By Craig Metherell, Private Equity Analyst, RisCura
Estimates are that traffic jams in Nairobi waste around US$600,000 a day through lost productivity, fuel consumption and pollution. The problem is also exacerbated by a deficit in infrastructure supply. According to the World Bank, in Africa as a whole, this ‘infrastructure gap’ needs around US$ 75 billion a year to close.
Governments use infrastructure-spend as a key policy tool to promote growth. The short-term nature of leadership, however, is at odds with the long-term nature of many projects. Governments pick and choose projects to portray themselves in a positive light and are wary of engaging in those that could divert funds away from short-term gains that improve their popularity.
African governments are also renowned for under-spending on infrastructure budgets, a major concern given the large infrastructure gap that plagues the continent.
The infrastructure gap problem is not limited to very under-developed countries. Even South Africa, the most developed and sophisticated African nation, has a poor track record of meeting planned infrastructure spend. Estimates show that in 2012-13 the South African government only spent 85 percent of the R255.6 billion allocated to infrastructure spend. This is worrying given the massive infrastructure shortfalls the country faces.
Governments often provide a large proportion of the initial funding for infrastructure projects and assume both the early-stage risk present in many projects as well as risks the operator is unable or unwilling to bear.
However, governments often lack the ability to execute large, expensive and complex projects. Public Private Partnerships (PPPs) are a good solution, one that has been given the seal of approval by President Obama’s Advisory Council on Doing Business in Africa.
PPPs may never fully replace the more traditional government-funded model however they do offer numerous benefits. These include the ability to introduce private sector technology and innovation that improves operational efficiency and provides enhanced public services.
Secondly, the private sector can be incentivised to complete projects on-time and on-budget. The transfer of risk to the private sector is another benefit, promoting the realisation of long-term value.
Establishing PPPs also helps to expose local, private sector companies to large international firms through joint ventures, which develop experience and knowledge. The end result is a diversification of risk that has the potential to improve countries’ competitiveness.
However, pitfalls are plenty if partnerships aren’t managed correctly. Before they even get off the ground, PPPs that are not expected to generate an enticing return on investment will find it difficult to raise funding.
Many investors, before even thinking about returns, make a call on the investment destination and whether it is too risky or not. It is well known that Africa is considered to have a high level of political risk, making funders particularly cautious.
If funding is secured, the increased risk results in a higher cost of financing. Furthermore, as the private sector operates on a commercial basis, companies involved in a project only complete what they are paid for. Therefore, incentives and performance requirements always need to be clearly defined. Finally, an inadequate legal and regulatory framework and poor planning will also undermine the success of a PPP.
That being said, Africa is full of stories highlighting the popularity and success of PPPs. The Southern African Development Community (SADC) has over the years benefitted from these partnerships, with a number of the positive outcomes involving the establishment of hospitals and national road infrastructure - two key ingredients in improving the social welfare of an economy.
There has also been notable success in Nigeria, such as the provision of clean water in the Ekiti state. Tanzania is another country that has actively encouraged PPPs as part of their Vision 2025 goal of reducing poverty while Kenya has established a specific PPP unit to assess and approve PPP projects.
In addition PPPs have given private equity funds the opportunity to invest in infrastructure and a number of dedicated infrastructure funds have been established. In South Africa, the Renewable Energy Independent Power Producer Procurement (REIPPP) Programme has proven to be a catalyst in this regard, with the aim of establishing renewable energy projects by accessing private funding and expertise.
Similar projects have sprung up around the continent with a prominent Kenyan investment company, Centum, recently entering a PPP agreement with Gulf Energy as another partner for the construction of the 1,000 MW Lamu coal power plant.
Overall, markets seem to have actively shifted towards PPPs as a way of investing in large government-led infrastructure projects. This symbiotic relationship has great potential for closing the infrastructure gap to the benefit of society while providing private equity funds with a means to diversify their portfolios and seek long-term returns.