Africa’s needs for infrastructure expenditure have been estimated at USD 93bn a year for 10 years, i.e. 15% of African GDP. Can Public-Private Partnerships (PPPs) contribute to meeting these needs? We take stock of this financial tool with Lionel Yondo, PPP expert in AFD’s Africa Department, Dominique Hautbergue, Project Manager at AFD’s training center (CEFEB), and Anne Gautier, Investment Officer in AFD’s structured finance team.
Is there a universal definition of PPPs?
PPP, the magic word supposed to solve all problems, but everyone has a different understanding of it!
What are the invariants of a PPP? First of all, the existence of a public sector, which can be a local authority, a State structure, or one of its subdivisions. More generally, the term PPP refers to forms of cooperation between public authorities and the private sector which aim to finance, build, renovate, manage or maintain infrastructure or provide a service. The PPP gives rise to a contractual agreement between the public authority and a private sector entity which allows the skills and resources of each sector (public and private) to be mobilized and shared in order to provide a service or infrastructure. The PPP is intended to facilitate the allocation of the risks that are inherent to a project by transferring them to the entity which is best able to bear them.
There are two main categories of PPP: user-pay PPPs (public services and works concessions, affermage and cost-plus State control) and public payment PPPs, such as French partnership contracts (formerly called partnership agreements) or PFIs (Private Finance Initiatives) in the Anglo-Saxon world. Consequently, there is a very wide range of forms of contract, as we find management contracts, long-term lease contracts, contracts for the temporary occupation of public property, the establishment of semi-public companies, as well as more traditional forms of contracts for public service delegation (concession, affermage and cost-plus State control).
In short, PPPs are not an end in themselves, but simply a tool for a project of public interest.
Can you give us a few figures on this method of financing in Southern countries?
In 2014, private infrastructure investments in developing countries stood at USD 107.5bn for 239 projects and have stood at USD 1,370bn for 5,606 projects since 1990. They have been almost constantly increasing for 15 years. Sub-Saharan Africa only accounts for 5% of projects (301) and 3% of investments (USD 41bn) for 1990-2014.
Why finance a PPP project?
PPPs can prove to be more effective forms of management for essential infrastructure and services than the use of traditional public structures. They provide a way of improving management by relying on the experience of the private sector. PPPs are also likely to help speed up the modernization of public services and build capacities for innovation.
In addition to building infrastructure, PPPs also make it possible to cover the cost of servicing, maintaining and renewing equipment, which ensures that public investments are sustainable. The contribution made by private operators with management experience and a capacity to mobilize financing aims to limit public debt and/or optimize the investment cost for the local authority. From an institutional and operational perspective, PPPs are designed to build the programming and contracting capacities of public authorities by promoting a sectoral dialogue with the private sector, while contributing to fostering the financial autonomy of local authorities and State-owned companies.
The press often refers to the failures of PPPs. What are the main criticisms made about this method of financing?
In France, most of the criticism is directed towards public payment PPPs which, for some time, were not recorded in the local authority’s debt and may sometimes have been misused (the press consequently often talks about “hidden debt” for local authorities). Since 2011, in France for example, it has been mandatory to record lease commitments to be paid in local authorities’ debt, which thereby avoids these adverse effects.
However, in a public payment PPP, the expenditure and rent are recorded separately, known, and set in advance, which allows a degree of transparency and good predictability for the cost for the State or local authorities, contrary to what is sometimes said in the media. We should bear in mind that in the case of France, for example, public payment PPPs only account for 2 or 3% of public investments. They are consequently not responsible for generating the overindebtedness of local authorities!
PPPs are also criticized for the complexity of the arrangements and the significant structuring costs. It is indeed more appropriate to use this type of arrangement when a minimum critical project size is reached (a few tens of millions of euros in general).
PPPs, particularly in French-speaking African countries, have extremely different paths and results. Indeed, while there are many PPPs with satisfactory results, we also see mixed results in certain cases. For example, PPPs subject to the concession regime, particularly in the water sector, have experienced difficulties.
The difficult experience of public authorities and the consortium of private operators in Mali in the 2000s with EDM in the water and electricity sectors, via the conclusion of two concession contracts, is somewhat telling. It demonstrates the need to have a framework conducive to the implementation of the PPP contract, the treatment of tariffs and investments, as well as to dispute resolution. In the present case, if the level of investment required in the water sector (in particular to reduce losses) and local context had been taken into account, it would have been possible to consider a more appropriate and less conflictual framework. Another difficulty has been the lack of clarity over Mali’s regulatory framework, with the juxtaposition of two models: the creation of a regulatory body based on the British model and a concession contract, which provides for tariff stipulations (French model), led to a number of disputes between stakeholders, which caused the early departure of an operator.
What lessons can be learned from experience?
Firstly, that the institutional and regulatory framework, as well as the choice of the contractual arrangement taking the sociocultural context into account, are decisive for the smooth conduct of a PPP.
Experience shows that PPPs are more successful in the energy sector (particularly thanks to the investments made by independent renewable energy producers) and in the transport sector (particularly ports and airports). Experiences have often been more mixed in the water sector, in particular due to the high level of investments required and the difficulty in ensuring sufficient tariff increases in order to achieve a balanced operation. The development prospects for PPPs in the social sectors (education, health) remain promising, given the considerable needs in Sub-Saharan Africa.
In view of their complexity, PPPs require careful preparation upstream in order to ensure that all the key factors for success are indeed present.
The use of PPPs also requires having a clear legal and institutional framework beforehand in order to ensure there is a predictability and accessibility in regulation to guarantee the legal and judicial certainty of investors.
Finally, PPPs must be considered as an instrument for the implementation of essential public policies that in particular allow investments to be planned in complete transparency and in the context of (value for money) bid invitations. In these circumstances, public authorities must play a key role in ensuring there is an optimal balance between the protection of the final user and the attractiveness of the project.
What contribution do donors make to setting up a PPP?
In addition to financing, donors provide training which aims to build the capacities of the stakeholders in the PPPs of our areas of operation. For example, since 2012, some 300 executives from all over Africa have been trained thanks to the “PPP Program” set up by the African Legal Support Facility, AFD (via its corporate university, CEFEB) and Expertise France. The objective is not to train top specialists, but to allow executives working in this field to take into account all the critical points concerning these complex projects. The French language PPP MOOC, conducted by the World Bank with AFD, participates in this comprehensive approach and also aims to expand educational tools in order to provide training combining face-to-face seminars and distance learning tools (blended learning).
Donors also help structure sectors via assistance in the implementation of specific regulatory and institutional frameworks for PPPs, support for projects via technical assistance, feasibility studies, by structuring the PPPs themselves and their various financing and guarantee mechanisms… Donors consequently seek to promote and secure the establishment of PPPs throughout the chain. For example, in the context of a decision by the Council of Franc Zone Ministers, a joint France (Expertise France/AFD)-World Bank initiative has been conducted since 2013 in order to set up a strategic, institutional and regulatory framework at regional level (WAEMU for West Africa).
There are more and more expectations towards the private sector for the financing of the Post-2015 agenda. Do you think the number of PPPs will increase in the coming years?
PPPs are a major issue for Africa given its significant infrastructure financing gap, which hampers its development. A diagnostic of infrastructure in Africa was conducted in 2012 at the request of the Infrastructure Consortium for Africa (ICA). Africa’s needs in terms of infrastructure expenditure were assessed at USD 93bn a year for 10 years, i.e. 15% of African GDP. The investments actually made only reach USD 45bn a year, over half financed by the public sector, which is constrained by its limited resources. The infrastructure deficit (some USD 50bn) costs Africa 2 growth points a year. PPPs provide an opportunity to contribute to bridging this financing gap and the infrastructure deficit.
For example, the PPP toll highway project in Dakar has a major impact on development, as it facilitates and increases the movement of people and goods, in particular to leave the City of Dakar: prior to the construction of this infrastructure, it was impossible to estimate how long it would take to leave the capital, several hours were often wasted. Today, it takes less than thirty minutes and the traffic exceeds 70,000 vehicles a day. This PPP also allows Dakar residents to find accommodation outside the central neighborhoods, where there is significant financial speculation. It is consequently a great achievement which should be replicated in the different African countries, in particular to facilitate regional integration.
The opinions expressed on this blog are those of the authors and do not necessarily reflect the official position of their institutions or of AFD.