39792 noTE no. 18 ­ Mar. 2007GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure The African project preparation gap Africans address a critical limiting factor in infrastructure investment James Leigland and Andrew Roberts I n Africa it is becoming clear that the reasons projects--projects with enough time and money for the shortage of infrastructure investment invested to establish that they are financially go beyond the need for policy and gover- viable from the standpoint of a financier. A closer nance reforms. But the key problem is not a look at the lists of infrastructure projects that lack of funding, as might be expected. Instead, circulate in Africa reveals many projects that still it is the lack of packaged, bankable projects-- lack a detailed cost-benefit analysis or sustain- which in turn points to a need for more and ability assessment. better project preparation. But understand- ing this fact is only a beginning. African policy In some cases the problem may be that regional makers face special obstacles when it comes projects are not included in the capital plan- to adequate project preparation. Their work to ning and preparation processes of the countries resolve these problems is generating important involved. Many projects that are socially or lessons for other low-income regions. economically desirable may not be bankable, at least by the private sector, no matter how well Country officials, development experts, and structured. Many others may not be viable or donor representatives have struggled for years desirable by any measure. to understand the infrastructure financing prob- lem in Africa. By all accounts the problem is Whatever the case, many project proposals in massive: Africa ranks last among the developing Africa are backed only by out-of-date engineer- regions in access to such infrastructure services ing studies, with little additional analysis or as water, transport, energy, and telecommunica- preparation. The projects need preparation and tions. Not surprisingly, there is no shortage of packaging. But such preparation is expensive and infrastructure investment opportunities in Africa. risky. Private operators and commercial lenders Estimates suggest, for example, that the original have money to do their own due diligence on Short-Term Action Plan developed in 2002 by projects for which bankability has been reasonably the New Partnership for Africa's Development established--but little to spend on preliminary (NEPAD) identified more than US$8 billion in assessments of bankability. needed infrastructure investment. Many African organizations are well aware of this If there are so many infrastructure investment basic problem and have taken initial steps to deal opportunities in Africa, why are so few projects with it. In the past several years both the African attracting capital? The need for policy reforms Development Bank and the Development Bank and better governance is clear. But what else is of Southern Africa have established infrastructure missing? Are commercial lenders too risk averse project preparation facilities. Regional economic for African projects? Are more risk insurance and communities, such as the Economic Community other third-party support needed? Are develop- ment finance institutions not making enough money available? James Leigland is PPIAF's regional program leader for East PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY and southern Africa. Andrew Roberts is an infrastructure It is becoming clear in Africa that the problem is advisor at DFID currently working at the Secretariat of the not just lack of funding. It is also lack of bankable Infrastructure Consortium for Africa. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY of West African States and the Southern Afri- the funding to address all of them. The situation can Development Community, are establishing is even more difficult for the highest-priority cross- such facilities to deal with cross-border infrastruc- border infrastructure projects. These projects, ture projects. And African governments--such as which tend to be extremely complicated, often those in Kenya, Malawi, Mozambique, Nigeria, lack ownership or involvement by country-level and Tanzania--are creating units to help develop officials, making coordination difficult. projects that take advantage of participation by private operators and investors. Little help for "upstream" preparation Progress in developing infrastructure projects in low-income countries is often stymied by lack Project preparation in Africa-- of adequate "upstream" preparation (mostly the lessons learned activities in the first two phases; see table 1). So, even if money is available for feasibility studies, But identifying the problem, and attempting to the lack of a basic legal and regulatory enabling address it through the creation of project prepara- environment can stall project development. A tion facilities, has not led to easy solutions. Efforts weak policy environment can have similar effects to deal with shortcomings in the preparation of because of the government's inability to identify, infrastructure projects in Africa have generated a plan, prioritize, or conduct action planning for series of valuable lessons about the difficulties and projects. complexities of project preparation in low-income regions. These tasks far exceed the mandates of the new generation of African project preparation facili- More complicated than anticipated ties. Yet getting help for these activities from Project preparation has turned out to be much development finance institutions--whether local, more complicated than was originally antici- regional, bilateral, or multilateral--is often diffi- pated in the design of many of the new facilities cult. Support for this work is scarce largely because in Africa--and this problem is common in other it is risky: the work is so far upstream from actual developing regions as well. Many of the African transactions that it may or may not result in a facilities were created to work on fairly mature closed deal. That makes the work unattractive to projects--to establish bankability through feasi- private developers, which must recover develop- Risks in the bility studies, then take the project through a ment costs from completed deals, and somewhat transaction process to lock in financing. But deter- unappealing for donors, which must justify expen- water sector mining bankability--that is, whether financiers ditures with tangible results that clearly promote are driving will support a project--is just one in a long series development objectives. of steps leading to a closed deal. a change in Weak project appraisal methods the profile A project's bankability can be determined only As the African facilities seek to upgrade their after establishing its feasibility in terms of social, techniques for technical project appraisal, they of private economic, financial, technical, environmental, are confirming the existence of a larger problem projects and administrative factors. Project development that only recently has been much discussed in normally involves feasibility and prefeasibility international project finance circles: traditional studies to assess these factors. But these studies cost-benefit analysis often leads to unrealistic need to be preceded by conceptualization, consen- evaluations and failed projects. As the World sus building around a project's purpose and initial Bank's chief economist recently noted (Bourgui- design, and action plans. And these steps in turn gnon 2006), this quantitative technique has been are often preceded by legal and regulatory reforms unable to deal with such complicating factors as in the relevant sector and by policy reforms. Even cross-border externalities, lack of good data, or a simplified list of the standard steps in project the complexities of mixed public-private funding preparation gives a sense of the complexity of the options. Nor has it been able to handle "political process (table 1). economy" issues such as governance problems and the behavioral responses to controversial projects As officials at some of the new project prepara- by beneficiaries and bureaucrats. tion facilities in Africa have discovered, many of the infrastructure projects considered priorities by These views were confirmed in recent research by governments or regional organizations have had the World Bank's Transport Department (Flyvb- little of this work done. Yet the facilities lack the jerg 2005). The study documented extraordinarily mandate to work on many of these tasks or lack high levels of misinformation about costs and Revival of private participation in developing country infrastructure TABLe 1 Phases in infrastructure project development Phase Actions 1. Enabling environment Designing enabling legislation Designing regulatory approaches Reforming project-relevant institutions Two key Reforming policy weaknesses: Building capacity to support project lack of Building consensus around project 2. Project definition Identifying desired outputs upstream Determining priority of project relative to others preparation Identifying project champions and failures Preparing action plans (including terms of reference) Conducting prefeasibility studies in project 3. Project feasibility Performing financial modeling appraisal Conducting economic, social, technical, and environmental studies 4. Project structuring Assessing public and private options Structuring project finance Designing legal entities 5. Transaction support Designing and conducting bid process and drafting contracts Negotiating financial and legal terms 6. Postsigning support Finalizing postsigning financial arrangements Conducting scheduled tariff reviews Renegotiating or refinancing project benefits in the analytical preparation of infra- investment cost. If correct, that means a need for structure projects. A survey of 58 rail projects, for hundreds of millions of dollars to prepare African example, found costs to be underestimated by an infrastructure projects over the next five years. average of 45 percent and future demand overes- timated by an average of 51 percent. Yet NEPAD has recently suggested that prepa- ration costs in Africa are closer to 10 percent The failures of technical project appraisal to of a project's investment cost, largely because anticipate fundamental financial, economic, and upstream preparation often has not been done. political issues have been reflected in the recent This estimate puts the total cost of preparing the performance of public-private infrastructure infrastructure projects in NEPAD's original Short- projects in developing countries: except in tele- Term Action Plan at about US$800 million. communications, investment in such projects has been in sharp decline since the Asian crisis of 1997. The response from donors With methodological failures of this magnitude in Since the late 1990s, when it became clear that the the international project finance market, Africa's market for public-private infrastructure projects in new facilities are having difficulties identifying best developing countries would not recover quickly practices for their own project appraisal efforts. after the Asian crisis, particularly in emerging economies, international development organi- Lack of funding for preparation zations have established dozens of initiatives to The huge funding needs for project preparation assist with infrastructure project preparation. far exceed what African facilities have avail- Bilateral donor agencies have designed special able. A general rule of thumb is that preparation programs to provide such support, as have Euro- requires the equivalent of 5 percent of a project's pean development finance institutions. Donors also have supported the creation of multilateral Conclusion trust funds managed by the World Bank to focus on specific sectors or types of projects. And the Africa's massive infrastructure financing problem World Bank Group has created several facilities is far from solution. But African leaders are begin- that deal with different aspects of project prepara- ning to focus in on the critical issues that must tion and finance.1 be resolved before this problem can become trac- table. Policy reforms and good governance are Perhaps the most active is the Private Infra- basic building blocks that must be in place, but structure Development Group, a multidonor, beyond that a lack of bankable, packaged projects member-managed organization established in seems to be the most critical limiting factor. A 2002. Members include bilateral donor agencies common phrase in Africa is "too much money (those of Austria, the Netherlands, Sweden, Swit- chasing too few projects." African leaders are zerland, and the United Kingdom) and the World focusing more effort on preparing projects that Bank. The organization has helped to create six can take full advantage of this funding--and in facilities (programs, investment vehicles, and doing so are learning important lessons about affiliates) for providing financial, practical, and project preparation that may be of value in other strategic support to encourage private infrastruc- low-income regions with urgent needs for infra- ture investment in developing countries. structure investment. Critics sometimes suggest that there are too many References of these facilities, most without enough funding to have significant impact in developing regions Bourguignon, François. 2006. "Rethinking Infrastructure for like Africa. Moreover, most are able to provide Development." Closing remarks at the Annual World Bank support only to a specific part of the project prepa- Conference on Development Economics, Tokyo, May 30. ration cycle--there is no "one-stop shop" able to Flyvbjerg, Bent. 2005. "Policy and Planning for Large Infrastructure provide support from project inception to finan- Projects: Problems, Causes, Cures." Policy Research Working Paper cial closure. Organizations preparing a project 3781. World Bank, Washington, D.C. therefore must often seek funding from several ICA (Infrastructure Consortium for Africa) Secretariat. 2006. of these sources. Lack of support for "upstream" "Infrastructure Project Preparation Facilities: User Guide--Africa." work on the enabling environment for projects is Tunis. www.icafrica.org. Also available at www.ppiaf.org. another enduring problem not addressed by most of these facilities. Finally, a more practical problem associated with these facilities is simply getting Notes information about them to potential clients; many African officials have little familiarity with the 1. For names of such programs, see ICA Secretariat (2006). many donor-supported facilities in operation.2 2.Asafirststeptowardbetterinformation,theSecretariatoftheInfrastructure Consortium for Africa (ICA) has used PPIAF funding to prepare a users' guidetotwodozendonor-supportedprojectpreparationprograms.Theguide, which categorizes the facilities and provides initial contact information, is available on the Web sites of the ICA (www.icafrica.org) and PPIAF (www. ppiaf.org). GRIDLINES Gridlines share emerging knowledge on public-private partnership and give an overview of a wide selection of projects from various regions of the world. Past notes can be found at www.ppiaf.org/gridlines. Gridlines are a publication of PPIAF (Public-Private Infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY Advisory Facility), a multidonor technical assistance facility. Through technical assistance and knowledge dissemination PPIAF supports the efforts of policymakers, nongovernmental organizations, research institutions, and others in designing and implementing strategies to tap the full potential of private involvement in infrastructure. The c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA views are those of the authors and do not necessarily Phone (+1) 202 458 5588 FAX (+1) 202 522 7466 reflect the views or the policy of PPIAF, the World Bank, PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY geneRAL eMAILppiaf@ppiaf.org WeB www.ppiaf.org or any other affiliated organization.