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Financing the gap in infrastructure through PPPs

  Oct 18, 2013

The Government understands the benefits of infrastructure development to the economy. For this reason, the Vision 2030 document has articulated a significant task to build infrastructure for the future to sustain the envisaged economic development. The financing needs are significant, with African Infrastructure Country Diagnostic report estimating Kenya’s infrastructure funding gap at about USD 2.1billion per year. In simple terms our ability to pay now for infrastructure investment is limited. There is clearly an intergenerational issue to be confronted in relation to the ability to pay and build today for tomorrow.

Beyond the available funding pool, attention needs to be steered towards the root of the problem. The key question is why the finance cannot be found when the economic needs and benefits are so clear? The simple answer is that we tend to fund infrastructure indirectly, for example, through the country’s balance sheets, rather than directly through appropriately pricing the use of the infrastructure.

We have also been over reliant on development partners for support. The global financial crisis has reduced the budget support from the donors over the recent years, meaning less money from the budgetary coffers for power, rail, road and port infrastructure projects. Even though recent budgetary allocations give infrastructure the lion’s share of the country’s development budget, unless alternative financing is found, the number of key projects failing to achieve funding will grow. The mammoth financing needs present a real gap in infrastructure funding. The country is unlikely to be able to fill the gap, given the pressure on its balance sheets and limited revenue sources.

There is therefore a need to bring together leaders from the public, private and academic sectors to synergize, discuss, debate and forge alliances that enable them to address and seek solutions to infrastructure issues in the East African region. An Institution such as Strathmore Business School is currently focusing on setting up a forum for dialogue and engagement between stakeholders in these sectors in order to interrogate issues facing Public-Private Partnerships (PPPs) in East Africa.

Stopping all stations for a sustainable funding model

Public Private Partnerships (PPPs) and user-pays pricing systems can deliver the revenue stream against which capital can be borrowed or invested to fund construction and operations. This is the reason why Independent Power Producers (IPPs) are able to obtain commercial infrastructure financing at the back of Power Purchase Agreements (PPAs) that promises a level of tariffs provided certain conditions are met. There are a number of IPPs in Kenya and more are being rolled out. Why not borrow the successful mechanisms for the other infrastructure subsectors.

PPPs allow appropriate pricing that can support the most economically efficient use of infrastructure. While the fuel levy to fund road maintenance is an existing example of user charging, its revenues may be (mis)appropriated to other priorities. Further this is not discriminatory – it does not promote better user behaviours that a well-constructed PPP can do. The recently launched railways development levy is a good attempt by the state to raise extra financing for the standard gauge railway. It is however no different from indirect methods employed before.

Successful PPP are the ones that achieve the right pricing model enabling capital to be attracted through appropriate private models. It is the appropriate pricing of transport use that supports project funding. For example, toll roads have been successfully delivered by both public and private sectors elsewhere. These projects’ revenue streams from tolling supported their capital raising.

The decision to deliver through a private vehicle needs to relate to the specific needs of the project, efficient allocation of risk, certainty of service outcomes and value for money for the public sector. An opportunity exists, for example, to overhaul the funding of roads through charging some commercial vehicles based on their use (including time of day) and impact on road maintenance. This could not only raise financing for these roads, but also release capacity during the peak hours to efficiently use the existing facilities and delay the need for expensive capacity expansion projects. It also provides a sustainable funding source for our key economic roads and a level playing field for rail.

Running express to long-term solutions, PPP investors are looking for sustainable, safe and long-term investments. Large and viably structured infrastructure projects will logically win attention if policy makers can offer a pricing model that translates into an effective revenue stream for all players – government included.

Julius Ngonga will be a speaker at the “Building stronger East African Public-Private Partnerships Summit” at Strathmore Business School. He is a Partner at Ernst and Young focusing on infrastructure and PPPs advisory. Views expressed in this article are the authors and not necessary of that of EY.

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