It has been a challenging period for Sub-Saharan Africa. The combination of economic shocks from the COVID-19 pandemic, surging global inflation and rising interest rates have led to a widespread fiscal squeeze that is undermining governments’ ability to invest the estimated $170bn required by 2025 to finance sorely needed infrastructure, including roads, rail and broadband internet1.
Of the 11 countries considered to be in debt distress by the International Monetary Fund in June 2023, eight are in Sub-Saharan Africa, including Ghana, Republic of Congo, Malawi, Zambia, Zimbabwe and Mozambique2.
Struggling to find the funds for infrastructure projects from public coffers, governments in the region are being encouraged to turn to the private sector to secure the required capital. However, private investors are often unwilling to shoulder the risk of a significant project themselves, while at the same time, governments tend to prefer to retain control of key public infrastructure.
Public-private partnerships (PPPs) sit in the middle ground between traditional public provision of infrastructure projects and full private sector financing. While they take a range of forms, PPPs involve the collaboration of the public and private sectors to deliver critical infrastructure assets and services. The private sector partner usually takes primary responsibility for the financing, planning and construction of the project, while the public sector partner facilitates and supports the project, and not infrequently provides some form of financial support. Long term arrangements are put in place to help ensure adequate cash flows to pay off project debt and deliver a profit to the private sector partner, for example in the form of a multi-year operating agreement that allows the private sector partner to charge customers for services provided using the infrastructure.
Project debt provided for PPP projects is at least partially held by the private sector partner, which recovers its investment from fees charged to customers. Examples in Sub-Saharan Africa include the Dakar-Diamniadio toll road in Senegal, the Kivu 56 Power Plant in Rwanda, and the Renewable Energy Independent Power Producer Procurement Program in South Africa. Even when governments do borrow for such schemes, the debt can usually be raised by project companies and secured against project assets, and therefore doesn’t sit on the state’s balance sheet – an important factor when central government debt levels are already historically high.
PPPs also bring much-needed international investment into these projects, provide local employment opportunities and can stimulate the domestic private sector if local companies are included in construction, service provision or design and planning.
It has been a challenging period for Sub-Saharan Africa. The combination of economic shocks from the COVID-19 pandemic, surging global inflation and rising interest rates have led to a widespread fiscal squeeze that is undermining governments’ ability to invest the estimated $170bn required by 2025 to finance sorely needed infrastructure, including roads, rail and broadband internet1.
Of the 11 countries considered to be in debt distress by the International Monetary Fund in June 2023, eight are in Sub-Saharan Africa, including Ghana, Republic of Congo, Malawi, Zambia, Zimbabwe and Mozambique2.
Struggling to find the funds for infrastructure projects from public coffers, governments in the region are being encouraged to turn to the private sector to secure the required capital. However, private investors are often unwilling to shoulder the risk of a significant project themselves, while at the same time, governments tend to prefer to retain control of key public infrastructure.
Public-private partnerships (PPPs) sit in the middle ground between traditional public provision of infrastructure projects and full private sector financing. While they take a range of forms, PPPs involve the collaboration of the public and private sectors to deliver critical infrastructure assets and services. The private sector partner usually takes primary responsibility for the financing, planning and construction of the project, while the public sector partner facilitates and supports the project, and not infrequently provides some form of financial support. Long term arrangements are put in place to help ensure adequate cash flows to pay off project debt and deliver a profit to the private sector partner, for example in the form of a multi-year operating agreement that allows the private sector partner to charge customers for services provided using the infrastructure.
Project debt provided for PPP projects is at least partially held by the private sector partner, which recovers its investment from fees charged to customers. Examples in Sub-Saharan Africa include the Dakar-Diamniadio toll road in Senegal, the Kivu 56 Power Plant in Rwanda, and the Renewable Energy Independent Power Producer Procurement Program in South Africa. Even when governments do borrow for such schemes, the debt can usually be raised by project companies and secured against project assets, and therefore doesn’t sit on the state’s balance sheet – an important factor when central government debt levels are already historically high.
PPPs also bring much-needed international investment into these projects, provide local employment opportunities and can stimulate the domestic private sector if local companies are included in construction, service provision or design and planning.
Underused Instruments
Despite their many advantages and the renewed demand for fresh sources of finance, PPPs still represent a relatively small market in Sub-Saharan Africa with less than 10% of infrastructure projects using the structure3. PPPs also tend to be concentrated in a few sectors, such as energy and transport, and a limited number of countries, including Kenya, Nigeria, South Africa and Uganda, which accounted for 48% of the PPP projects in Sub-Saharan Africa in the 25 years to 2021, according to the World Bank4.
The narrow range of sectors and countries in which PPPs have been concentrated is not the only challenge. According to World Bank data, the level of infrastructure investment with private participation, including PPPs, has been volatile in Sub-Saharan Africa. After peaking at $15bn in 2012, investment fell as low as $2.6bn in 2014 and was at $4.9bn in 2019, the latest available data5 .
Challenges to the greater adoption of PPPs include the relatively small size of African economies, weak legal and regulatory frameworks for procuring and implementing PPPs, a mixed track record in terms of outcomes, the need for regular and dependable cashflows to meet project debt commitments and the unstable operating environments in some countries.
Challenges to the greater adoption of PPPs include the relatively small size of African economies, weak legal and regulatory frameworks for procuring and implementing PPPs, a mixed track record in terms of outcomes, the need for regular and dependable cashflows to meet project debt commitments and the unstable operating environments in some countries.
A shortage of practical experience with these partnerships is also a bottleneck, despite more PPP frameworks having been a feature of the market on the continent for more than a decade.
Separately, there are several assumptions about PPP projects that don’t necessarily apply to those being undertaken in Sub-Saharan Africa, such as an exclusive focus on large infrastructure projects.
One of the key challenges when structuring PPPs is to make them attractive enough for private investors to be willing to commit the necessary capital and expertise, without overcompensating them and thereby taking away the financial benefit that should accrue to the government partner. Striking the right balance requires careful planning and analysis, a skilled project team and a measure of good faith on both sides. Factors that are important to the balance include the characteristics of the country, the sector, and the nature of the project itself.
The balance between public and private financing should also be informed by the optimum allocation of project risks, with the share of financing weighted towards the party most capable of managing these risks. Allocating the appropriate level of risk and reward to the private and public sector is crucial; getting it wrong can raise project costs and lead to inefficient utilization of capital.
Underused Instruments
Despite their many advantages and the renewed demand for fresh sources of finance, PPPs still represent a relatively small market in Sub-Saharan Africa with less than 10% of infrastructure projects using the structure3. PPPs also tend to be concentrated in a few sectors, such as energy and transport, and a limited number of countries, including Kenya, Nigeria, South Africa and Uganda, which accounted for 48% of the PPP projects in Sub-Saharan Africa in the 25 years to 2021, according to the World Bank4.
The narrow range of sectors and countries in which PPPs have been concentrated is not the only challenge. According to World Bank data, the level of infrastructure investment with private participation, including PPPs, has been volatile in Sub-Saharan Africa. After peaking at $15bn in 2012, investment fell as low as $2.6bn in 2014 and was at $4.9bn in 2019, the latest available data5 .
Challenges to the greater adoption of PPPs include the relatively small size of African economies, weak legal and regulatory frameworks for procuring and implementing PPPs, a mixed track record in terms of outcomes, the need for regular and dependable cashflows to meet project debt commitments and the unstable operating environments in some countries.
Challenges to the greater adoption of PPPs include the relatively small size of African economies, weak legal and regulatory frameworks for procuring and implementing PPPs, a mixed track record in terms of outcomes, the need for regular and dependable cashflows to meet project debt commitments and the unstable operating environments in some countries.
A shortage of practical experience with these partnerships is also a bottleneck, despite more PPP frameworks having been a feature of the market on the continent for more than a decade.
Separately, there are several assumptions about PPP projects that don’t necessarily apply to those being undertaken in Sub-Saharan Africa, such as an exclusive focus on large infrastructure projects.
One of the key challenges when structuring PPPs is to make them attractive enough for private investors to be willing to commit the necessary capital and expertise, without overcompensating them and thereby taking away the financial benefit that should accrue to the government partner. Striking the right balance requires careful planning and analysis, a skilled project team and a measure of good faith on both sides. Factors that are important to the balance include the characteristics of the country, the sector, and the nature of the project itself.
The balance between public and private financing should also be informed by the optimum allocation of project risks, with the share of financing weighted towards the party most capable of managing these risks. Allocating the appropriate level of risk and reward to the private and public sector is crucial; getting it wrong can raise project costs and lead to inefficient utilization of capital.
Unrealistic Expectations
There is often a mismatch between the expectations of governments considering their first PPPs and reality. Many initially believe upfront costs will be entirely financed by the private sector, operating costs will be completely covered by service sales, and risks will be mostly borne by the private sector. What generally ensues is considerably more involvement from the public sector – an average of 40% of the investment cost of PPP projects in Sub-Saharan Africa came from national governments and development finance institutions (DFIs) between 2011 and 20206.
The focus on major infrastructure projects is also holding the sector back. Some countries’ project pipelines are so ambitious as to be unachievable. Private investors are often unwilling to finance mega-PPP projects when the team behind them has no experience of delivering them.
Delivering Successful Projects
By focusing on smaller, impactful projects, nations can build a track record of successful PPP implementation, becoming a more attractive destination for private capital and reducing the cost of financing in the process before taking on larger projects.
Several tools have been developed to improve the design and implementation of PPPs. The Public Investment Management Assessment (PIMA) framework, launched in 2015, aims to help countries through the three key stages of the public investment cycle: planning, allocation, and implementation, and has a set of recommendations specifically for PPPs.
As of the end of 2020, 25 of the 46 Sub-Saharan Africa countries had undergone a PIMA assessment, according to the IMF7. Another tool, the PPP Fiscal Risk Assessment Model (PFRAM) can be used to assess the potential fiscal costs and risks arising from PPP projects or portfolios.
In recent years, project development costs, which can account for 5-10% of the total investment8, have significantly constrained the bankability of projects in Africa. A leading cause of this is a lack of technical capability to prepare projects to a standard required by private investors, a situation that can be ameliorated with a focus on training and capacity building as well as the adoption of tools and resources to improve project preparation. Examples of the latter include project preparation facilities, such as the South African Treasury PPP Project Development Facility, and project information platforms, such as the NEPAD/AUDA Program for Infrastructure Development in Africa (PIDA).
For private investors, information asymmetry between them and local companies (both those sourcing projects for investors and companies involved in the execution of such projects) is a common challenge, an issue that is exacerbated by the absence of publicly available information on the track records of projects in Sub-Saharan Africa. To counter this, foreign investors need to commit time and money to carry out due diligence on the ground, and where possible, to originate deals themselves through local networks.
Delivering Successful Projects
By focusing on smaller, impactful projects, nations can build a track record of successful PPP implementation, becoming a more attractive destination for private capital and reducing the cost of financing in the process before taking on larger projects.
Several tools have been developed to improve the design and implementation of PPPs. The Public Investment Management Assessment (PIMA) framework, launched in 2015, aims to help countries through the three key stages of the public investment cycle: planning, allocation, and implementation, and has a set of recommendations specifically for PPPs.
As of the end of 2020, 25 of the 46 Sub-Saharan Africa countries had undergone a PIMA assessment, according to the IMF7. Another tool, the PPP Fiscal Risk Assessment Model (PFRAM) can be used to assess the potential fiscal costs and risks arising from PPP projects or portfolios.
In recent years, project development costs, which can account for 5-10% of the total investment8, have significantly constrained the bankability of projects in Africa. A leading cause of this is a lack of technical capability to prepare projects to a standard required by private investors, a situation that can be ameliorated with a focus on training and capacity building as well as the adoption of tools and resources to improve project preparation. Examples of the latter include project preparation facilities, such as the South African Treasury PPP Project Development Facility, and project information platforms, such as the NEPAD/AUDA Program for Infrastructure Development in Africa (PIDA).
For private investors, information asymmetry between them and local companies (both those sourcing projects for investors and companies involved in the execution of such projects) is a common challenge, an issue that is exacerbated by the absence of publicly available information on the track records of projects in Sub-Saharan Africa. To counter this, foreign investors need to commit time and money to carry out due diligence on the ground, and where possible, to originate deals themselves through local networks.
From Toll Roads to Power Plants
It is by no means all bad news. Despite the challenges, PPPs have been used successfully for a number of Sub-Saharan Africa projects, providing working models for future successful projects in the region. The PPP phases of the Dakar-Diamniadio toll highway in Senegal occurred between December 2006 and August 2013. While the timeline was extended in part due to it being Senegal’s first partnership of this kind, it achieved success thanks to the early creation of an effective legislative and institutional framework ahead of the procurement process, the establishment of a well-resourced PPP unit to manage the process, an effective campaign communicating the benefits of the highway, and strong political support at the highest levels. The model did need to be tweaked along the way, and the commitment of both sides to achieving a sensible outcome was crucial. Most significantly, the project was renegotiated in 2021, leading to a redefinition of the concession's economic, financial and contractual balance, resulting in a more balanced partnership in the interests of both the Republic of Senegal and users. In particular, toll rates for users have been reduced and the Republic of Senegal has acquired 25% of SECAA's9 share capital as part of the renegotiation process.
The Kivu 56 Power Plant project in Rwanda is another successful model. The project itself is innovative and makes use of local resources: it is fueled by methane from the bottom of Lake Kivu. It is another project that required commitment and adjustment. Following numerous financing and construction setbacks and a change in investors in 2008, the project was completed in 2015 thanks to high-level political support.
South Africa’s Renewable Energy Independent Power Producer Procurement Program (REIPPPP) has been highly successful in attracting investment and expertise from the private sector. More than 6GW of mainly solar and wind energy has been awarded to bidders under the program since 2011. In the Eastern Cape region, a total of 16 wind farms and one solar farm have been awarded, with the investment value totaling R33.7bn10. Prices fell in successive bidding rounds, and projects came online in just two years. Key to its success has been an experienced project management team with expertise in PPP, and a well-designed and transparent procurement process that offers reasonable rates of return where the government mitigates many of the risks.
Public-private partnerships are not a silver bullet solution for the significant challenges facing Sub-Saharan Africa countries today, but used wisely, they can help cash-strapped governments keep their infrastructure programs moving during a particularly challenging period for the global economy.
From Toll Roads to Power Plants
It is by no means all bad news. Despite the challenges, PPPs have been used successfully for a number of Sub-Saharan Africa projects, providing working models for future successful projects in the region. The PPP phases of the Dakar-Diamniadio toll highway in Senegal occurred between December 2006 and August 2013. While the timeline was extended in part due to it being Senegal’s first partnership of this kind, it achieved success thanks to the early creation of an effective legislative and institutional framework ahead of the procurement process, the establishment of a well-resourced PPP unit to manage the process, an effective campaign communicating the benefits of the highway, and strong political support at the highest levels. The model did need to be tweaked along the way, and the commitment of both sides to achieving a sensible outcome was crucial. Most significantly, the project was renegotiated in 2021, leading to a redefinition of the concession's economic, financial and contractual balance, resulting in a more balanced partnership in the interests of both the Republic of Senegal and users. In particular, toll rates for users have been reduced and the Republic of Senegal has acquired 25% of SECAA's9 share capital as part of the renegotiation process.
The Kivu 56 Power Plant project in Rwanda is another successful model. The project itself is innovative and makes use of local resources: it is fueled by methane from the bottom of Lake Kivu. It is another project that required commitment and adjustment. Following numerous financing and construction setbacks and a change in investors in 2008, the project was completed in 2015 thanks to high-level political support.
South Africa’s Renewable Energy Independent Power Producer Procurement Program (REIPPPP) has been highly successful in attracting investment and expertise from the private sector. More than 6GW of mainly solar and wind energy has been awarded to bidders under the program since 2011. In the Eastern Cape region, a total of 16 wind farms and one solar farm have been awarded, with the investment value totaling R33.7bn10. Prices fell in successive bidding rounds, and projects came online in just two years. Key to its success has been an experienced project management team with expertise in PPP, and a well-designed and transparent procurement process that offers reasonable rates of return where the government mitigates many of the risks.
Public-private partnerships are not a silver bullet solution for the significant challenges facing Sub-Saharan Africa countries today, but used wisely, they can help cash-strapped governments keep their infrastructure programs moving during a particularly challenging period for the global economy.
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