In the past two decades there has been a worldwide shift in thinking on how infrastructure should be owned, organised and regulated. Traditional vertically-integrated public utilities are increasingly being challenged on poor service delivery. The need for improved operating performance, new technology and new financing has resulted in the introduction of competition, private participation and reformed regulatory regimes.

Internationally, the role of the private sector in financing infrastructure projects has been varied. Between 1990 and 2001 more than $750 billion was invested in 2500 private infrastructure projects in emerging market economies but only 3% of this amount went to Africa and the Middle East.

It is clear therefore that this financing source has been underutilized in Sub-Saharan Africa. The financing of infrastructure development in Africa was a key theme at the 2nd Africa Trade & Investment Conference held in Cape Town recently.

Infrastructure finance trends
Infrastructure projects are traditionally financed by government revenues, with large, often inefficient state-owned enterprises (SOEs) being responsible for investment and service delivery. There has been a trend in recent years for infrastructure to be financed on a project basis or purchased/developed by the private sector. Public-private partnerships (PPPs) in infrastructure provide an option for capital funding not available from public funds as well as a means of enhancing service delivery by employing private-sector entities to supply physical infrastructure and services.

Compared to other assets, infrastructure investment is long-term and requires patient investment. Due to the typically high capital costs of infrastructure projects, long-term financing (exceeding 5 years) is essential for privately-owned infrastructure projects to be financially feasible.

Private infrastructure projects can take different forms (Kirkpatrick and Parker, 2004):

• Management and lease contracts – a private entity takes over the management of the state owned enterprise for a given period. The facility is owned by the public sector and investment decisions and financial responsibilities also remain with the public sector.
   
• Concessions – a private entity takes over the management of a SOE for a given period during which it also assumes significant investment risk. The ownership of the facility reverts back to the public sector at the end of the concession period.
   
• Greenfield projects – a private entity or a public-private joint venture builds and operates a new facility for the period specified in the project contract. The facility may return to the public sector at the end of the contract period, or may remain in private ownership.
   
• Divestitures (Privatization) – a private entity buys an equity stake in a SOE through an asset sale, public offering or mass privatization programme.
   

Leeds and Sunderland (2003) argue that the promise of private equity in emerging markets has failed to meet expectations. “After an initial proliferation of new funds in the mid-’90s, growth has slowed to a trickle, and few practitioners believe that this trend will soon be reversed.” Furthermore, there is evidence that debt has been replacing equity in the financing of infrastructure in developing countries.

Financing Infrastructure in Africa
Africa requires infrastructure development and possesses a plethora of potential infrastructure projects, however there is a lack of capacity to turn ideas into bankable deals. The environment for infrastructure project development in Africa is difficult due to transparency, capacity and stability issues.

For foreign investors the Africa infrastructure investment environment offers both risk and significant opportunities. Ideally projects should be demand-led and supported by industries with big financial clout.

According to the Africa Finance Corporation, there is $130bn worth of infrastructure investment opportunity in Africa in the next five years. In addition government officials from Nigeria and Zambia insist that they are creating a regulatory environment conducive for private sector investment in infrastructure projects.

Private Infrastructure Investment in Africa (1990-2006)

Source: World Bank

As illustrated in Figure 1 there are strong private investment flows in telecommunications and greenfield projects in Africa. However, weak investment flows into energy are hampering industrial growth. Energy and water are generally perceived as “non-commercial” sectors, due to large capital expenditure requirements and extensive regulations.

In a presentation at the Africa Trade & Investment Conference, the argument was made that greenfield project financing is the norm as the private sector attempts to deal with risks it cannot readily offset by itself. Concessions hold promise, but require good legal and regulatory frameworks. 

Africa’s share of global emerging market infrastructure investment has grown over the past few years. Following the large investment flows into commodity production infrastructure development represents a new phase of investment opportunity in Africa.

Private sector investment in energy: independent power projects
The roles of governments and private businesses are evolving with changing technology and innovation, consequently the market is slowly assuming more responsibility for the provision of infrastructure. For example, “in electricity generation, the advancement of solar and wind-powered generators are shifting electricity production from the traditional viewpoint towards ownership and management, a move brought about by lower fixed costs and smaller economies of scale” (Claitz and Fourie, 2007).

In South Africa there are more opportunities for private investment in infrastructural development than the government’s tax financing choice offers. The prevailing energy crisis means there are new opportunities in electricity generation. For instance investing in infrastructure for: clean energy technologies, independent power projects (IPPs)[i] and co-generation projects.

According to Frost and Sullivan’s energy and power systems analyst, Jeannot Boussougouth, power projects in Africa boasted a 25% return on investment, compared with 15% for power projects in Latin America, and 12,5% for Eastern European power projects. Boussougouth estimates that up until 2030 about $162-billion would be spent on electricity infrastructure in Africa.

Researchers from the University of Cape Town’s Graduate School of Business have been systematically reviewing the experience of IPPs in Africa. They contend that successful IPP investments are more likely if a sustainable balance is achieved between the expectations of investors and the host countries. “Host countries may lower risk and the cost of capital through improvements in the investment climate and transparent policy, legislative, regulatory, planning, bidding and procurement processes. Investors and project developers may work towards producing lower cost and reliable power supply through effective risk management, appropriate equity partners who assess risk appropriately and debt financing that does not unfairly expose host countries to the vagaries of currency fluctuations.”

Conclusion
Infrastructure development offers real opportunities for investors. Arguably increased private sector participation in infrastructure is not a panacea, but should be a part of the solution in meeting infrastructure needs of developing countries. In order to create sustainable infrastructure projects, it is critical to find a balance between investment and development outcomes and a shift towards hybrid financing model involving a combination of the main stakeholders: government, donors and multilateral agencies, private sector (domestic and foreign) and consumers.

Sources:
- Adeola, A. 2008. Financing Infrastructure in Africa: Is there a role for the Private Sector. Presented at the 2nd Africa Trade & Investment Conference 2008, Cape Town, April 3-4, 2008.

- Claitz, E. and Fourie, J. 2007. Infrastructure in South Africa: Who is to finance and who is to pay? Bureau for Economic Research, University of Stellenbosch.

- Kirkpatrick, C. and Parker, D. 2004. Infrastructure Regulation: Models for Developing Asia. ADB Institute Discussion Paper No: 6. Available online at http://www.adbi.org/discussion-paper/2004/05/06/22.infrastructure.regulation.asia/introduction/ 

- Leeds, R. and Sunderland, J. 2003. Private Equity Investing in Emerging Markets. Johns Hopkins University.

- Plugging the gap. African Investor. January-February 2008

- UCT GSB study identifies success factors for Independent Power Projects in Africa. Newsline. The University of Cape Town Graduate School of Business. Available online at http://www.gsb.uct.ac.za/newsletter/v2/story.asp?intArticleID=1886  

- World Bank. 2003. Private Participation in Infrastructure: Trends in Developing Countries, 1990 – 2001. Washington, D.C.: World Bank and Public Private Infrastructure Advisory Facility.

Useful Links:
http://www.ipfa.org (The International Project Finance Association)

http://www.ppp.gov.za (South African Public Private Partnership)

http://www.africaninfrastructure.com/policytools/Finance/II_Jul_06_p52.pdf

http://www.africaninfrastructure.com/policytools/Finance/II_Nov_06_56-57.pdf

http://www.gsb.uct.ac.za/gsbwebb/default.asp?intpagenr=294

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[i]“According to Gratwick and Eberhard, “IPPs generally refer to privately developed power plants that sell electricity to the grid. They typically rely on non-recourse project finance and enter into long term power purchase agreements (PPAs) with the incumbent national electricity utility”