Columnists

Why PPPs should make us nervous

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Work in progress on Nairobi Expressway. FILE PHOTO | NMG

Summary

  • A number of people, including high-ranking government officials around the President, surprisingly argue that PPPs have no cost to the government or the taxpayer.
  • This is evidently poor understanding of infrastructure financing or the government officials are intentionally misleading the public
  • In 2007, Bloomberg ran an article titled “Road To Riches: Why Investors Are Clamouring to Take Over America’s Highways, Bridges, and Airports – And Why the Public Should be Nervous.”
  • In 2020, we can easily replace the word ‘America’ with ‘Africa’ in that statement.

Many African countries have found themselves in a constrained debt sustainability position after going into a debt accumulation spree.

With this constraint, there are efforts led by the World Bank to push African economies to bet on private development of public infrastructure as the safe avenue for filling the gap left by perennial budget shortfalls, debt sustainability limits and the thorny politics of increasing taxes.

But is this path really safe? Are public-private partnerships (PPPs) better alternatives for infrastructure development?

A number of people, including high-ranking government officials around the President, surprisingly argue that PPPs have no cost to the government or the taxpayer. This is evidently poor understanding of infrastructure financing or the government officials are intentionally misleading the public

In 2007, Bloomberg ran an article titled “Road To Riches: Why Investors Are Clamouring to Take Over America’s Highways, Bridges, and Airports – And Why the Public Should be Nervous.” In 2020, we can easily replace the word ‘America’ with ‘Africa’ in that statement.

In the Bloomberg article, the writer talked to Steve Hogan (now deceased) who was managing the Northwest Parkway Public Highway Authority about his observation as a sector player on private interest in public infrastructure.

Hogan narrated how his organisation had run up $416 million in debt to build the 10-mile toll road and was worried about the high payments. He approached various investors for a refinancing deal but none of the hundred of investors were interested. A couple of months later, he got a letter from Morgan Stanley suggesting to him that they can lease the road to a private investor and raise enough money to pay off the whole chunk of debt. He was not sure about this model but took up the proposal only to be shocked by the responses he got from all over the world.

It was at this point that he came to the realisation that banks and private investment had fallen in love with public infrastructure because of the rich cash flows that roads, bridges, airports, parking garages and shipping ports were generating and the monopolistic advantages that kept cash flows steady.

In Kenya, we are seeing the government increasingly smitten by PPPs and the public should be concerned. We already have the Nairobi Expressway — dubbed the ‘Expressway of the Rich’ — that runs from Westlands to JKIA at a costly price of Sh59.9 billion. In his State of the Nation Address last week, President Uhuru Kenyatta announced that his government had signed Africa’s largest PPP-funded project, the Nairobi-Mau Summit Express way. And many more PPP-funded projects will be coming.

To start with, some PPPs are known to have sizeable upfront fees. For those that don’t have upfront fees, they never escape the return requirements and fiscal subsidies of PPPs which always make the deals attractive to private investors. These return requirements and fiscal subsidies are well in excess of government entities’ borrowing rates, making this financing model more expensive.

Second, toll roads have actually made what is a public good expensive. For example, when Chicago introduced a parking meter concession contract, parking rates quadrupled. It was estimated that Chicago could have earned between $670 million and $2 billion more if it had kept the meters public. Closer home, we have seen how toll roads have been costly to South Africans, leading to a heavy backlash.

Third, these infrastructure contracts require the government to give up some control over its policy prerogatives through unfavourable clauses that guarantee investors returns. Non-compete clauses are always the most controversial, where government commits not to build competing public facilities and the contractor can seek damages when government exercises its sovereign prerogative on the public good.