Faced with shrinking fiscal space, are Public-Private Partnerships the silver bullet to Africa’s infrastructure challenges?

The African continent faces huge infrastructure backlogs and an expanding funding gap. The African Development Bank estimates that the continent requires investments of between $130 and $170 billion per year over the next decade to close the infrastructure gap. On the other hand, available fiscal resources from traditional/conventional funding sources have not been adequate to close the gap. This has resulted in the continent falling short of its infrastructure target by between $68 billion and $108 billion per year. 

Just like in most economies, funding for African country's infrastructure developments has derived primarily from on-balance-sheet resources, including own resources from taxes, duties and levies, grants and balance sheet-backed borrowings from local and international capital markets. Recent economic developments, characterised by a general decline in economic growth, the ever-increasing international competition for financial resources, coupled with increasing debt levels, have seen a shrinkage in fiscal space and are hampering the ability to fund infrastructure projects on-balance sheet in most economies, a situation worsened by the recent impact of the Covid-19 pandemic. In the absence of own-resources, Public-Private Partnerships ("PPPs"), an off-balance-sheet (alternative and innovative) mechanism for infrastructure delivery, have often been touted as a silver bullet or panacea for the continent's massive infrastructure challenges, with an ability to mobilise private sector financial resources and to yield private-sector efficiency in designing, construction, operating and maintaining infrastructure. 

Notwithstanding the seemingly huge benefits and potential of delivering infrastructure through PPPs, evidence on the ground paints a complex picture. PPPs' uptake as an infrastructure delivery mechanism across the continent has been rather sluggish. For instance, in South Africa, 33 projects, totalling $5,6 billion, have been delivered through the PPP mechanism between 1999 and 2018, a relatively small 2,3% contribution to the total infrastructure spend during the same period. In Kenya, 37 PPP projects worth $5,1 billion have reached financial close since 1990, while Nigeria has a slightly higher 57 projects ($11,7 billion) over the same period. The picture in these leading economies is a near reflection of the rest of the continent. Despite the emerging fiscal challenges, most of the infrastructure is delivered primarily through traditional mechanisms. 

With this in mind, a key question is whether PPPs are the silver bullet for Africa's infrastructure challenges. The question should be asked, what are some of the difficulties experienced by African governments in exploring PPPs as an alternative procurement and financing mechanism? Are these difficulties insurmountable and what needs to be done to improve PPPs' uptake in Africa. This article attempts to answer these and other questions on the slow uptake of PPPs across the continent. The slow uptake of PPPs has been attributed to several reasons, chief among these being the lack of supportive legislation and regulatory environments to support PPPs. In addition to this, PPPs generally take a long time frame to prepare and package, leading to many countries defaulting to seemingly easy and quick traditional procurement mechanisms. The shortage of project preparation facilities to prepare, structure and package PPP projects partly to blame. Investor perception about risks associated with infrastructure finance in Africa. Lastly, there is a general perception that PPPs tend to be more expensive than traditionally funded projects. This article uncovers each of these challenges. 

1. The absence of supportive legislation and regulation to support PPPs. 

PPPs are long term contracts between the public and private sector to deliver a public good (infrastructure or service), where significant risk  (designing, financing, construction, operation and maintenance) is transferred to the private party. In return, the private party receives fixed payment from the Contracting Authority or through concessions that give the Private Party rights to collect user fees (tariffs or toll fees) over the contract term. PPPs are structured so that the Private Party absorbs significant risk, including financing, design, construction, operations & maintenance. The private party will mobilise financial resources through debt and equity to front-load the construction phase of the work, leveraging off its financial strength and the strength of the underlying PPP contract. 

The bankability (acceptability of the PPP contract to financiers) is underpinned by risk structuring (risk allocation between the Private Party and the Contracting Authority) in the PPP Agreement. The robustness of the PPP contract is supported by enabling legislation that supports the enforceability of contracts, respect of property rights and respect of the rule of law. In most cases, such rights are enshrined in the Supreme Law of the Land - the Constitution. Other countries have gone further to enact legislation that supports infrastructure procurement through PPPs, additionally supported by regulation. Such legislation and regulation support and promote the Private Party and the Contracting Authority's interests throughout the PPP Agreement term. Evidence shows that countries that have done well in PPP contracting have an enabling legislative framework, supported by a supportive regulatory framework, governing the procurement of infrastructure through PPPs. 

In the absence of supportive legislation and regulation, most countries have failed to attract enough private sector interest for PPPs. In cases where PPPs have been procured in the absence of supportive legislative and regulation, Contracting Authorities ended up with unsustainable, unaffordable PPPs (beyond available budget), not delivering value for money and risk not adequately transferred to the private sector, leading to early contract termination and huge penalties. Enabling legislation and a supportive regulation provides the rules of engagement between the Contracting Authority and the Private Party. It provides guarantees and assurances to both parties throughout the PPP period. The strength of the legislation and its subsidiary regulation dictates the PPP contract's bankability, governing key clauses such as Payment Regime, Monitoring & Evaluation, Termination, Penalties, Force Majeure, Material Adverse Government Action (MAGA). Legislation underscores the degree to which the Government would guarantee the project either implicitly or explicitly.  The greater the degree of Government Support, the greater the chances of banking the PPP contract. In South Africa, for instance, Regulation 16 of the Public Finance Management Act of 1999 (TR16) governs the rules of engagement through a PPP mechanism, providing a framework from engagement, with robust decision gates from feasibility studies, risk structuring, procurement, contracting, monitoring and evaluation of the PPP arrangement. 

South Africa is one of the few countries on the continent where both legislation and regulation exist. Notwithstanding this, it is interesting to note that the uptake of PPPs remains low. As stated above, only 2,3% of South Africa's infrastructure has been delivered through PPPs between 1998 and 2020. It is also interesting to note that South Africa's PPPs are mostly within National Departments and State-Owned Enterprises, with only a handful of municipal PPPs. There is a general slow uptake of municipal PPPs within the country. The answer to the uptake of PPPs does not depend on legislation alone but several other factors. Below is a discussion on some of these factors. 

2.The absence of PPP institutions 

Enabling legislation and supportive regulation alone would not be enough to promote the development of projects through the PPP mechanism. Besides, countries would require strong institutions, namely a regulator (often called a PPP Unit) and a PPP Advisory component. The PPP Advisory Component would work with sponsor departments or project sponsors to develop and structure projects to yield the best outcome for the Contracting Authority. This component advises the sponsors during project preparation (feasibility, structuring and packaging) and contracting and operations & maintenance. On the other hand, as the regulator, the PPP Unit will focus on granting approvals at key decision-gates such as feasibility, contract structuring, tendering, and giving the preferred bidder status and eventually in contracting. The regulator's role continues during project implementation up to the end of the PPP term. Key considerations during the entire process include project sustainability in terms of affordability, value for money and risk transfer. It is of paramount importance for the two arms to maintain their Independence throughout this process. The absence of this institutional arrangement has often led to countries entering into unsustainable PPP contracts, which in most cases lead to early termination by the Public Sector, which also comes with hefty penalties. 

3. PPPs tend to take a long time to prepare 

Unlike conventionally procured projects, one of the factors often raised as impeding the uptake of PPPs in Africa has been the long period that it takes to prepare, package and finally procure projects through a PPP mechanism. In engaging with the private sector, the Contracting Authority would need assurance that the project offers value for money, is affordable and that risks are adequately transferred to the private party. With this in mind, significant time and financial resources are invested in upstream project development work covering feasibility studies (needs assessment, options analysis, cost-benefit analysis, value assessment), structuring, project packaging, tendering, commercial and financial close. The process is time-consuming and involves several iterations before the project reaches a financial close. In most instances, PPP projects would take anything between 5-10 years, in some cases going beyond 15 years, in which, unfortunately, several projects do not make it to the finishing line. The relatively long project preparation time has often led Contracting Authorities to opt for traditional procurement mechanisms over PPPs. 

4. Lack of project preparation funds to prepare and package projects 

There is a general lack of expertise and capacity to prepare, package, and de-risk infrastructure projects to attract private sector investment. PPPs projects are inherently complex and require top-notch expertise in preparation, structuring and packaging. Unfortunately, most Procuring Authorities do not have the financial muscle to finance the upstream project preparation work. In addition to preparation, the Contracting Authority will also require a solid team to lead negotiations with the Private Party, in the absence of which the outcome may be a weak contract favouring the Private Party. The lack of project preparation funds and supporting teams often lead many countries to default to conventional procurement mechanisms.  Development Finance Institutions such as the World Bank Group (WB), the African Development Bank (AfDB), the European Investment Bank (EIB), the French Development Agency (AFD), the German Development Bank (KFW), among others have facilities (non-recoverable or recoverable grants) to assist Contracting Authorities to fund project preparation, albeit not limited specifically to PPPs. In recent periods, the sector has also attracted private financiers such as InfraCo, the Harith Fund, participating with seed capital for upstream project preparation. Other development agencies are funding sector-specific project development work, for instance, in the energy sector, where several international development agencies are supporting early-stage work (pre-feasibility and feasibility) in renewable energy and energy efficiency projects. Notwithstanding these efforts, available project preparation funds still come short of the huge demand for projects in need of project preparation support. 

5. PPPs are generally expensive 

Adding to the list of factors is that PPPs are relatively expensive compared to traditional financing mechanisms. Critics of the PPP mechanism argue that PPPs can be more costly than conventional mechanisms. A PPP contract covers construction and life cycle maintenance. If not correctly structured, PPP contracts often result in re-negotiations, mostly favouring the private parties. For this reason, critics of PPPs have often argued that PPPs are more expensive compared to traditional financing mechanisms. 

Conclusion 

There is merit for African countries to pursue PPPs as an alternative financing mechanism in light of the existing fiscal challenges. In most countries, there are still many hurdles to go through, mainly creating supportive legislation and regulatory framework, supportive institutions, streamlined project preparation timelines, the establishment of human and financial capacity for preparation, and support the monitoring of PPPs. PPPs remain a viable alternative across the continent.