World Bank statistics on infrastructure development in Sub-Saharan African countries rarely make for comfortable reading. The World Bank estimates that around US$93 billion a year is required to address Africa’s infrastructure deficit. Surprisingly, World Bank reports that there is a surplus of transport infrastructure spending in Africa assuming that US$3.8 billion of ‘efficiency savings’ are made each year. For anyone who has travelled through the inefficient ports and airports, sat in endless traffic jams or stood on the ageing platforms of train stations, these figures are difficult to believe, particularly outside South Africa. As the territories most in need of development are generally those that are in the direst of circumstances and therefore the least attractive to investors, the challenges are clear. Despite the massive need for transport infrastructure projects, we have yet to see African jurisdictions move with any speed to undertake transport PPPs. In this article, we comment on some of the reasons why the transport PPP market has failed to deliver the flow of deals that might start to address the investment gap identified by the World Bank. We also set out some of our (good and bad) experiences of, and key lessons learned from, trying to structure bankable transactions.
A daunting task
The very scale of the developmental challenge gives rise to issues in the structuring of viable projects. So much needs to be done very quickly to get anywhere near achieving the Millennium Development Goals, that any project that is not a ‘mega-project’ will hardly scratch the surface. Coupled with the extended development periods for African projects (often straddling election cycles), it is easy to see why public authorities quickly lose faith in the ability of PPPs to deliver political objectives. To use a well-worn but nonetheless true phrase, expectations (particularly those of the public sector) need to be managed and the private sector must describe the limits of what can be done early on, clearly and with care.
We have, unfortunately, experienced instances in which the public sector’s expectations as to the risks it should bear are different from the expectations of the developer and, crucially, the banks. Either the developer continues to push the public sector in a direction it is unwilling to go, thereby (further) delaying the negotiation process and incurring cost or the developer bears the risk itself. As the risks in question cannot normally be banked if absorbed by the project company, the developer will likely need to offer recourse to its balance sheet. In one recent example, a port infrastructure deal in West Africa, the resistance of the conceding authority to enter into a typical direct agreement with the lenders left the sponsors (who were already funding the project on balance sheet) with no option other than to provide the lenders with a guarantee.
Another example of differing expectations occurred on Lekki-Epe Expressway. The original project scope included a stretch of road disconnected from the remainder of the project. Whilst extremely important to the government, it required an effective cross-subsidy from the more economically viable elements of the concession. Lenders and investors – who were already nervous at the thought of taking the full traffic risk on a complex urban toll road project – were not prepared to construct, maintain and toll an uneconomic stretch of road that was not contiguous with the main highway. After some delicate negotiation, the government recognised that the inclusion of this section threatened the viability of the scheme as a whole and agreed that the focus should be on what was commercially deliverable not simply politically justified.
P is for ‘Partnership’
The attractiveness of the PPP concept to cash – strapped public authorities is clear: they are not required to use scarce resources to develop the required infrastructure yet have a political scapegoat (the concessionaire) if problems arise. The public sector may, therefore, forget the ‘Partnership’ in ‘PPP’ and say to the concessionaire that ‘it’s over to you’ once financial close of a project has been achieved (or even before as with the West African port example above). But, in reality, there are very few transport – related concession projects that can function long-term without an on-going interaction between the private and public sectors throughout the whole project lifecycle.
Securing land and rights of way for a project is a classic example where public and private sectors need to work together. This has been and will, no doubt, continue to be a key challenge for urban toll roads within sub-Saharan Africa where land ownership is complex and legally uncertain and third party claims to land can often arise on an unregulated basis, free from planning constraints. This results in houses, businesses and often informal utilities connections being located illegally on areas of land ear-marked for the project. The politics involved in undertaking the removal and relocation of such items needs to be sensitively managed. This is a crucial issue if a project is funded by development finance institutions (DFIs) or multilaterals notwithstanding the real risk that disgruntled citizens may be prepared to take the law into their own hands to protect their (unlawful) interests. Negative feeling towards a particular project within the local community can be fatal.
By pursuing PPPs, the private sector partner must be careful not to overstate what can be achieved. Road and rail projects involving an assessment of traffic, usage and ridership are particularly vulnerable to changes in scope when actual traffic figures do not match expectations and then fail to support the level of investment that the public sector thought it was entitled (or had been led) to expect. Reports suggest that this was an issue on the Rift Valley Rail Concession Project in Kenya which narrowly avoided being cancelled in August 2009. According to the World Bank,
‘the main hitch in such concession arrangements is that the service revenues are too low to support investment finance, partly due to low traffic volumes and intense intermodal competition as well as failure by governments to compensate concessionaires for running loss-making obligatory passenger services’.
The problem of inaccurate and/or over-optimistic traffic forecasts in start-up road concessions is notorious. In 2002, Standard and Poor’s published a study of 32 highway and bridge projects across Europe, Asia and North America and found that, on average, traffic volumes were about 70% of their predicted values. Until the toll booths are first opened, it is very difficult to predict how users will react to having to paying for a service that they are used to receiving for ‘free’. Traffic studies and preference surveys are, of course, minimum requirements for an assessment of the likely patronage (and bankability) of a particular scheme. However, more often needs to be done. For example, the concessionaire should use every means possible to raise awareness within the community of the reasons for the toll and the services that will be provided. In the Lagos toll road project, it was very important to the concessionaire to combat the contention that the use of the existing untolled road was ‘free’. In fact, users were paying with their time, fuel, security and maintenance costs ever since it was constructed. Furthermore, the concessionaire marketed strongly the fact it was not merely providing a road, but a range of new services including breakdown facilities, enhanced security and predictable journey times. All of these efforts were required to maintain the political will and public support for the scheme throughout the extended development period.
Knowing your Partner
Transport concessions are full of unknown and unquantified risks, no matter where they are located. Sub-Saharan African projects are no exception. A prime example is the risk associated with securing the right of way. For example, it is not uncommon in many jurisdictions for there to be few, if any, accurate records of where utilities equipment is located making it impossible for the contractor to price this risk into its contract. Equally, the clearance of such equipment may involve an interface with multiple entities, none of which feel the pressure felt by the concessionaire to address the issue. The easy solution to these issues appears to be to place the responsibility on the public sector. However, for transport projects in sub-Saharan African jurisdictions, such a black and white approach rarely fosters a lasting partnership. Indeed, absolving the private sector partner from all responsibility can back-fire seriously if the public sector does not do what it is supposed to do under the carefully drafted concession agreement. This may not be a lack of will but a lack of capacity. It can be a lack of awareness as the relevant public department has not been informed of its obligations under the concession agreement. They are simply caught by surprise when the concessionaire asks them when they expect to have power lines cleared from the right of way. A key lesson we have learnt from this is that the concessionaire needs to be the master of its own destiny by managing the public sector functions in a manner consistent with the implementation of the project. For example, on the Maputo Port Project in Mozambique, one of the key risks was whether the public sector partner would perform crucial services such as piloting and dredging in a manner consistent with the concessionaire’s own business requirements. In the end it made sense for the concessionaire to take over the management of these services (and others) from the port authority as it was best placed to ensure that these services were adequately and properly performed in a coordinated manner to the lenders’ satisfaction.
Establishing a Presence
Still on the theme of partnership, one of the factors common to successfully financed transport infrastructure projects in sub-Saharan African has been the presence of the concession company as an entity capable of thinking and acting for itself. In many PPP projects in Europe, the concession company is little more than a medium for the pass-through of risks and revenues to other entities. In the case of both the Tema and Maputo Port concession projects and also the Lagos toll road project, the concession companies were fully staffed organisations ready to deal with the issues as they arose on each of the projects. In the case of the Lagos toll road transaction, Lekki Concession Company Limited was established as an operating entity (and not just as the co-signatory to the concession agreement) well over a year prior to financial close occurring. This takes courage and no small amount of investment from the sponsors at a time when no-one can be certain that the concession company will have a project to manage.
The Rules of the Game
For a long-term partnership to survive, it must be framed by an enabling legal and regulatory environment. In recent years quite a few countries within Africa have focussed on restructuring their telecoms and power industries. For a number of those countries that have managed to implement the necessary reforms, the benefits in terms of investment are starting to emerge. Although some observers question the abilities of these new regulators to act effectively due to lack of experience, this will come in time and does not undermine the logic of putting in place a transparent, clear and consistent enabling environment. In the transport infrastructure market, underdeveloped legal and regulatory frameworks for concession projects are common. Although a radical overhaul is required before investors are willing to commit their capital to projects, this is too often not addressed proactively government at the start of the process. This has been a recurring issue in the transport sector and is particularly acute where projects are proposed by potential investors rather than being part of a general transport strategy of the government. In the case of the Lekki-Epe Expressway, the private sector had to push for a new act of the State legislature to establish and empower the relevant State entities to enter into and undertake their obligations under the concession agreement.
At the Federal level, Nigeria has now started to tackle this issue by establishing the Infrastructure Concession Regulatory Commission on which sit the Attorney General of the Federation, the Minister of Justice, the Minister of Finance and the Governor of the Central Bank of Nigeria. It is hoped that the Commission will become the central resource for the development of PPP projects within Nigeria both on a national and state level and will enable PPPs to be developed on a consistent and coordinated basis across the nation.
Statutory frameworks and regulatory systems are topics guaranteed to generate a stampede for the exit at any infrastructure conference. But what better way for a government to show that it truly is ‘open for business’ and to create investor confidence by establishing an environment that is conducive for long-term infrastructure projects through properly thought out and scrutinised legislation?
Long-Term Sources of Finance
A particular issue for user – paid concession arrangements is the potential currency mismatch between the debt obtained to finance the project and the project revenues. The answer, in general terms, is to obtain debt denominated in the same currency as the revenues to eliminate the currency risks. But for many African countries, the tenors of local currency financings are too short and the pricing too expensive. In the early days of the Lagos toll road project, maximum local tenors were fixed at 5 years which is simply not long enough for a long-term infrastructure development. Various structures were considered to increase the tenor, such as arranging a Naira facility with a 5-year term that rolled over twice to create an artificial 15-year term (i.e. 5+5+5 years). It was envisaged that the ‘roll over’ risk would be taken by an external organisation such as Guarantco of the UK. However, the ultimate solution was found through a combination of Naira funding sourced from Standard Bank and local banks and a US Dollar loan from the African Development Bank. Standard Bank structured a swap product that substantially mitigated the currency risk on the African Development Bank loan to address the mismatch. Ironically, the delay to the achievement of financial close assisted as Nigeria gained an investment grade rating in that period. This resulted in tenors becoming available that were more consistent with the long-term nature financing requirements of the project. Nevertheless, sourcing local currency for these projects remains a huge challenge and it is hoped that the DFIs can continue their efforts to address this.
One of the key challenges faced by the African transport infrastructure market is to find developers willing to take up the challenge of developing projects. This is common to most infrastructure sectors within Africa outside of oil and gas. European-style tenders for transport PPPs where multiple high quality tenders are submitted, followed by best and final offers and the selection of the chosen private sector partner after a well organised process of negotiation are, unfortunately, the very rare exception. The lack of developers can partly be explained by opportunities elsewhere being perceived as less costly, less risky and more certain, a combination of the factors mentioned earlier in this article and a perception that, despite the obvious need and the political rhetoric, the deal flow in Africa is more of a trickle than a torrent.
Perhaps the mixed experiences of those international investors in the African infrastructure arena prove the detractors somewhat correct. The Lagos toll road project took around five years to structure: long enough for even the most committed of investors to question whether it was worth the trouble. So it would be quite easy to paint a fairly bleak picture about the possibility of the African transport concession market opening up. At Trinity, we take the more optimistic approach that lessons from past experiences are being learned and applied all the time and that properly structured projects will (eventually) generate much greater competition for concessions in the future.
Where to next?
In the next few months, the African transport infrastructure concession market will face a number of milestones. First, the toll plazas on the Lekki-Epe Expressway will open and tolling of the initial section will commence. No doubt, all eyes will be on that project to see the reaction of the public in Lagos and whether the predicted levels of traffic and revenue materialise. Second, the concession on the Nairobi Urban Toll Road Project will be signed and the financing process for that project will commence. Achieving financial close for this project will be a major milestone for the development of user-paid toll roads in sub-Saharan Africa and will, inevitably, be heralded as the blue-print for future schemes. Therefore it is incumbent on everyone involved, particularly government and the DFIs, that the blue-print is bankable and that the momentum is maintained. If the flow of gloomy World Bank statistics is to be stemmed, a concerted effort to draw on past experiences to structure successful PPPs is urgently required.