiency.

In addition, growth in these emerging economies and their cities will spur manufacturers of materials such as oil, steel, aluminium, cement, plastics, and paper/pulp to find the most optimal locations especially locations with affordable labour, energy supply and a sizable market.

Oil refineries, for example, are better located close to where oil is produced or consumption is expanding. Nigeria has both.  Refining crude oil into diverse products like petrol, plastics and perfumes will invariably diversify the industrial structure of Nigeria and create value-added exports.

Tayo Fagbule