“In 2050, Nigeria is going to be as big as the United States.” That was one assertion at the World Economic Forum in Davos last year. While the statement is debateable, it certainly reflects some of the optimism surrounding the growth of sub-Saharan African countries as modern nations at the moment.
Yet modern nations need infrastructure to match that status and the rapid rise of Africa's middle classes alongside growing urbanisation is making that need all the more urgent. The African Development Bank estimates sub-Saharan African infrastructure is only receiving about
$45 billion of the $93 billion a year it needs, a third of which comes through public-private partnerships.
While its populations may be becoming wealthier, many of Africa's governments are still financially challenged. As such, the need for infrastructure is increasingly driving them towards PPP procurement, particularly as they see a growing number of investors pursuing projects in the region while technical expertise in the public sector remains a shortage.
“The overwhelming majority of investment in African infrastructure continues to be delivered through traditional procurement techniques, using public capital,” Kodeidja Diallo, director of private sector operations at the AfDB, says. “However, as governments become increasingly constrained in their ability to deliver public infrastructure, the need to crowd-in the private sector has become more pressing.”
Yet many challenges remain for both the private and public sectors to overcome if Africa is to secure the infrastructure needs required. At a recent event in London hosted by law firm Eversheds to address PPPs' role in building Africa's infrastructure, some of those key challenges were discussed.
Paul da Rita, PwC's director of global capital projects and infrastructure, asserted that several governments in the region see PPP projects as something they do not need to pay for. A similar view was espoused by Maude Vallée, principal legal counsel at the African Legal Support Facility, who said some governments seem to sign memorandums of understanding on PPP projects without knowing where to proceed from there.
Clearly, there is a need in parts of the region to have a more robust PPP framework so that both governments and the private sector have a better understanding of what is required for projects. Stronger systems will also be better equipped to deal with a growing number of unsolicited proposals being made, according to da Rita. Currently, there is a lack of transparency in some markets due to frameworks unable to sufficiently deal with such proposals.
Some countries, though, have developed PPP laws that have enabled significant investment. While Diallo highlights South Africa, Senegal and Ivory Coast as “relatively developed”, Eversheds' Tim Armsby, partner and head of energy and infrastructure, says “Egypt remains a market of great potential”.
“The country has an excellent PPP law in place, a PPP Central Unit with expertise of closing transactions and a clear pipeline of projects,” he adds.
Solid frameworks are not just about a country's legal system, however. The International Finance Corporation is currently taking its Scaling Solar programme across the continent after its first installment in Zambia this year attracted some of the world's largest industry players and procured 100MW of power in a country with barely any existing solar capacity.
Scaling Solar is “P3 in a box”, da Rita says, and brings a credibility to the market not seen before. “If you can do that for solar, why not [for] other projects?” he asks.
The cost and tenor of finance are key issues in the African PPP market and at 6.02 cents per kilowatt hour, the programme produced the lowest cost for solar power across the entire continent. The IFC is already planning to replicate the programme – which includes IFC financing and World Bank insurance – to Senegal, Madagascar and Ethiopia, and aims to develop 1GW of solar power in the next three years.
Power projects in general are one of the greatest drivers of PPPs in Africa, with schemes ranging from the 25MW Cabeolica wind farm in Cape Verde to the cross-border 1.6GW Batoka Gorge hydropower project. The need is urgent: Nigeria, for example, is said to have a power deficit of 94.5GW.
Transport projects are another significant growth driver for the African PPP market, with the landmark Dakar toll road in Senegal, inaugurated in 2013, held up as an example to the rest of the market. The scheme was West Africa's first toll road PPP and has received an extra €130 million investment for an extension. Support for the project arrived from the AfDB, French Development Agency and the IFC. Meanwhile, Nigeria is pressing ahead to tender the concession for four of the country's largest airports as PPPs.
“The successful completion of the Dakar toll road in Senegal is an example of what can be accomplished through careful structuring and the participation of strong sponsors,” Diallo says. “With time, we will be able to see the private sector taking on more risks and be willing to invest in PPPs, especially in telecoms, power and transport. However, private investment has not grown in some sectors, especially water supply, as it should to respond to the demand. My view is in East Africa, the PPP market seems to be lagging behind the other sub-regions and needs to be developed.”
How to be bankable without a blank cheque
Bankability issues remain prevalent. While Diallo says political risk is generally investors' top worry, the financial sustainability of the offtakers, currency risks and tariff levels are high on the list. The growth of successful PPPs in the region in recent years is testament that these worries are not necessarily prohibitive, but Diallo stresses that government intervention is needed to provide a better investment environment.
“Governments should implement policy/institutional reforms aimed at improving the legal and regulatory environments and ensure macroeconomic stability,” she advises.
“This would help reduce the general risk perception of private investors. They should also strengthen the various PPP offices and counterparties with strong legal, technical and financial teams, and also provide credit enhancements in collaboration with DFIs. For example, we find that most utilities are strong technically, but have a lack of PPP structuring expertise.”
The introduction of Chinese funds and technical expertise to the market, a trend that has grown more noticeable over the last 10 years, is helping to close the funding gap.
In particular, this has seen the arm of the China Exim Bank extend loans to over 35 countries, including notable PPPs in the power and transport sectors such as the 600MW Karuma hydropower project in Uganda and the $876 million Abuja-Kaduna rail line in Nigeria.
With state approval to invest heavily and forge bilateral relations, Chinese investment in Africa's PPPs and general infrastructure market bypasses many of the hurdles that exist for other investors in the region and which are of less concern to the Chinese.
Mthuli Ncube, chief economist at the AfDB, points out that “the growing engagement of China on the African continent also challenges the way we at the AfDB and other development partners operate [and] requires us to rethink, and in some cases, gradually adjust our approach”.
The challenge remains for Western investors and African governments to prove they can produce the same results without a blank cheque and with full transparency.
Nigeria's quadruple airport tender might be a good place to start to show it can be 2050's United States.