New Trends in Financing Infrastructure

This article was originally drafted by the African Center for Economic Transformation for the newsletter “West Africa Trends” as part of the Rockefeller Foundation’s Searchlight Process. For more Searchlight content on futurechallenges.org, please click here.

Provision of infrastructure is central to efforts to eliminate poverty and reach the path of sustained growth. The key constraints in closing infrastructure gap have been financial resources. Traditional funding sources have been governments through taxes and development partners through loans and grants and these have proved inadequate. Another key challenge has been the delivery and management of infrastructure investments. In particular, projects are delivered late and maintenance of existing investments has been poor. These challenges have been compounded by the monopolistic structures of organizations that governments have traditionally used which have created huge inefficiencies. The failure of this approach has led to searches for alternative models for the development and management of infrastructure.

Public Private Partnership model  (PPP) model

A PPP is a contract between a public sector institution and a private party, in which the private party assumes significant project risk (financial, technical and operational risk) in the design, financing, building and operation of a project. Public-private partnerships emphasize the collaborative element between the public and the private sector for achieving a particular goal. This approach allows governments to tap into the resources (financial and human) of the private sector. However, there will often be challenges in reaching acceptable deals between the two parties as governments strive to get the best deal for their citizens, whilst the private sector strives to maximize profit for their shareholders.

The role of the public sector is most prominent in water, sanitation and transport, where it accounted for about 90% of investment in 2007. Most private investment has been in the information and telecommunications sector, which received 87% of all investment commitments in 2008 (OECD 2010).

Generally, PPPs offer a welcome alternative approach to financing, operating, building and maintaining infrastructure, and the PPP process, in itself, creates a climate for realistic debate on project selection as well as the proper identification and allocation of the risk to the appropriate part. It thus enhances the efficient use of resources.  The biggest impact has been in the telecommunications sector where the transfer of provision to private sector has provided great benefits to the general public making telephone services more accessible to the majority of people.

Collateralizing Natural Resources for Infrastructure

Recently, non-traditional donors, acting as investors looking to maximize their return on investment are seeking payment in the form of natural resources such as oil. Oil for infrastructure arrangements are not new in the development of countries.  Nearly all major emerging economies have used their strategic resources (such as oil) at one time or the other to develop their infrastructure.  In West Africa, Asian companies have been the most aggressive bidders for such contracts. Nigeria has been most active in collateralizing oil for infrastructure, however the performance of these projects has been very poor. However, the list of foreign investors who have failed to deliver on over $10 billion of PPP contracts in Nigeria over the last few years is growing.

In order for the benefits of these types of transactions to be realized, future natural resources for infrastructure deals must be therefore be subject to strict monitoring and evaluation to ensure that the highest ethical and business standards are upheld. Government workers in key ministries should receive better training in the intricacies of high-level negotiations and project management of PPP contracts. Outside expertise where needed, may also be required; an acceptable group of “honest brokers” to mediate between both sides and provide higher level governance and oversight. Development partners could also intervene to identify skills needed and help in formulating programs to develop these. Funding could also be provided to develop an independent database of credible experts, advisers or strategic consultancy firms, to further support African governments. (More reading: Buy Shares on share dealing accounts)

Future Prospects and Impact on the Poor

The political will to forge more PPPs is currently very high across West Africa and there is a significant push by governments to get such programs going and they are creating specialized units to promote this method of financing infrastructure. With the right framework that provides the right incentives in terms of risk sharing, private sector participation may increase. However, building such a framework will depend critically on building upstream and downstream private sector management expertise in government; developing coherent policies on PPPs and creating well-staffed units within government to develop, market and manage those projects.

For the poor, the impact of the PPPs approach could be negative as infrastructure that serves the poor is often unattractive to conventional private investors. They are unlikely to afford toll roads, electricity or piped water at rates that would give private investors the return they need. Indeed, the entry of PPPs could further marginalize the poor and vulnerable, which was the case in a Kenyan project where a potential investor in a toll road was keen to explore the possibility of closing alternative routes so that traffic could be diverted towards his construction, thereby increasing his profits.

A broader understanding of the term “PPP” and “private participation” is necessary when seeking partners in Africa. There are other private providers who are strategically placed to lend their support governments on infrastructure projects, depending on the nature and scale of the proposal.  Community-based groups, village enterprises and youth groups, known as small-scale private service providers (SPSP) are also able to contribute to building and construction work in different ways. This increases local ownership and such community PPPs have been known to successfully deliver borehole projects, rural maintenance projects, toll-gate maintenance schemes and water delivery programmes. There is sometimes a risk that these small-scale providers may take advantage of their local knowledge to monopolize clients, especially in rural areas. Better government regulation and monitoring of private sector activities can be used to mitigate such fears.