Zimbabwe Infrastructure Report Q2 2012

BMI View: Zimbabwe has the potential to become a very attractive frontier market. Since reforms were implemented in 2009, the country has witnessed a construction boom – driven by a pressing need to improve infrastructure as the economy returns to growth following a lost decade. At the same time, the economy is seeing rising demand for commercial and residential real estate. Both trends are expected to continue over the medium term; however, there are strong downside risks, with limited access to financing and political risk the most pressing.

Recent developments:

In January 2012, Zimbabwe announced it would be drawing US$40mn from an emergency IMF fund to invest in urgent water and electricity upgrades, as a major typhoid outbreak plagued Harare. Investment will be channelled into upgrading access to potable water and sanitation.

Construction of a US$3bn coal-fired power plant moved a step closer to realisation in January 2012, after the unnamed French consortium that proposed the project, to be located near the Lusulu coal fields in Binga, Matabeleland North, had the project approved by the government. The 2,000 megawatt (MW) is to be constructed over a four-year period and once completed would almost double the country’s existing generation capacity.

Plans to establish the Zimbabwe Construction Industry Council (ZCIC) were progressing in January 2012. A draft bill proposed in 2011 has been examined by the Public Works Ministry’s legal department. Establishing a council would significantly improve the structure of the construction industry, with the implementation of legal procedures and a code of conduct to ensure adherence to health and safety standards and quality of work. Capacity utilisation has increased dramatically in the country’s construction sector, which has suffered from a lack of finance and raw materials. The matter is even more pressing after concerns were raised over Chinese labour practises in the country, which are attracting international attention.

Zimbabwe's construction sector is forecast to record strong growth over the medium term, with real growth estimated to average 8% per year between 2012 and 2016. This is in significant contrast to a prolonged period of mostly negative growth up until 2008. However, pertinent risks to our optimistic outlook remain:

Zimbabwe's economy is experiencing a boom in economic growth. This is placing increased pressure on existing and already outdated and insufficient infrastructure. Electricity supply is the most pressing concern, with capacity trailing peak demand by at least one gigawatt (GW). The World Bank estimates US$13bn is needed to upgrade the system; while this is unlikely to be realised, projects to expand capacity and upgrade transmission and distribution systems are progressing.

In terms of the two sub-sectors which comprise the construction segment, residential and nonresidential building is likely to outperform infrastructure – as the real estate market benefits from substantial demand. Residential real estate is supported by growing demand from a population seeking to invest as the country benefits from economic expansion. At the same time, businesses are looking for new office space, and rising consumer spending power is driving demand for retail space, with a US$1.5bn mall planned in Harare and Anhui Foreign Economic Construction Company (AFECC) currently building a US$98mn national defence college, also in Harare.

Downside Risks To Growth:

The primary risk to the construction sector is a shortage of finance. International lenders, investors and donors are all steering clear of Zimbabwe due to concerns about political risk. This is inhibiting the flow of capital and could impact planned projects.

Political risk concerns should come as no surprise to investors looking to Zimbabwe. Concerns over a successor to Mugabe and the timing and political climate in the run up to elections are causing investors to hold off on entering the sector.

The indigenisation law is a major deterrent for investors looking to establish themselves in Zimbabwe, and some have already left the country. Although the law has been implemented arbitrarily, the threat is enough to deter many, leading to an absence of crucial funding and industry capacity growth.