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Sustainable infrastructure PPPs Africa needs

ppp

Nairobi Expressway under construction. PHOTO | LUCY WANJIRU | NMG

Summary

  • It is recommended that risk should be allocated to a party that is best placed to manage the risk at the lowest cost possible.
  • African governments can build realistic risk allocation strategies and government support mechanisms that strike a balance between bankability and value for money.
  • Private sector players would not invest in infrastructure projects where they feel the risk allocation framework is unfair.

The allocation of risks and returns in infrastructure projects that are to be procured through the Public-Private Partnership (PPP) model is pivotal and will determine whether the project will attract sustainable financing.

Ostensibly, the construction and operation phases of most PPP projects are relatively long and as such susceptible to a myriad of risks which if not appropriately mitigated will adversely affect the project. Consequently, the procuring authority must undertake a thorough risk analysis during the preparation phase.

It is recommended that risk should be allocated to a party that is best placed to manage the risk at the lowest cost possible.

With a good understanding of these challenges, and making reference to global best practices, African governments can build realistic risk allocation strategies and government support mechanisms that strike a balance between bankability and value for money. The strategy should be alive to the challenges on the “ground”.

Private sector players would not invest in infrastructure projects where they feel the risk allocation framework is unfair and that they inadequately compensated for the risk they are asked to shoulder. If the private sector feels they are inadequately compensated, they will channel their investment elsewhere.

The need to raise financing to bridge the infrastructure financing gap is the main driver for most African governments that are pursuing PPPs. Due to the limitations and inefficiency of the local financial market to invest in infrastructure projects, most of the private sector players will raise financing from international sources.

The solution is to ensure that the local financial market plays a bigger role in the financing of infrastructure projects. African governments must put in place adequate support mechanisms including acting as an intermediary so as to mitigate the risks that the local financial market associate with investing in government infrastructure projects.