PPPs Bridging the gap of Infrastructure Finance in Africa

1. OVERVIEW

1.1  In November 2010, the Collaborative Africa Budget Reform Initiative ("CABRI") published a report titled "Ensuring Value for Money in Infrastructure in Africa: Financing Infrastructure Projects". The report is centred on the financing of infrastructure projects in Africa via Public ­ Private Partnerships ("PPP"). The paper examines the various ways of financing infrastructure projects with a particular focus on the role of PPPs within the realm of infrastructure finance.

Over the years, there has been an unparalleled thrust towards infrastructure development in Africa. The public and private sector are increasingly starting to work together via PPP arrangements to provide funding and support for infrastructure initiatives. Since, the mid-1990s there has been an emergence of PPPs in the sphere infrastructure development finance in Africa. The proliferation of PPP arrangements is steadily gaining momentum as African countries are increasingly adopting it as a model for the procurement of infrastructure facilities and related services. For instance, South Africa undertook a rigorous plan of implementing PPPs in the 1990s, whilst countries like Mauritius, Egypt, Nigeria, Botswana and Rwanda have followed-suit in recent years.

2. TRADITIONAL APPROACHES TO INFRASTRUCTURE FINANCE

Although, there has been a significant increase in private sector participation in infrastructure initiatives across the region, the traditional approach to infrastructure finance continues to dominate the playing field.

2.1 Financing Through the Budget

Traditionally, governments have financed infrastructure projects through state resources. There several drawbacks associated with financing projects entirely from the government budget:

(a) Large infrastructure projects often take several years to develop and public funding may only be available for the initial stages of the project. As a result, government departments are cautious about investing time in the planning stage of a project if there is a degree of uncertainty regarding the future availability of funds to complete the project.

(b) There tends to be disproportionate focus on the capital aspect of the relevant government ministry’s budget. In most African countries, governments more inclined to have to separate budgets for the capital and recurrent aspects of the budget which results in the lack of adequate funding for the operation and maintenance of the assets after completion.

(c) There is lack of equilibrium between the costs of the project vis-à-vis the capital returns. It is crucial that the project costs are weighed against the capital returns to ensure that the investment will add value and contribute to overall economic growth of a country.

2.2 Concessional Financing for Public Projects

Concessional funds sourced from multilateral and bilateral development institutions is a major source of infrastructure development finance for developing countries. It had been reported that development aid has been plagued with criticism due to its failure to address systemic issues pertaining to the public sector’s failure to deliver services despite the availability of finance. In particular, these problems include a lack of transparency during the tendering process; weak implementation and management capacity; and inadequate operation and maintenance following the completion of a project. The development partners have attempted to redress these issues in several ways. For example, the provision of technical assistance and administrative support to projects. Donor institutions also require beneficiary countries to implement the donor’s procurement procedures. In general, these measures have contributed to improved project planning and implementation during the construction phase. However, in most cases the projects inevitably face a poor budget for maintenance and operations once they delivered to the public sector.
Project finance in a form of concessional lending will continue to play a crucial role in infrastructure development in Africa. Institutions such as the Development Bank of Southern Africa ("DBSA") and the African Development Bank ("AfDB") have had a great deal of success in financing projects across the region. Nevertheless, regional banks such as the East African Development bank has not fared well as its efforts have been hindered by political interference. This suggests that that the scope and mandate of development banks should be clearly defined and measures should be put in place to curtail political interference.

3. PUBLIC PRIVATE PARTNERSHIPS

The CABRI paper argues that there is no clear-cut definition of a PPP although a standard definition is that a PPP is a business venture which is financed and operated by a partnership between the government and a private sector company. This arrangement contrasts with traditional public investment where the government contracts with the private sector to build an asset that is designed and financed by the government. There various types of PPP projects however, PPPs characteristically take the form of the Design-Build-Finance-Operate arrangement. In this type of arrangement the government would specify the services required and the entity would design and build a specific asset for that purpose. In addition, the entity finances the construction and operates the asset for the contracted period and provides the requisite services.

Furthermore, there are various forms of PPP contracts with regard to the project scope, project duration, level of private sector involvement and the financing model.

Nevertheless, project finance is the most common financing vehicle adopted by most countries to finance large infrastructure projects which entail concession agreements.

4. CORE PRINCIPLES OF PUBLIC-PRIVATE PARTNERSHIPS

4.1 Value for Money in a Project

The CABRI report stresses that ensuring value for money ("VfM") in an infrastructure project should be at the core of the public sector’s decision to engage in a large infrastructure project. Essentially, a PPP is a considered a VfM transaction if it generates a net profit for a public institution in terms of quantity, quality of the service or facility, cost and risk transfer during various stages of the project life cycle. Hence, the VfM prognosis of a PPP plays a fundamental role in the decision whether a public institution would be willing to enter into PPP agreement.

4.2 Transfer of Risk

The public sector in most countries has shown a lack of capacity to finance and manage the multi-faceted risks associated with large infrastructure projects. According to the paper, PPPs are a more suitable vehicle for risk management and mitigation in large scale projects as opposed to the traditional means of public procurement. This is given that risk identification, allocation and mitigation is at the heart of a PPP arrangement which is based on the project finance model. In addition, the private sector has the requisite skills and capacity to manage the complex risks associated with project development and execution.

4.3 Ensuring Affordability

(a) Affordability of PPP Infrastructure Projects

The concept of affordability is premised on the notion that a PPP arrangement should be designed to stay with the limits of the government’s budgetary ceiling. It is important to note, that many public sector services in Africa are underfunded as a consequence the budget forecast figures on their own may underestimate the cost of the provision of these services. Therefore, if a project is not accurately defined, it is likely to be deemed unaffordable under a ministry’s existing budget allocations. Nevertheless, external funding provided in the form of grants or concessional lending is vital to lowering the public sector expenditure and ultimately reducing the costs of the end-users.

(b) Infrastructure Funding Facilities

The lack of adequate public sector funding has been identified as a significant constraint to infrastructure development in Africa, which eventually renders infrastructure projects unsustainable. It has been reported that donor funding injected in PPPs to bridge the capacity gaps is becoming common-place in developing countries. African countries can source donor support for infrastructure projects from several multilateral development finance institutions such as the World Bank, the AfDB and the DBSA.

5. PRACTICAL CONSTRAINTS PERTAINING TO THE EXECUTION OF PPPS

5.1 Selection of Appropriate Infrastructure Projects

One of the challenges faced by institutions is the ability to discern the suitability of an infrastructure project for the PPP model. This suggests that the notion of ‘one size fits all’ is not applicable to infrastructure projects. Governments should heed the fact that PPPs are not a panacea for all infrastructure development initiatives. It is therefore crucial that in the planning phase to select infrastructure projects that would be well suited to the PPP model as it would be more likely to ensure the success of a project.

5.2 Establishing Legal and Regulatory Framework

It is vital that a strong legal and regulatory framework is established to govern PPP transactions. In view of the nature and the lengthy time frame of such projects it is imperative that the interests of both the public and private sector are protected by law. It is evident an established legal framework governing PPP transactions creates an incentive and an enabling environment for prospective investors. For countries that do not have a legal and regulatory frame work governing PPP arrangements, it is recommended that they embark upon such reform as this would create an incentive for prospective investors.

5.3 The Tender Process

It is suggested that VfM is more likely to be realised when the tender process is competitive, transparent and fair to all bidders. This would imply a degree of divergence from the traditional tendering process used in most Africa countries which includes fragmented decision making, lengthy tendering processes, and political interference. The report further asserts that an extreme manifestation political interference is practice of the unsolicited bid to deliver public services. It is prudent that the government conducts a formal market test in order to determine that there are no other formidable competitors because "competition is the best determinant of value."

6. CONCLUSION

In conclusion, the report analysed the various approaches to infrastructure finance in Africa with a specific focus on the role of PPPs within the realm of infrastructure development. In addition, the paper identified the core principles on which PPP arrangements are founded and addressed the practical challenges pertaining to PPP execution.
Over the years, there has been gradual increase in the collaborative efforts between the public and private sector to provide funding and support for infrastructure projects in the region. Despite the increase in private sector participation in infrastructure initiatives, the traditional approach to infrastructure finance continues to dominate the playing field.

The report argues that there are several disadvantages associated with financing projects entirely from the government’s budget. Therefore, regional development banks are stepping-in to bridge the gaps through the provision concessional funding.

Furthermore, the report underscores the fact that PPP initiatives in the sphere infrastructure development have been plagued by several drawbacks. The report addressed these constraints that include the lack of established legal frameworks, absence of transparency in the tender process and inability to select appropriate projects for the PPP model. 
Nevertheless, the landscape of infrastructure development is gradually evolving in Africa, as countries are shifting from the traditional approach to infrastructure finance via the government budget to PPP initiatives. In general, it appears this novel approach towards the finance of infrastructure development involving PPPs is gradually taking roots across the region.