If Africa is to continue to grow and maintain its promise as a developing continent it must leap forward in developing its infrastructure. Resources from governments are insufficient to meet this challenge so smart, well-designed PPPs can make a significant contribution and fill this need.
As is well documented, Africa faces some of the biggest challenges of any area of the world. Mobilising private investment on a continent renowned for political instability, limited local financial resources and often difficult terrain is not a simple task.
There are, however, some significant attractions for investors. It is one of the world’s fastest growing economic hubs with a burgeoning middle class, and the continent’s lack of physical infrastructure is hampering its wider development. So money needs to be found, and fast.
One area that has proved particularly successful across Africa over the last few years has been the development of Independent Power Producers (IPP). These are entities other than a public utility that own facilities to generate power. A number of projects have been brought to market through IPPs, and there is a growing belief that these types of deals can act as a catalyst for a growth in PPP deals by proving that private investment can work across the continent.
Peter Kasanda, partner in law firm Clyde & Co’s Dar es Salaam office in Tanzania, believes PPPs across Africa are the natural extension of the proliferation of IPPs. “The development of Africa is very much dependant on stable power. Power and infrastructure go hand in hand,” he says. “It is now not only an African but a global issue and if you look at Power Africa – the recent initiative backed by US President [Barack] Obama to double the number of people with access to power in sub-Saharan Africa – we can see how important an issue it is.
“This will in turn lead to the development of PPPs in all other sectors such as health, water and transport.”
Power Africa sees the private sector, and other partners such as the World Bank and African Development Bank working together, primarily with the governments of six countries: Ethiopia, Ghana, Kenya, Liberia, Nigeria and Tanzania. The aim is to add more than 10,000 megawatts of clean, efficient electricity generation capacity while expanding access for 20 million people and commercial entities.
Clean energy is certainly an area in which Africa has the capability to lead the world. While thermal, wind and geothermal projects have all been successful, the continent is one of the largest untapped hydropower sources in the world and is now edging towards fulfilling its potential in this sector.
The recent commissioning of the 250MW Bujagali project on the river Nile in Uganda marks the completion of the first sizeable IPP on the continent. There have been smaller schemes but sources suggest this project demonstrates that the right combination of private finance along with public support can get projects across the line, boosting confidence among investors and developers alike. There are others that offer a similar prospect, including the Bunbuma 250MW plant in Sierra Leone and Ruzizi 3, the 147MW plant bordering the Democratic Republic of Congo and Rwanda.
But will this success really translate to a serious pipeline of bankable PPPs? According to Ryan Ketchum, partner at lawyers Hunton & Williams, it will. “There are a lot of IPPs and power projects across the continent or currently in procurement, this is leading to a growing confidence and interest in PPPs in sub-Saharan Africa. Countries like Uganda, Kenya and Rwanda are all working to get various projects off the ground.”
The right people
Having the right people on the ground as well as mitigating political risk will be key factors in producing successful projects over the coming years. Investing in these countries requires a heightened sense of awareness and in some cases nerve.
Currently a large share of the continent’s infrastructure is domestically financed, with central government budgets being the main driver of investment. In many cases governments will have little understanding of the opportunities that private finance can bring – or how to attract investors. So potential PPP suitors need to either have their own experts on the ground or be working with governments that have individuals who are already highly trained in PPPs and project finance.
As a result, experts suggest that development finance institutions and multilaterals like the World Bank and African Development Bank (AfDB) should focus their efforts more on education than on providing credit enhancement to projects.
“It’s not really an issue for institutions like the AfDB to drive things forward anymore,” says Kasanda. “They have done work for years and been a catalyst for growth but it’s the government who is then supposed take over and push things forward.
“These banks need to support governments to invest in education and train civil servants who can manage a PPP. They get the concepts of projects but they need the skills. These countries already get a lot of money from these banks. They really need to focus on training up people so when investment and foreign interest does come in, it can be used properly.”
One lawyer goes further, suggesting that in some instances they almost do too much work in Africa.
“These institutions do a lot of good work, for example the AfDB brought in a partial risk guarantee in support of a lot of power projects around Africa. However in one way they are signed up to too many programmes and initiatives and should focus themselves into key areas.”
Richard Birks, partner at Eversheds, says the continent is undoubtedly a tough market, but there will definitely be opportunities for whoever “cracks” it first. “Like the Middle East was 20 years ago, it is in a sense an unknown market and has its own rules that it plays by. You need skilled people on the ground to get deals done but if companies have the time and patience to get involved, the rewards could be huge,” he says. “With some of these countries and sectors, as soon as the first deal closes there will be many more. Excitement is building.”
For possible inspiration some of the smaller countries in the continent can look to South Africa, where PPPs have been ongoing since MP Trevor Manuel introduced them to the country in 1997.
South Africa has so far completed more than 50 municipal and 300 national PPPs since they were introduced. However, the country is now suffering something of a football World Cup hangover, having made huge efforts to deliver new infrastructure in time for the 2010 tournament held in the country. Nonetheless, its determination and bullishness in getting projects across the line in difficult conditions should be praised.
If other countries can learn from South Africa’s experiences – together with their own understanding of IPP schemes – a recipe for even greater investment could be on the way.