Editor's Note: This article originally appeared in the August 2016 edition of Into Africa (PDF), a publication of Capital Markets in Africa. An abbreviated version is reprinted here with their permission.
Africa is widely acknowledged as being the ‘preeminent emerging markets investment destination’ attracting global investors across all sectors. Investors seeking relatively higher risk-adjusted returns are appraising opportunities across the consumer sector, services and infrastructure.
However, one of the key constraints to economic growth in Africa is the lack of adequate and well-maintained infrastructure. Various studies on the infrastructure deficit have been carried out by multi-lateral agencies, most notably a World Bank study which revealed that the annual financial requirement for infrastructure in Sub-Saharan Africa (SSA) is about US$93 billion a year for both capital expenditures and maintenance. To finance this, only US$45 billion is being mobilized, two-thirds paid for by African governments and citizens, 8% by multilateral and bilateral donors and the rest by the private sector in emerging economies. There is therefore an estimated funding gap of US$50 billion a year.
Public Private Partnerships (PPP), which are gaining traction lately with governments, are in their basic form a procurement method that seeks to utilize the private sector to deliver a service that has traditionally been delivered by the public sector. But for the PPP to work, the partnership must not forget the end users who typically are the citizens because when the service is delivered, the key issue that remains is the ability to pay for the service that the infrastructure is providing.
Government financing is challenging, especially in fiscally constrained environments, end-user financing is a politically sensitive issue depending on the ability and willingness of the general public to pay for new infrastructure investment. So at the macro level; for the PPP to work, a country needs to demonstrate that the following are present in-country:
- Political stability;
- A continuous pipeline of bankable projects;
- Transparent and efficient procurement;
- Enforceability of contracts;
- Equitable sharing of risks with the public sector; and
- Certainty of the envisaged future cash flows.
Attractive as it may seem, PPPs are certainly not for all projects, sectors or indeed countries. The upstream work required to enable a long lasting successful PPP is often underestimated by governments and in so doing, the projects never reach financial close. The procurement and preparation of a PPP project is expensive and time consuming (particularly for first time projects in a country).
Based on my personal experiences of structuring projects in Africa, for a project to make it across the line, it is essential that the following fall into place at the right time:
- A credible pipeline of projects - mobilizing for PPP projects from a private sector perspective is quite expensive both at the procurement and implementation stage. For key players to invest the time and resources there has to be a credible and consistent pipeline within a country to justify costs and also refine key contractual provisions in subsequent projects.
- Real demand for the service - if the end users are going to directly pay for the service, then the demand and willingness to pay for the service must be real and not perceived. If however government is the payer, then the contracts must not be ambiguous in addition to an actual demand being there for the service because if the demand is false, it won’t be long before the government gets ‘bored and tired of paying the private sector for a service with no demand’.
- Environmental & Social considerations - responsible and sustainable investing is a consideration that has gained priority amongst many international investors and quite rightly so because we all have an obligation to preserve the environment for future generations. Many projects have stalled because of a halfhearted attempt at mitigating Environmental & Social issues. As a good start, governments should review and incorporate key provisions of the Equator Principles within their national environmental and social guidelines.
- Multilateral Development Bank Involvement - quite often, the affordability and bankability of projects is difficult and multilateral development agencies often play a critical role in providing viability gap funds, political/credit guarantees and a very unquantifiable confidence boost to crowd in capital from private investors.
- Currency fluctuations - majority of projects in the energy and transport sector have a currency mismatch brought about by loans & their repayment being in hard currency whilst project revenues and government revenues/taxes being in local currency. Over the life of projects, local currencies typically depreciate against the hard currencies and very quickly, this along with other factors will lead to African projects defaulting leading into termination. Strong consideration must be given to local currency financing, service/off take payments in local currency and the inclusion of local capital markets (e.g. pension funds, insurance funds) that are highly liquid and looking for long term assets to match their long-term liabilities.
- Local content - across many African countries, governments/private sector and the public are increasingly pushing for local companies to be supported into building their requisite capacity to handle the infrastructure drive across Africa. Though this must certainly be considered, the challenge is always in how you prescribe local content and the right proportion of it into projects. Done wrongly, it only promotes the interests of a few savvy investors but done rightly, it builds a nation’s capacity to compete globally.
Your Feedback Needed to Update the Public-Private Partnerships (PPP) Reference Guide
We are seeking your detailed input and feedback on the current version of the PPP Reference Guide, especially in the area of stakeholder engagement. Share your comments with us by November 10, 2016.