• Joining forces

    Business and government need to work closely together to develop many large infrastructure projects on the continent.

    Joining forces

    The barrage of AU development programmes is filled with references to the need for more public-private partnerships (PPPs). From the 2008 Accelerated Industrial Development of Africa – which promises to ‘strengthen private-public processes and partnerships’ – to the 2015 Economic Report on Africa titled Industrialising Through Trade, this corpus of literature repeatedly recommends that African governments strengthen the legal frameworks needed for these kinds of projects.

    In particular, the 2010 Programme for the Infrastructure Development of Africa with its 15 cross-border energy, 24 transport and nine water programmes – expected to cost US$68 billion between 2012 and 2020 – requires PPPs if it is to make any impact.

    PPPs do promise a great deal and have delivered around the world. Essentially, a project arrangement where government delivers an enabling environment and the private sector brings expertise and money to the party, they seem uniquely suited to delivering infrastructure in under-developed countries.

    However, optimism must be tempered by reality. The evidence is that PPPs are not a substitute for state incapacity. Indeed they work best where governance is strongest. Vishaal Lutchman, divisional director at engineering services consultants WSP in Africa, refers to ‘sovereign risk’ as the critical variable. ‘There has to be political will behind any PPP. In Africa, all too often when a government changes, so the risks increase,’ he says.

    Thus, although there is a powerful drive towards implementing PPPs in Africa, with Ghana leading the way and Kenya not far behind, there is sufficient ambiguous evidence to sound a cautionary note.

    Much of this evidence comes from what the Economist Intelligence Unit (EIU) describes as ‘the only “mature” PPP environment on the continent’ – South Africa.

    The country established a PPP unit in its Treasury in mid-2000. Its role was to facilitate and ‘package’ PPP projects in partnership with the Development Bank of Southern Africa (DBSA) – which had established a PPP unit as early as 1996 – and whichever private sector players were appropriate.

    The success of PPPs over the next decade were remarkable. Among the mega-projects completed was the ZAR25 billion Gautrain, an urban commuter rail system linking the main commercial nodes of Johannesburg to the administrative capital of Pretoria and the OR Tambo International Airport. This was a ‘turnkey’ project where the PPP consortium was responsible only for construction, after which it was handed over to a third-party operator.

    In PPP jargon, this is the ‘design, build and transfer’ model, one of 18 options defined by the US National Council for Public-Private Partnerships. In Africa, a particularly relevant model is ‘build, operate and transfer’, where the PPP consortium continues to operate the infrastructure after construction. This is a widely used option around the world, in harbours and railways.

    Another success was the N3 toll road, which for the first time saw the country’s major port – Durban – linked to its commercial capital –Johannesburg – by a continuous double-lane highway. Other achievements were the many municipal infrastructure projects, the Coega harbour development, expansion of the huge coal terminal at Richards Bay, as well as the construction of the Platinum highway.

    However, some of these projects were controversial. The ANC-aligned trade unions rallied against municipal water PPPs in Nelspruit (now Mbombela) and the Dolphin Coast (Ballito and Stanger) on the grounds that these amounted to the ‘privatisation’ of domestic water supply.

    Their opposition was ideological and ignored the fact that these PPPs had massively increased the number of households with access to potable water, at rates affordable to them (in many cases, free). This was thanks to cross-subsidisation and municipalities having to comply with national policy on free municipal services to indigent households.

    At the end of 2015, Treasury’s PPP unit had only two projects in preparation and neither was bigger than a wastewater treatment facility in a small municipality.

    Outside the renewable energy sector, PPPs in South Africa appear to be in abeyance. Whether this is due to the current factional issues within the government, especially with regards to its alliance partners, remains to be seen as far as a long-term scenario goes. Though, the choices of the South African government – or perhaps neglect – is out of step with current thinking on the continent.

    World Bank senior director of public-private partnerships Laurence Carter observes that ‘PPPs can help investments, expertise and other resources for infrastructure that delivers essential services like clean water’. The EIU argues that over the next decade, Africa’s infrastructure development needs – which it estimates at US$93 billion – face an enormous financing gap that only PPPs can bridge.

    Ghana is currently in the process of passing a battery of PPP-enabling legislation. Yet, even specific PPP legislation is unnecessary if the country’s commercial laws are adequate. Lutchman says that ‘Ghana has become a lot smarter about doing business’. This is reflected in the range of PPPs already under way in advance of the enabling legislation.

    The Tema and Takoradi port expansions, the 245 km Accra-Takoradi highway, the 330 km eastern railway line and the Boankra inland port projects all depend on international private sector management and expertise. The advantages of PPPs are illustrated by the costs of the eastern railway line – US$1.5 billion, of which the Ghanaian fiscus will have to stump up only US$211 million. The pre-feasibility report was approved in July 2015 and contract finalisation is due in June 2016.

    The port projects are expected to be real game-changers in Ghana’s economy. Tema is currently the country’s only deepwater port but the various phases of the Takoradi project – including dredging, new berths, an oil hub, oil services terminal and a 300 000 twenty-foot equivalent unit (TEU) container hub, plus all the associated back-of-port infrastructure – will make it the second.

    Tema, in the meantime, is already engaged in a massive expansion, upgrading its container facilities to 3.5 million TEU. The need for such expansion has to be seen as part of a pattern of economic booms that saw the container traffic through Tema increase by 56% between 2009 and 2012. PPP experience in ports has been accumulating in Ghana since before 2004, when the management of Tema was concessioned to a private partner, Meridian Port Services.

    In Kenya, enabling legislation was passed in 2013. In 2015, the Treasury’s PPP unit had a pipeline of 71 projects, including power-generation plants, the Kisumu Port on Lake Victoria, South Nairobi bypass and a second Nyali bridge linking Mombasa Island to the north mainland.

    In Senegal, the Dakar-Diamniadio toll road opened – on time and on budget – in August 2013. It cut the commuting time between Dakar and its suburbs from an average of two hours to 30 minutes, sparing commuters three hours that would be spent in transit every day. This has been proclaimed as the first road transport PPP in Africa outside of South Africa, and is a harbinger of things to come.

    According to the EIU, 12 African countries now have PPP units located in or adjacent to their national treasuries. The relevant question – as the South African experience shows – is whether they all have sufficient political commitment to make them effective.

    Following his comments about the importance of sovereign risk, Lutchman says that ‘the regulatory environment does not have to be perfect. Big international firms know how to manoeuvre around problems, within reason. The question is whether PPPs are insulated from political changes’.

    When it comes to PPPs, business is simply profit-motivated. Lutchman points out that companies feel no allegiance to the countries in which they operate. ‘There’s no warm fuzziness in their motives,’ he says.

    Another expert, former DBSA PPP project manager Simon Vincent, argues that one of the problems with the PPP experience is that the sectors selected are usually natural monopolies. ‘If you simply hand a whole sector over to the private sector, you’re asking for consumers to be ripped off – unless you have very strong regulation and monitoring by government,’ he says. ‘There’s no doubt that PPPs work. But they need strong state capacity to continue working.’

    Both Lutchman and Vincent were involved in South Africa’s N3 toll road PPP that transformed the link between Johannesburg and Durban. ‘That was a very successful model,’ says Vincent. It worked because, contractually, toll fees are increased only by the rate of consumer-price inflation.

    ‘That made it easy to raise inflation-linked bonds, which are popular with the institutions.’ However, asks Vincent, are the other conditions being monitored and enforced? ‘Is the portion of revenue that is contractually obliged to go into maintenance actually going there? Every year?’

    Vincent does not know the answer to the question in this particular instance. Although, simply posing it raises the centrality of the governance issue. As PPPs have been touted as a mechanism to circumvent weak governance in developing countries, this is a critical objection. It suggests that PPPs create a catch 22. They are only selected in the first place because state capacity is poor. Yet state capacity remains poor because functions requiring expertise are contracted out.

    While African countries such as Ghana and Kenya appear to have developed the capacity and garnered the political will to manage PPP contracts, these issues yet again raise the problem of treating Africa as a single entity.

    PPPs are already working in these two countries. However, if weaker or less coherent states are incapable of performing their basic responsibilities, they will end up simply contracting out problems to parties with little or no social agenda. It might be that development will not be possible without PPPs but they should not be seen as a universal panacea.

    By David Christianson
    Image: G