31st March, 2014
By Elizabeth Uwaifo
One of the top developmental challenges in Africa (the focus being on sub-Saharan Africa) continues to be the shortage of infrastructure. Public sources alone cannot meet the funding needs and African countries are seeking strategies to increase private sector investment in infrastructure. There should be strategies for promoting private sector investment in infrastructure and the opportunities for private investors in African infrastructure projects.
Inadequate physical infrastructure covering transportation, power and communication is inhibiting growth and productivity while inadequate social infrastructure including water supply, sanitation, sewage disposal, education and health are adversely affecting the quality of life. Energy, water, transport, information technology services and other infrastructure require extensive renewal or installation in order to support the projected growth over the coming years.
In a report issued in 2010, the World Bank found that the poor state of infrastructure in sub-Saharan Africa reduced national economic growth by two percentage points every year and cut business productivity by as much as 40%. The growth in infrastructure needs to be transformational in order to have an impact. African development institutions and African governments have recognised that adequate infrastructure is critical to achieving the growth levels expected and required.
According to the World Bank Africa Infrastructure Country Diagnostic (2009), the infrastructure needs of sub-Saharan Africa exceeds US $93 billion annually over the next 10 years. It is reported by the African Development Bank that less than half of this amount is being provided which leaves a financing gap of more than US $50 billion per annum to fill.
It is widely recognised that the funding required to develop the required infrastructure cannot be met from public sources alone. African governments are implementing initiatives that are designed to increase the participation of private sector investors in infrastructure. The challenge is to speed up the process of reforms so as to hasten the availability of the much needed private sector investment.
Public-private partnership (“PPP”) arrangements have emerged as one of the major avenues for channelling the participation of private capital and expertise in delivering infrastructure projects in recent years. A description of a PPP arrangement as captured in an OECD definition is:… an agreement between the government and one or more private partners (which may include the operators and the financers) according to which the private partners deliver the service in such a manner that the service delivery objectives of the government are aligned with the profit objectives of the private partners and where the effectiveness of the alignment depends on a sufficient transfer of risk to the private partners.
PPPs have been hailed in many countries for providing the public sector with access to much needed private sector capital or construction expertise and efficiency.
PPP arrangements could generate much needed funding for infrastructure projects that are appropriate for private investment. Some projects may be socially desirable but not economically viable as an investment by the private sector. PPP arrangements could be used to provide funding for projects that are bankable while allowing the government to apply public funds on non-bankable but socially desirable infrastructure projects.
The framework for PPP in a country should be designed with a view to attracting private sector participation in public infrastructure projects in a manner that provides value for money for the public sector. A country must adopt a PPP model that is tailored to the specific needs and environment of the particular country and must in addition incorporate best practices from countries that have been highly rated for their PPP activity and delivery.
The Canadian and UK PPP models provide examples of PPP frameworks that ought to be considered in devising a unique model for an African country. Several other countries including Australia, France and Korea have PPP models that have produced infrastructure projects on schedule. Each model has its advantages and disadvantages.
The Canadian model has been much celebrated due to the high level of standardisation in the procurement process thereby making the procurement process more efficient and cost-effective for bidders, reducing the period to financial close and increasing the number of pipeline projects. There may be lessons to learn from the Canadian experience. However, without diminishing the attractiveness of the Canadian example, the Canadian context must be borne in mind.
Canada follows the ‘negotiated’ PPP path and does not have to, for example, follow the “competitive dialogue” procedure which all countries in Europe have to follow in compliance with a directive of the European Union. In Canada, bidders are given a design on which to give a price. The “competitive dialogue” procedure is meant to allow a public entity which knows what outcome it wants to achieve in awarding a public contract but does not know how best to achieve it to discuss, in confidence, possible solutions in the dialogue phase of the tender process with short-listed bidders before calling for final bids. This can be expensive but may be appropriate in the case of complex and high value infrastructure projects. Some may question whether the absence of a dialogue among the private and public participants as to the optimum design for a project (which obtains in the Canadian model) may result in the public getting less value for money from the project.
Commentators have noted that the high volume of PPP transactions in Canada between 2008 and 2012 was due to the adoption of a “PPP first” attitude towards infrastructure procurement pursuant to which all big infrastructure projects were to be procured as PPPs unless it was proven that PPP was not the most suitable form of procurement. The policy arguably resulted in government departments and private sector advisors being motivated to opt for PPP as they knew that project authorisation and funding were more likely to be obtained if it was determined in the business case that it should be delivered as a PPP. It is worth considering when a similar policy by African governments would be appropriate.
Investing in African infrastructure is challenging and the challenges are varied given that Africa is a continent with 55 countries and sub-Saharan Africa has 48 countries, each with a separate legal and regulatory system and all at different stages of development. The typical risks for investors are no different from those that would be experienced in other emerging markets.
Notwithstanding the current challenges for private investment, there are investment opportunities at present for private investors in infrastructure. McKinsey reported in 2010 that African infrastructure will be worth US $200 billion in annual revenue to the private companies by 2020 and PEI (2011) “Infrastructure Investor Africa – An Intelligence Report” noted that African independent power projects have earned investors internal rates of return of up to 25 percent, compared with 15 percent in Latin America and 12 percent in Eastern Europe.
Investors wishing to take advantage of the current investment opportunities may be able to employ structured solutions to mitigate risks and ease the adoption of investment opportunities. The structured finance markets have a history of designing structured solutions to address the funding, credit and risk management challenges of western financial institutions and structured products that balance the needs of the originator against the risk appetite of the target investor. Examples of solutions that could be employed in Africa include:
•Credit risk mitigation techniques (such as financial guarantees or partial guarantees from institutions better able to manage the credit risk) may be employed to deal with insufficient credit history and enable more entities to access the markets;
•Structured finance techniques could be used to isolate risk into more manageable forms;
•Derivatives and other hedging techniques may be used to better manage default, currency, market and other risks; and
•Credit derivatives techniques (including risk sharing arrangements) may be used to align the interests of investors with other stakeholders and mitigate credit and other risks.
The foregoing techniques have been used in the more mature western markets to better manage a variety of risks. Such techniques can be adapted to the African context to devise creative solutions that address the unique concerns of the relevant transaction.
It is critical that African governments double efforts to provide a policy and regulatory environment that promotes investor confidence and facilitates the growth of the debt capital markets and alternative investment markets. In addition, international financial institutions should be engaged to facilitate private sector participation and investors and other transaction participants should consider employing structured solutions to enhance investment opportunities. There is no “one size fits all” solution, and the road map to sustainable infrastructure development must be unique for each African country.
•Uwaifo is Partner, Fasken Martineau LLP, Director, Africa Agribusiness Knowledge Centres Inc.