Financing critical infrastructure projects

Summary

  1. To rapidly accelerate the development of critical infrastructure – power, water, wastewater & transport – in Africa (and attract significant interest from private sector investors) the number of bulk utility commercial off-takers needs to rapidly grow.
  2. With the governments’ balance sheets in its current state, even before the COVID-19 outbreak, many African governments are in no position to invest or to provide offtake guarantees, a requirement for private equity financing on any PPP project.
  3. A possible strategy for African governments would be to initiate an industrialization program that would entice international OEM providers to establish manufacturing and processing plants in Africa. That in turn would require governments to develop policies that will benefit international investors to establish plants and facilities to process raw materials locally (or at least on the continent),  develop infrastructure in areas with easy access for supply chain operators, thus providing a positive multiplier effect for the African economy.

 

Introduction

Africa’s population will increase by a staggering 25 percent over the next 10 years.  It will grow from the current 1.341 billion to 1.675 billion by 2030.  At present more than 600 million people on the continent don’t have access to reliable power with almost as many living below the poverty line of $1.80 per day.  Many countries are suffering from ailing infrastructure, if there was any, or not being able to develop infrastructure quick enough for its fast-growing populations.  With Asia’s growth rate declining, many consider Africa as the last continent with certain future growth prospects.  The UN estimates that by 2050, half (50 percent) of the global workforce (those between the ages of 18-65) will be in Africa.

 

Over the past 12 months ABiQ has hosted a number of investment led events in Africa focussing on affordable housing, power, water and transport infrastructure. With this backdrop, a number of common themes have emerged.

 

Why Public-Private-Partnerships (PPP)

There seems to be a scepticism towards PPP in the African market.  The role of the private sector is to make a profit.  Therefore, the cost to deliver a PPP should be higher, or so it is believed, and the view is often shared.  The counter argument is that private sectors’ drive for profitability results in improved efficiency, or at least that is the theory. Most contractors specialised in constructing complex infrastructure projects are privately owned. It is safe to say that the EPC part (construction cycle) of the PPP program is not the concern.  It must then be the operational & maintenance part of PPP that is the challenge.  More specifically, it’s the revenue component that often fails.  Because of this failure, many African governments had to take on the additional costs (in the form of guarantee payments) when PPP projects are no longer viable.  Often, governments will simply change the rules or renege on payments in an effort to back out of such guarantees.

Fees

Revenue on PPP projects depends on fees charged for the services rendered.  In most cases, the end user (public) pay for the utilities on a scaled fee structure with the first water or power consumed falling in a low-cost bracket and scaled up as consumption increase.

 

Normally fees charged are typically calculated to only cover the cost of production and don’t necessarily include any extras for future infrastructure expansion or renewal programs. Thus, many infrastructure renewal or expansion programs are a sunk cost with no means of recovery.  A major challenge for any capital program will be to keep costs to such an extent not to affect the end consumer (public) fee structure.

 

Although Africa is rich in natural resources, it does not have a large industrial base of bulk consumers limiting the commercial off-take potential.  By increasing the number of commercial consumers that can pay corporate rates, there would be a means to recover infrastructure investment costs.

 

Government funding

In light of the current COVID-19 pandemic, most African economies will contract, and liquidity is in short supply.  This has affected the governments’ ability to finance projects with its current debt burden.  With balance sheets in its current state, the governments are also unlikely to take on any significant off-take guarantees, a requirement for private equity financing any PPP project. A stalemate.

 

Industrialisation

A strategy would be to initiate an industrialization program that would entice international OEM providers to establish manufacturing plants in Africa.  That, in turn, would require African nations to back investment in infrastructure in areas with easy access for supply chain operators.  An industrialisation program would offer the ability to develop areas where utility access is easier.  Congested European manufacturers could move operations to Africa and have the opportunity to service markets in Africa, Europe, the Americas and Asia. After all, Africa still holds most of the worlds un-developed resources and with 50 percent of the working-age population set to be in Africa by 2050, an untapped workforce should be available.

 

Therefore, countries should consider policies that would encourage private sector investing in:

  • Transport Infrastructure
  • Utilities (power, water, wastewater, ICT)
  • Education
  • Healthcare

 

Guarantees

For PPP’s as a means of procurement to succeed, there is a need for guaranteed off-take agreements.  With limited funding and a debt laden balance sheets, governments can’t take on these guarantees.  An option to put out there is for IDF’s to back the government guarantees for PPP finance, rather than finance itself.  This would remove the strain on the governments’ balance sheets and enable them to take on large scale infrastructure projects through PPP.

 

ABiQ Forecast

Dubai based ABiQ Business Intelligence provides long term forecasts for future demand on basic infrastructure in African countries using population as growth driver. For more information about ABiQ and the various forecast models we use, please visit us on www.abiq.io

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