TRENDS, CHALLENGES AND OPPORTUNITIES IN FINANCING INFRASTRUCTURE PROJECTS

IN SUB-SAHARAN AFRICA

KENNETH AMOLLO

SMEC INTERNATIONAL PTY. LTD

SPEAKERKenneth Otieno Amollo

Civil Engineer SMEC International Pty |

Nairobi

A Civil Engineer at SMEC International Pty. Limited with extensive experience in transportation infrastructure

projects. He is particularly enthusiastic about road safety, infrastructure financing, road asset management and

economic analysis of transportation engineering projects.

INTRODUCTIONTHE INFRASTRUCTURE GAPAccording to the United Nations Sustainable Development Goals in 2016, Globally:Over 2.5 billion people lack access to proper public health conditions About 663 million people lack access to hygienic and safe water for consumption

Over one billion people do not have electricity in their homes and the rural access index (RAI) for most low-income countries remains low.

INTRODUCTIONTHE INFRASTRUCTURE GAPAfrica 50, an infrastructure investment platform backed by the AfDB:Estimates overall infrastructure funding needs in Africa amounts to $1.2 trillion for the period between 2017 and 2025.It puts the funding gap at between $30 billion and $40 billion a year.The slow growth in African economies has put limitations on government budgets whereas the donor funding rules make it more challenging for banks to free up capital for infrastructure lending.

The Public Private Partnership Model

World Bank defines PPP as contracts between the public sector and private sector.

Investments by the private participants in terms of funding, or better technology, or expertise

Payments are made in exchange for performance, for the aim of service delivery that was initially offered by the public sector.

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PPPs can mobilize additional sources of funding and financing for infrastructure

PPPs can improve the process of project selection by subjecting potential projects to the test of attracting private finance.

Projects are always delivered on schedule and within budget limitations.

Interests of the contracting authority and the private partner are well aligned since payments is tied to performance.

Advantages of Public Private Partnership Model

The challenges in implementation of infrastructure projects and the various ways a PPP framework can mitigate them:

Figure 1: The Infrastructure implementation shortcomings and their mitigation measures using PPP model

A. Government FinancingB. Corporate or On-Balance

Sheet FinanceC. Project Finance

Infrastructure Financing Mechanisms for PPP

A

A.Government Financing

The public sector may adopt a method of financing and fund fully or partially the capital investment in a project and seek the services of the private entities to bring in expertise and efficiency. This is a typical example of a Design-Build-Operate project where the contractor is paid a lump sum for mile stones of construction and eventually receive an operation fee to cover for the maintenance of the project.

BB. Corporate or On-Balance Sheet Finance

A private partner may elect to use its own resources to finance the project through corporate finance. This can involve mobilising for funding based on his balance sheet This criterion is used especially for projects of lower value where the cost of the investment low and does not warrant a project financing mechanism or where the private entity has capacity to fund the investment from its own balance sheet.

CProject financing normally takes the form of limited recourse lending to a special purpose vehicle (SPV). SPV is a legal business entity created for a limited business transaction and in this case to carry out the construction and operation of the .The SPV is dependent on revenue streams from the contractual agreement and/or from revenues collected from end users which will only start streaming once construction has been completed and the project is operational.

Higher Budgetary Commitm

ents

• Interest rates• Inflated costs• Risks on the private

entity

Unclear Fiscal Costs

• The choice of projects suited for PPP remains primarily with the government.

PPP’s are not flexible

• The contract implementation is somewhat very delicate as the risk has been totally shifted to the private partner.

Mercy of the Private

Partner

• Incentives for effective PPP implementation depends on the private partner.

PPP Shortfalls:

PPP Regulatory Framework in sub-Saharan AfricaThe first structured PPP arrangement dates back to 1997 in South

AfricaBetween 2004 and 2018, more than 33 African countries adopted the legal framework regarding Public-Private Partnerships (PPP). Currently, less than 10 African countries lack a PPP framework.

According to the United Nations Economic Commission for Africa (2019), an estimated 479 PPPs have been implemented in Africa, since 1990 to date. A majority of the PPPs on the continent are concentrated in a few sectors i.e. the energy sector and particularly electricity, has the highest number of PPPs.

PPP Regulatory Framework in sub-Saharan Africa

Cote d'voire Egypt Gabon Ghana Kenya Mauritius Morocco Mozambique Nigeria Rwanda0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2,666

8,169

1,940

6,960

2,915

604

18,245

2,743

10,526

694

Countries with the Highest Number of PPPs

Total Investment in PPPs ($million) Total PPP Projects (#) #REF! #REF!

Figure 2: Countries with Highest Number of PPPs

A. Planning and selection of projects

B. Financing projectsC. Delivering projects and

oversight

Opportunities for Consulting Engineers

A

A. Planning and selection of projectsTransportation engineers determine the most feasible

and economically viable construction and engineering methods for infrastructure development. The engineer develops strategy, identifies goals/objectives and ensures they can be achieved (giving consideration to technical constraints and sustainability; sets frameworks and uses standards to ensure safety, and prioritisation according to evidence of need; questions project assumptions and assesses alternative scenarios; employs mechanisms that ensure detailed analysis, while offering sound risk assessment; supports organisations’ holistic decision-making in a way that accounts for the impact of climate change on strategy, risk, and operational and financial performance, thus enhancing organisational resilience.

B

Sophisticated financial modelling based on poor technical assumptions or poor modelling on correct technical inputs equally result in a misrepresentation of a projects potential. If a project that is reliant on a process or engineering solution is misrepresented at the funding stages without good technical assumptions or bespoke inputs, it may result in a strong project not seeing the light of day. The engineer considers sustainable finance options, including climate-change adaptation and resiliency needs; assesses financial viability and identifies long-term impact and strategies for risk mitigation; acts as a visionary, by providing sound life-cycle advice to decision makers and giving them better understanding of the long-term technical difference between construction services and maintaining services, and of how the latter can create greater cost pressures over time.

CThe engineer implements the required supervision, monitoring and evaluation; allocates project risk between parties of a PPP to reduce moral hazard; is supported by several frameworks (e.g. the Engineer’s Act) for professional judgement and ethics, which promote the use of logic, flexibility, consistency, reliability, relevant standards, unbiased information, and alternative framing to avoid precipitous decisions; and which promote a balance of experience, knowledge and emotion to ensure delivery of projects on time and within budget.

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Establish expert-led relationships with contractors

Independent Engineer for Lenders and Government Entity.

Engineer’s Representative in project identification.

Owners Engineer.

Consulting firms should position themselves strategically for the following roles at various phases of PPP implementation:

In conclusion:

321PPP is

the way to go

End Corrupt

ion

Political Goodwil

l

References:Marcus Ahadzi, Grame Bowles. Public-private Partnerships and Contract

Negotiations: An Empirical Study. [J]. Construction Management and Economics, 2004(22).

KarstenMause, Thomas Krumm. Public-Private Partnership as a tool of Government: Exploring its Determinants Across German State. [J] German Politics. 2011(20):527-544.

Yisuo Li. Economic research of public-private partnership (PPP) - based on German experience [J]. Lanzhou Academic Journal, 2012, 06: 146-154.

Yisuo Li. “project consultant” in public-private partnership: German experience [J]. Economic and management review, 2013(4): 24-30.

Eurasian PPP liaison network. A case study of public-private partnership (PPP) in infrastructure construction in Europe and Asia [M]. Liaoning science and technology press, 2010

Jill Eicher (2016), A Technical Paper on Assessing Value for Money of the PPP.

Andrew Meaney and Peter Hope (2012), Alternative Ways of Financing Infrastructure Investment: Potential for ‘Novel’ Financing Models, International Transport Forum, OECD.

References:Infrastructure Financing Instruments and Incentives (2015), The

Organisation for Economic Co-operation and Development.Omawumi Kola-Lawal (2019), A paper on ‘Why it is so Difficult to Fund

Infrastructure Development in Africa’.Public-Private-Partnership Legal Resource Centre, World Bank Group.Luis Gravito, Jared Haddon, Andrew Alli and Alice Usanase (2017),

Infrastructure Financing in Sub-Saharan Africa, The Boston Consulting Group.

Global Infrastructure Outlook, the G20 initiative.Beryl Zoraima Nalo (2018), Establishing an Effective Regulatory

Framework for PPPs in Kenya, University of Nairobi.Jason Mitchell (2018), a research on why Africa seeks new solutions to its

infrastructure needs.

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