Transport Engineering Consultancy and Financing trends in Subsaharan Africa

Infrastructure development was touted as a major driver of economic growth for long by African policymakers and their ‘development partners’, i.e. bilateral donors and multilateral financing institutions. Therefore, African governments have been borrowing left right and center over the last two decades to supposedly jump-start and grow their economies through investment in infrastructure. This growth in GDP would theoretically have been achieved through increased Foreign Direct Investment (FDI’s), slashing trade deficit through increased export, and import substitution in agriculture and manufacturing, after which there is supposed to be a steady stream of revenue to service the debt and to maintain the infrastructure built over the same period.

However, in the last two decades, it has been proven that the myth of infrastructure development jump-starting and growing drowsy economies remained just that – myth. Not so much because infrastructure development is the wrong prescription for development, but because it was not accompanied by the relevant policy reforms and lacked the necessary politico-economic growth climate. As we speak, these loans from IFI’s (International Financing Institutions) are maturing all over Africa, while simultaneously, payback in terms of maintenance is just around the corner. Yet, no revenue stream is on the horizon to fulfill the twin obligations of debt servicing and maintenance as originally planned. As stated above, the underlying reasons may well be the failure to juxtapose investment in infrastructure with a conducive growth environment. These are manifested by:

·        Lack of good governance

·        Failure to set up an enabling institutional and regulatory framework for entrepreneurship and investment

·        Setbacks in implementation of the appropriate legal and policy instruments

·        Setbacks in domestic resource mobilization resulting from lack of political commitment to solidify tax base, and lack of capacity in tax administration

·        Setbacks in proper utilization of earned revenues along the value chain and lack of capacity/political commitment for proper public expenditure management

On the other hand, the AfDB’s African Economic Outlook for 2018 reported another hurdle: a mismatch in expenditure and revenue currencies. Major investments in infrastructure in Africa, financed principally by external borrowing, suffer from mismatch in the currency and timeline of revenue streams and debt servicing, more so as revenue streams accrue pre-dominantly in local currencies, while debt obligations in hard currency mature in advance of inflow from these streams.

Lately, IFI’s such as AfDB and WB are showing reluctance in providing even concessional loans to some African countries with questionable fiscal/debt-sustainability ratios as their credit ratings plummeted with accumulating debt and difficulty in servicing the same. As a result, these countries are increasingly relying on Chinese loan and international sovereign bonds as a source of infrastructure financing, which are evidently not cheaper, and so the cycle will continue until it becomes unsustainable.

African policymakers may apparently have failed to internalize this reality, and so they are currently not doing much to wean themselves off aid, grant and loan. However, there will soon come a time when they will, and then the first casualty will be traditional QCBS (Quality and Cost Based Selection) infrastructure service procurement, which is an industry almost entirely reliant on IFI funding.

Given the trend above, Public-Private-Partnerships (PPP’s) are the rational way to go for the future of international consulting firms in Africa, and that is where they should strategically place themselves. This requires cooperation with contractors as these PPP contracts typically require an association between a contractor, a consultant and a financial/audit firm. This is in contrast to traditional FIDIC arrangements, in which the consultant as a representative of the Employer exercised powers on the contractor that almost represents the employer, only with a reduced scope through the instrument of delegation.

We can consider the following as potential ways to go for contractors/consultants in transport infrastructure:

1.      PPP (performance and service-level oriented contracts Road-tolling, etc

a.      OPRC

b.      EPC Contracts (performance and service-level oriented contracts)

c.      Road Tolling

2.      Road Asset Management (especially using UAV’s)

In this article, I shall discuss the first one of these contracts – OPRC. But let’s have a brief overview of PPP models for transport infrastructure.

PPP

PPP models range from Operation & Maintenance (Management Contracts) through leasing all the way to Private ownership. In the short-term models, the risks, obligations, and investment are mainly borne by the public partner and the outlay demonstrates more government control. As the contract term grows longer, these increasingly tend towards the private partner. As shown in Figure 1 below, the private sector involvement is complete (longest-term) at the farthest end of the spectrum when the mode of PPP switches to ownership.

The models vary from short-term simple management contracts (with or without investment requirements), long-term and very complex BOT form, to divestiture. They vary mainly by:

·        Ownership of capital assets

·        Responsibility for investment

·        Assumption of risks, and

·        Duration of contract.

A categorization of the PPP/PSP models is shown in the next table in five broad categories. While the spectrum of models shown in the table is available as individual options, combinations are also possible. For example, a lease or (partial) privatization contract for existing facilities could incorporate provisions for expansion through Build-Operate-Transfer (BOT). In fact, many contracts of recent times are of the combination type.

OPRC

OPRC - Output and Performance-based Road Contracts, or MROR (Marché de Contrats Routiers à Obligation de Résultats) in French-Speaking Africa, should start gaining currency and are the way to go for African countries that are increasingly under pressure to provide infrastructure yet find it hard to finance it through the unique mobilization of public funds. Funding agencies like MCC and WB are encouraging this type of contracts and have already issued Template Bidding Documents for them. OPRC is in the first line– as a Management & Operation contract- of PPP initiatives by governments that feel the need to mobilize private financing to fund public transport infrastructure.

OPRC for Roads using the Levels of Service Management and Maintenance is an innovative approach to improving the efficiency and quality of road maintenance operations. Its main objective is to guarantee the physical condition of roads, which, once built or rehabilitated, will have to satisfy users' needs throughout the duration of these multiannual contracts. This type of contract significantly expands the role of the private sector, from the simple execution of works to the management and preservation of road assets.

With performance-based road contracts (OPRC), the role of the private sector is significantly increased, moving from the simple execution of works to the management and preservation of road investments.

In traditional road maintenance contracts, the Contractor is in charge of carrying out the tasks such that the quantities are specified by the Contracting Authority by setting up the material and personal means to carry out the volumes given at unit prices given per type of task. This approach is already a significant improvement over direct labor, but the Company's incentive to maximize the volume of work performed to maximize revenue and profits at the expense of quality, so the results are often unsatisfactory.

To minimize or even avoid this type of non-incentive maintenance situation, the concept of performance-based road contracts was born, the main objective of which is to have maintenance work carried out not by quantity or unit price but by kilometer of road properly maintained during the month. The objective pursued and to be achieved, through these management and maintenance contracts by service level, is the perverse effect in terms of incentives or maximizations of turnover and profits for Contractors.

OPRC (Output Performance and Service-level oriented Road Contract) tries to address the issue of inadequate incentives. During the bidding process, contractors compete among each other by proposing a fixed monthly lump-sum fee per km of road to be paid to them. It is important to understand that contractors are not paid directly for “inputs” or physical works (which they will undoubtedly have to carry out), but for “ouputs,” i.e., the initial rehabilitation of the road to pre-defined standards (if so required by the bidding documents), the maintenance service of ensuring certain quality levels on the roads under contract and specific improvements (if so required by the bidding documents). The monthly lump-sum remuneration paid to the Contractor will cover all physical and non-physical maintenance services provided by the Contractor, except for unforeseen emergency works which would be remunerated separately. The initial rehabilitation works, which have been explicitly specified by the Employer in the contract, would be quoted on the basis of measurable output quantities and paid as performed. In order to be entitled to the monthly payment for maintenance services, the Contractor must ensure that the roads under the contract comply with the service quality levels specified in the bidding document. It is possible that during some months he will have to carry out a rather large amount of physical works in order to comply with the required service levels, and very little work during other months. Yet his monthly payment remains the same as long as the required service levels are complied with.

One fundamental feature of the performance-based contract is that the Contractor is responsible for designing, scheduling and carrying out the actions he believes are necessary in order to comply with the service quality levels stated in the contract. The service quality levels are defined from a road user’s perspective and may include factors such as average travel speeds, riding comfort, safety features, etc. If the service quality is not achieved in any given month, the payment for that month may be reduced or even suspended. Under the performance-based contract, the Contractor has a strong financial incentive to be efficient. In order to maximize profits, he must reduce his activities to the smallest possible volume of intelligently designed interventions, which nevertheless ensure that pre-defined outputs (measured indicators of service level) are achieved and maintained over time.

OPRC contracts require Contactor with satisfactory management capacity. Here, “management” means the capability to define, optimize and carry out in a timely basis the physical interventions needed in the short, medium and long term, in order to guarantee that the roads remain above the agreed service quality levels.

In other words, within the contract limitations and those required to comply with local legislation, technical and performance specifications and environmental and social regulations, the Contractor is entitled to independently define: (i) what to do, (ii) where to do it, (iii) how to do it, and (iv) when to do it. The role of the Road Administration/Employer is to enforce the contract by verifying if the agreed service levels have been complied with, as well as all other legislation and regulations the Contractor must comply with.

Given the nature of the OPRC contracts, the capacity of contractors must go beyond the mere execution of works and include the capacity to design and plan the required actions and interventions in order to maintain the contractually agreed service levels. The client should carry out a brief assessment of the private-sector entrepreneurs active in the country and sub-region, in order to evaluate their technical, managerial and financial capacity. This shall not be limited to works contractors, but also include other firms which may have the technical, financial and management capacity to carry out an OPRC contract, with the use of subcontractors to carry out physical works. The purpose of this task is (i) to get an idea of the potential bidders and their capacity, (ii) to have a basis for defining pre-qualification criteria for bidders, (iii) to identify weaknesses of likely bidders and ways to mitigate risks linked to those weaknesses.

To summarize:

OPRC is normally composed of four types of activities

? Management and Maintenance Services

? Rehabilitation Works: Bring roads back to a standard they had before.

? Improvement Works: Add new characteristics to the road, in response to new traffic, safety, or other considerations.

? Emergency Works: Repair the road after damage from unforeseeable events.

 Payments under OPRC Contracts are mostly for a Service to be provided

? The contractor has to ensure that road users get a certain Level of Service

? Level of Service is defined in terms of usability, travel speeds, user comfort conditions, safety features, roadside assistance, etc.

? Specifications included in Contract describe Level of Service expected for each road in the network.

Below is a sneak-peek of service level definitions in a typical OPRC contract

Service Level – Unpaved Roads

General

?        Road must be open to traffic

?        Average traffic speed

User Comfort & Safety

?        Corrugation

?        Rut Depth

?        Other surface degradations

?        Useable road width

?        Cleanliness of surface

?        Height of tree

·        Branches above road,

etc.

·        Durability: Crown Height

Service Level – Pavements

·        Potholes / Patching

·        Cracking

·        Cleanliness of Surface

·        Rutting / Ravelling

·        Loose pavement edges

·        Height pavement /shoulder

·        Shoulder conditions

·        etc.

Supervision of Performance-based Contracts

• Is very different from the traditional Supervision of Works, since it focuses on the four performance criteria only.
• Is also much cheaper than traditional supervision; instead of 7-10 % of the contract value, it will only be around 3-5 %.
• For a network of 450 km, supervision should not take more than 3 to 4 days every month.

In Performance-based Contracts

? Contractors get paid a fixed monthly amount if they fulfill the agreed performance criteria, and

? are free to decide (i) what to do, (ii) when to do, (iii) how to do, and (iv) where to do.

The following table summarizes the change of approach from traditional contracting and consulting to OPRC- type contracts.