The past decade has seen a significant increase in the use of the public-private partnership (PPP) for African project finance as leaders grapple with struggling economies, over reliance on foreign aid and unstable tax bases. PPPs aim to provide a public service or fulfill a public need through governmental and private cooperation. A PPP may be defined as: ‘a contract between a public sector institution and a private party, in which the private party assumes substantial financial, technical and operational risk in the design, financing, building and operation of a project.’⁽²⁾

The case of Mozambique: Port Maputo and the N4 Toll Road

The African Development Bank has since long criticized the continent’s ports; Africa’s trade is largely extra-continental, with over 80% of trade requiring goods to be imported to or exported from the continent. Increasing demand is unmatched by available ports, placing a heavy burden on outdated port systems, the inefficiency of which leads to high transaction costs, impacting the competitiveness of African economies.⁽³⁾ Inland infrastructure is also required to facilitate efficient freight shipments; the development of Port Maputo and the N4 toll road addresses these issues.

The port project is an integral part of the significant investments (more than US$ 5 billion) made in the Maputo Development Corridor (MDC) under the stewardship of the South African and Mozambican governments. The MDC connects the South African provinces of Gauteng (South Africa’s economic hub), Limpopo and Mpumalanga to the port. The Maputo Port Development Company’s (MPDC) ownership is split between Portus Indico (a private consortium of Gindrod Limited, DP World, Mozambique Gestores SARL), whose stake is 51% of the project, and the parastatal CFM (Mozambique Ports and Rail), who owns 49% of it.

The project’s capital expenditure (CAPEX) is US$ 749 million over 20 years. Forecasts in 2009 indicated that the port would handle 10 million tons of cargo in 2010, and will handle 16 million tons by 2015. Ship numbers are expected to reach 1,500 by 2015. Developments include upgrades to existing quays and container terminals, constructing deeper berths and a significant dredging project. Figures indicate that thus far the project is on its way to achieving its targets: in 2009 the port handled 8.5 million tons of cargo, up from 6.5 in 2006.⁽⁴⁾

The port’s success is linked to its position in the broader MDC strategy. Increased inland freight to the port has been facilitated by the new N4 toll way – important given the manufacturing, mineral and agricultural wealth of the South African provinces it links to the port. Negotiated between 1994 and 1997 by then presidents Chissano and Mandela, the N4 PPP consists of France’s Bouygues, South Africa’s Basil Read and Stocks & Stocks, and parastatals⁽⁵⁾ of each government: South Africa’s SANRAL and Mozambique’s ANE. Equity was provided by the construction firms and SA Infrastructure Fund, Rand Merchant Bank Asset Management and five other investors. Syndicated debt finance was issued by ABSA, Nedcor, Standard Bank and First National Bank, the Development Bank of Southern Africa and the Mine Employees and Officials Pension Funds. The debt is guaranteed by the two governments.⁽⁶⁾ The N4 is a Build-Operate-Transfer (BOT) 30 – year concession, at the expiration of which ownership will transfer to the two governments.

The flow of capital both ways is considerable: South Africa is Mozambique’s largest trade partner (35% of exports; 36% of imports).⁽⁷⁾ NEPAD has reported that increased traffic on the road has facilitated greater private investment in Mozambique.⁽⁸⁾ Increased investment from China, India and Brazil is on the Mozambican economic horizon. Those countries rely on the MDC and port infrastructure for exporting, among other things, aluminum and coal. Growth rates in Mozambique are expected to remain healthy in 2012, facilitated by private consumption, public investment financed through non-concessional loans, private investment addressing huge infrastructure deficits in transport and energy, and the beginning of coal exports. PPPs along the development corridors are expected to absorb all fiscal space through to 2013, favouring large foreign investments linking extractive areas with the coast. The Mozambican government has also benefited from a well-timed change in tax policy, increasing its customs collection in 2010 (though foreign companies receive better tax-breaks than domestic firms). Agriculture and SME jobs are expected to benefit through spill-over effects along the development corridors.⁽⁹⁾

MDC developments are not without their critics. Professor Castel-Branco, the current director of IESE Mozambique, supported by Professor Roodt of Rhodes University in Grahamstown, has argued that the connection between the two countries reproduces pre-existing inequalities, noting that from a South African point of view, ‘Mozambique is interesting…[because it strengthens]…the regional expansion of oligopolistic industries, and at the same time promote[s] exports from South Africa.’⁽¹⁰⁾ There has also been criticism of the failure of MDC PPPs to support local businesses, which are yet to see the promised ‘spill-over’. Large infrastructure investments geared towards extractive industries tend to benefit large export partners and foreign investors, not the local economy. This is particularly problematic because policy decisions in Mozambique are centralized, leaving local municipalities ‘outside the boardroom’ despite the impact of mega-infrastructure on the local level. Mozambique will require a more comprehensive national development plan for its people to fully enjoy the benefits of economic growth. It is worth investigating the possibility of tying small business investment to PPP development to promote projects and encourage local participation.

Nigeria and the Lekki Toll Road Concession project

Fuelled by its successful use of the PPP model in the telecommunications sector, PPPs have become a popular source of project finance for the Nigerian government. This is particularly true of Lagos state – currently undergoing a facelift at the hands of Governor Babatunde Fashola. While the crippled condition of Nigerian infrastructure may necessitate private assistance to meet the needs of Africa’s most populous country, a recent example highlights the risks associated with investment in PPPs where the cost is passed on to the consumer.

At least 65% of the 198,000 km of road in Nigeria are in poor condition.⁽¹¹⁾ The Fashola administration addressed the problem in 2006, forming a PPP with Lekki Concession Company Limited (LCC, a subsidiary of ARM Investment Managers) to upgrade, expand and maintain 50km of the Lekki-Epe Expressway (Phase I), and construct approx. 20 km of the Coast Road on the Lekki Peninsular (Phase II). The PPP has a 30-year BOT structure. LCC’s costs are recouped and profits earned from a toll imposed on road usage. The road opened and tolling commenced on 18 December 2011.

The public has reacted negatively to the project. The primary concerns are toll costs, which are between N50 – N350 (US$0.31, US$2.19 respectively) depending on vehicle type. The promised alternative route has yet to be constructed. Epe residents who must use the road to access Lagos city have reported cost increases on goods as commercial drivers factor the toll into their prices. It is also worth noting that state administrative apparatus (courts, hospitals etc) is lacking in certain areas of Lagos state, and accordingly paying the toll is necessary to access some social services. Lagosians have also complained about significant traffic delays cause by tollbooths and bus fare increases of 30-35%.⁽¹²⁾ This issue is further complicated by the poorly timed removal of fuel subsidies in the region.

The legality of tolling has been subject to judicial challenge, but the clearest manifestation of civil discontent was the ‘OccupyLekki’ protest of 17 December 2011, in which 23 citizens, including a 2011 People’s Democratic Party (PDP, Fashola’s opposition) candidate, were arrested.⁽¹³⁾ The PDP has called for Fashola’s impeachment should he permit the tolling to continue.⁽¹⁴⁾ Lagos collects the highest Federal Allocations and IGR of all of Nigeria’s 36 states, and opponents have queried the need to rely on private finance.

The Lekki toll project is deeply enmeshed in Lagosian politics. This is true of PPPs beyond Africa, but past political spats concerning PPPs have ended disastrously – at times with incoming governments refusing to honour contracts entered into with previous administrations. It has been said that: ‘the nature of PPP[s] in Nigeria has shown that the politics of introducing PPP projects has clouded the practice of the framework. The PPP arrangement at present is skewed against private sector…The snag in this ‘master-servant’ relationship is [that] most PPP arrangements cannot outlive the administration that initiated them.’⁽¹⁵⁾ Whether or not this fate awaits the Lekki toll project remains to be seen.

What are the lessons for infrastructure PPPs in Africa?

Change in government policy. Both cases highlight the importance of harmonizing changes in fiscal policy with infrastructural developments. In the Nigerian example, the cancellation of fuel subsidies coupled with the imposition of a toll on a key arterial road produced an adverse public reaction, and, in all likelihood, contradicted earnings forecasts - angering private investors. Conversely, in the Mozambican case, the coupling of more efficient customs collection with an increased import/export capacity via the N4 and port developments maximizes the beneficial impact of PPP investment.

Cost pass-on.There may also be an issue regarding the transfer of PPP costs onto the consumer. In the Lagosian example, the direct imposition of the toll on local consumers was poorly received. This issue has not arisen in the Mozambican case because the PPP primarily supports and thus charges big business. In the case of the N4, while costs are inevitably incurred by the consumer at final point of sale, the extractive nature of many of the shipped materials and the volume at which they are shipped reduces the degree, if any, of impact on small purchasers. The developments at the port shorten waiting times, which reduces the cost of shipping and makes imports cheaper for African consumers.

Community consultation.In both cases, a lack of community consultation has resulted in negative public reaction. Local frustration results from the failure of PPPs to deliver on promises: namely the provision of an alternate route into Lagos, or the spill-over of MDC benefits into adjacent community economies.

Changes in leadership.While this has not negatively affected the projects discussed, it is important to note the risks associated with contracting with some African governments. For example, in 2010 Nigerian President Goodluck Jonathan reneged on PPP contracts executed in 2007 by the Obasanjo administration for the construction of a second Niger Bridge. Conversely, the long-term MDC PPPs have remained viable despite multiple changes in leadership in both South Africa and Mozambique.⁽¹⁶⁾ It is clear that, to as great a degree as possible, politics should be kept out of the equation.

This article has highlighted key risks and opportunities in investing in African infrastructure through PPP models. While not discussed here, it is important to note that criticisms of other projects have emphasized the inadequacy of African legal frameworks to properly govern PPPs, corruption, neo-patrimonialism and lack of transparency in concession awards. It is also worth noting that a greater spread of risk between partners and debt and equity finance in such projects is a possible means of mitigating potential losses in the event of project collapse. More information is available from the Public-Private Infrastructure Advisory Facility.⁽¹⁷⁾

In the next installment: African PPPs in healthcare.

NOTES:

(1) Contact Hugh Boylan through CAI’s Industry and Business unit ( industry.business@consultancyafrica.com).
(2) Farlam, P., ‘Nepad Policy Focus Series: Working Together - Assessing Public–Private Partnerships in Africa’, The South African Institute of International Affairs, 2005.
(3) ‘Concept Note for the African Development Report 2010 on Ports, Logistics and Trade in Africa’, African Development Bank, 2009.
(4) Port Maputo, Maputo Port Development Company, Handbook & Directory, 2010-2011.
(5) State-owned organisations
(6) Farlam, Ibid.
(7) Trading Economics: Mozambique – Balance of Trade, http://www.tradingeconomics.com.
(8) Farlam, Ibid.
(9) African Economic Outlook 2011: Mozambique, AfDB, OECD, UNDP, UNECA.
(10) Castel-Branco, C., ‘What is the experience and Impact of South African Trade and investment of Host Economies – a view from Mozambique’, IESE, Maputo, 2004; and Roodt, M, ‘The impact of regional integration initiatives and investment in a southern African crossborder region: The Maputo Development Corridor’, African Sociological Review Vol. 12, No. 1, 2008.
(11) ‘Nigeria: the Most Dynamic PPP Market in Africa?’, Nigerian Infrastructure Concession Regulatory Commission, 2010.
(12) Vanguard Nigeria, 7 January 2012.
(13) Nigerian Tribune, 23 December 2011.
(14) Nigerian Compass, 16 December 2011.
(15) ‘Public-Private Partnership: Will it fix Infrastructure in Nigeria?’, Initiative for Public Policy Analysis, 2011.
(16) It should be noted that there have been changes is company structure and approach to the MDC upgrades throughout the project – see Roodt, Ibid.
(17) www.ppiaf.org.

Click here to read Part II

Written by Hugh Boylan ⁽¹⁾