Investment risks in public private partnerships in sub Saharan Africa infrastructure projects
Date
2016-08-25
Authors
Nkambule, P S
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Abstract
Infrastructure development is one of the constraints to the economic development of sub-Saharan Africa. The region needs to invest in excess of US$68bn by 2020 to bridge the gap in the current core infrastructure areas of energy, transport, water and information and communications technology. Governments are therefore pursuing strategies that include Public Private Partnerships (PPPs) for core infrastructure services. This structure involves contracting the private sector to develop and deliver services that would traditionally be the responsibility of the state. In return the private sector retains rights to all revenue related to the service provision under defined terms with the government. Equitable risk allocation, funding structure and contract enforcement are some of the key characteristics of effective PPP programmes and growing private sector investment into the sector.
The investment risk profile of PPP projects is fairly similar in structure to that of typical project finance transactions with the added complexity of the dynamics introduced by public sector policy and politics. Understanding the risk profile of sub-Saharan Africa projects is essential to growth in the sector. Through the literature, the critical risk elements are identifiable and further study into their relevance to sub-Saharan Africa investors and market observers is what this research pursued. These include the state project preparation processes, governance, legislation, political stability, operational and market risk. The research focused primarily on identifying and analysing those elements in the risk profile that are having significant negative impact on the growth of private sector investment participation and in turn the wider adoption of the PPP strategy in infrastructure provision. Further to this was the identification of viable recommendations the industry could implement to improve investor participation.
The research was conducted through structured interviews with market participants, reflecting on the trends data, reports, a selected few project cases and academic studies found in the literature relevant for the risk elements identified. It was found that the lack of sound project selection and preparation processes and poor legislative and regulatory environment were the two highest inherent risks in sub-Saharan Africa impeding the development of infrastructure PPPs. Respondents highlighted the need to establish well governed and resourced PPP agencies responsible for the legislation and regulation of PPP projects. Technical and operational risk management did not concern investors as much as issues with dealing with the political and social dynamics the projects are exposed to. Successful projects in the region are characterised by sound preparation with experienced transaction advisors leading to an equitable risk allocation structure, good governance and availability of support and guarantees against political risk and breach of contract from multilateral agencies like The World Bank.
On-going state fragility will remain a challenge for the region in terms of poverty and political instability in some countries and this would affect the viability of regional integration infrastructure initiatives. The role of multilateral funding agencies like the African Development Bank and World Bank is essential for risk coverage and capacity building. Overall the improvement of planning and governing processes within the
public sector procuring entities is what will result in real improvement in the risk profile of projects in the region and in turn the growth of PPP investment.
Description
Master of Management in Finance and Investment (2015)