37544 noTE no. 8 ­ may 2006GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure Reform, private capital needed to develop infrastructure in Africa Problems and prospects for private participation James Leigland and William Butterfield I n Sub-Saharan Africa the story of private in additional infrastructure finance (Estache participation in infrastructure has been 2005, p. 30). But in 1990­2004 the region largely one of telecommunications. managed to attract an average of just US$2.6 With other sectors taken into account, the billion annually in total investment (private levels of private activity have been low for and public) for infrastructure projects with the past 15 years. Still, the overwhelm- private participation.1 ing need for infrastructure has motivated regional economic organizations to push Africa ranks last among developing regions for an ambitious agenda of private partici- in investment flows to such projects, with pation. But to begin solving Africa's infra- US$39.4 billion in 1990­2004, far behind structure investment problems will also such leaders as Latin America (US$391 require broad institutional reform along billion) and East Asia (US$199 billion). But with greater financial commitments by its small share of the total investment flows governments and donors. The private in low- and middle-income countries in sector appears capable of supplying only 1990­2004 (5 percent) is roughly consistent a fraction of the estimated US$5­12 billion with its share of their total GDP over the a year in additional infrastructure finance same period (6.2 percent).2 Moreover, the that Africa needs to meet its Millennium data on private activity exclude small-scale Development Goals for infrastructure. private service providers, which probably play an important role in Africa.3 By most measures Sub-Saharan Africa has lower access to infrastructure than Thus while small, total investment flows to any other region. The share of the infrastructure projects with private participa- population with access to safe water is tion in Africa appear at first glance to play a three-quarters--and the percentage of significant role. Yet South Africa accounted paved roads about half--that in East Asia, for about half these flows in 1990­2004 the region with the second lowest levels. (US$19 billion). And Nigeria has claimed And in all but a handful of African coun- a rapidly growing share, about 14 percent tries less than half the population has over the 15-year period, with much of that access to electricity (World Bank 2005). investment coming since 2001. Excluding South Africa, the region's share of the total The region's track record of investment for low- and middle-income countries is less suggests that the private sector by itself is than 2 percent. unlikely to provide the kind of near-term funding needed to address these shortcom- PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY James Leigland is PPIAF's regional program leader ings. To meet its Millennium Development for East and southern Africa. William Butterfield is a Goals for infrastructure, for example, Africa consultant in the World Bank's Infrastructure Economics needs an estimated US$5­12 billion a year and Finance Department. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY In contrast with the rest of the developing private sector, combined with capacity world, where flows in 2004 were still about and resource constraints that limit the 50 percent off the 1997 peak, in Africa number of projects. total investment flows grew strongly at the · The sectoral distribution of investment end of the 1990s and have remained rela- reflects the difficulty of completing tively stable since. But investment in Africa infrastructure projects with private has been driven overwhelmingly by growth participation in poor countries. Less in telecommunications, which has helped commercial and more politically sensitive offset weak performance in other sectors sectors like water and sewerage account for a much smaller share of investment in since 1997 (figure 1). Africa (1 percent) than in the rest of the developing world (5 percent). Telecom- fIGUre 1 munications, now the most competitive and commercial infrastructure sector, Telecoms have driven investment Investment in infrastructure projects with private receives the largest share of investment participation, in Sub-Saharan Africa, 1990­2004 (US$ billions) in Africa. 6 5 · Greenfield activities (such as build- operate-transfer projects) account for 4 60 percent of all infrastructure projects 3 with private participation in Africa (figure 2 2). This pattern is common in the poor- 1 est countries, where private firms often 0 find it too risky to invest in existing 1990 1995 2000 2004 infrastructure through ownership or long- To al T tal term concession arrangements because Te ecoms T lecoms of concerns about their ability to fully Otherr sectors Ot sectors The patterns recover their investment (Houskamp and Source: World Bank and PPIaF, PPI Project Database. Tynan 2000). of private activity · Because of this risk aversion, shorter-term Patterns of private activity and lower-risk contracts (such as manage- in African Sub-Saharan Africa includes more low- ment or lease contracts requiring little or infrastructure income countries than any other region, no investment) have been more common in Africa than in any other developing are typical and these countries account for 80 percent of the region's infrastructure projects with region. Management or lease contracts of those in private participation and half the total have been used across all sectors--12 in the world's investment in these projects. Not surpris- energy, 12 in transport, 10 in water, and 2 in telecommunications. poorest ingly, the patterns of private activity are typical of those in the world's poorest 70 Patterns across sectors and investors countries countries (Houskamp and Tynan 2000): 60 The story of private participation in infra- · By 2004, 47 of 48 Sub-Saharan countries 50 structure in Sub-Saharan Africa has been 40 had infrastructure projects with private 30 largely one of telecommunications. This participation, but only 4 had projects in 20 sector accounted for almost 73 percent of all 4 infrastructure sectors. The projects' 10 total investment in infrastructure projects average size was only about a quarter of 0 with private participation in 1990­2004, that in the restDivestures Concessions Greenfield Management of the developingandworld. projects lease with stand-alone mobile telephony claim- contracts So Africa has relatively widespread ing more than half that share. Since the private activity, but fewer and smaller Sub-Saharan Africa mobile boom began in 1994, investment projects per country than in more afflu- Rest of developing world in that segment has grown by an average ent regions. This pattern may reflect of more than 20 percent a year, peaking in the often desperate need to involve the 2004 at more than US$3.2 billion.4 Reform, private capital needed to develop infrastructure in Africa fIGUre 2 large utility that they then turn over to private operators. Africa had 9 such projects Greenfield projects preferred by investors in Africa in 1990­2004, more than any other devel- Infrastructure projects with private participation by type, oping region. These projects accounted 1990-2004 (percentage of projects) for about 5 percent of total investment, 70 though anecdotal evidence suggests that 60 most investment went into electricity 50 40 rather than water. 30 20 Regional investors, mainly from South 10 Africa, have played a key role in all infra- Outside the 0 structure sectors, accounting for more Concessions Divestures Greenfield Management telecom projects and lease investment (about 38 percent) in Africa contracts than any other category of investor in sector, private Sub-Saharan Africa 1998­2004 (Schur, von Klaudy, and activity Rest of developing world Dellacha 2006). in African Source: World Bank and PPIaF, PPI Project Database. Questions of sustainability infrastructure About 8 percent of infrastructure projects has been Investment in other infrastructure sectors with private participation implemented has been much lower, again typical of in Sub-Saharan Africa in 1990­2004 had limited low-income countries. While 126 tele- been canceled or classified as "distressed" communications projects with private by 2004, representing less than 2 percent participation attracted investment commit- of investment commitments in the period.5 ments of US$28.7 billion in 1990­2004, Other developing regions had lower project projects in other sectors attracted just failure rates (5.5 percent) but lost a much US$10.6 billion. And while investment in larger share of investment commitments telecommunications may still be growing, (9.5 percent). that in other sectors has declined sharply since 2002 (see figure 1). Moreover, while other developing regions have had some of their largest projects Two-thirds of the investment in other canceled or go into distress, all of Afri- sectors went to 54 energy projects. Among ca's 10 largest projects, seven of them recent energy projects, the largest is the in telecommunications, remain opera- 865-kilometer pipeline to transport natu- tional. Half the canceled or distressed ral gas from fields in Mozambique to South projects in Africa were small greenfield Africa, a US$1.2 billion project. mobile operations that failed to build a sizable customer base. Management and Transport had the next largest share of lease contracts are lower risk, and popu- activity, with US$3.2 billion. Nearly 60 lar in the region, but these characteristics percent of this went to toll roads, mostly do not guarantee their sustainability. for long-term concessions. More than 50 Of the 36 such contracts entered into since transport projects reached financial closure 1990, 5 were canceled by 2004. in 1990­2004. The largest recent project is the US$450 million Bakwena Platinum Africa had a larger share of contracts with Toll Highway, linking Pretoria to South private infrastructure firms that concluded Africa's border with Botswana. in 1990­2004 than other developing regions: 14 percent of energy, transport, Investment in projects focusing exclusively and water projects, compared with 2 percent on water lagged far behind that in other in the rest of the developing world. The sectors, at US$230 million (less than 1 main reason for the difference was shorter percent of the total) for 14 projects in contract periods in Africa. The conclusion 1990­2004. But many African govern- of most of these contracts meant the end of ments bundle energy and water into one private participation. Of the 17 concluded contracts, only 4 were followed by contract tial reforms implemented, meeting Africa's renewal or a new contract. The other 13 proj- infrastructure development challenges will ects returned to public sector management. also require substantial increases in govern- Future prospects ment budgetary allocations and official With Africa's low levels of infrastructure development assistance. investment in the face of rapidly growing needs, regional organizations and their Notes development partners appear to be more 1 Data are from the Private Participation in Infrastructure (PPI) favorably disposed toward private participa- Project Database. The database includes only low- and middle- tion than ever before. The New Partnership income countries, as classified by the World Bank. Country for Africa's Development (NEPAD) is classifications and project information are updated annually. All encouraging regional economic communi- U.S. dollar amounts are in nominal terms as posted on the PPI Web site (ppi.worldbank.org). ties like the Economic Community of West African States (ECOWAS) and Southern 2 GDP in nominal U.S. dollars from World Bank (2005). African Development Community (SADC) 3 It is estimated that nearly half of urban dwellers in Africa rely on to include cross-border infrastructure proj- small-scale private providers for at least part of their water supply. These providers are also important in electricity. See Kariuki and ects in their long-term regional development Schwartz (2005). plans. Several of these organizations are 4 The PPI Project Database underestimates investments in creating project development facilities to telecommunications because of data gathering problems. It relies structure and appraise these projects and on public information, but many operators, especially medium- procure private partners for their imple- size mobile operators, do not release data on investments. mentation. And the African Development 5 Canceled projects are those in which private sponsors sell or Bank is allocating more resources to prepar- transfer their economic interest back to the government; remove all ing regional infrastructure projects that are management and personnel; or cease operation, service provision, likely to involve private participation. or construction. Distressed projects are those under international arbitration or for which cancellation has been formally requested. Still, private participation by itself will not References solve the region's infrastructure investment Estache, Antonio. 2005. "What Do We Know about Sub-Saharan problems. To succeed, private participation Africa's Infrastructure and the Impact of Its 1990s Reforms?" in infrastructure requires fiscal reform and Draft, June 15. World Bank, Infrastructure Vice Presidency, improvements in public sector manage- Washington, D.C. ment. It also requires careful attention Houskamp,Melissa,andNicolaTynan.2000."PrivateInfrastructure: to the basics of project design, including Are the Trends in Low-Income Countries Different?" Viewpoint identifying and allocating risk and ensuring series, Note 216. World Bank Group, Private Sector Development Vice Presidency, Washington, D.C. sound procurement practices. Develop- Kariuki, Mukami, and Jordan Schwartz. 2005. "Small-Scale GRIDLINES ing successful projects requires some Private Service Providers of Water and Electricity: A Review of things in short supply in the devel- Incidence, Structure, Pricing, and Operating Characteristics." Gridlines share emerging knowledge oping world--time, money, and Policy Research Working Paper 3727. World Bank, Washington, on PPP and give an overview of a wide sophisticated skills. Moreover, D.C. selection of projects from various regions of the world. Past notes can be found at www. private participation does Schur, Michael, Stephan von Klaudy, and Georgina Dellacha. ppiaf.org/gridlines. Gridlines are a publication not always work well in 2006. "The Role of Developing Country Firms in Infrastructure: of PPIAF (Public-Private Infrastructure Advisory every infrastructure sector A New Class of Investors Emerges." Gridlines series. PPIAF, Facility), a multidonor technical assistance PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY Washington, D.C. facility. Through technical assistance and or every developing coun- knowledge dissemination PPIAF supports the efforts try. Even if projects are World Bank. 2005. World Development Indicators 2005. of policymakers, nongovernmental organizations, Washington, D.C. research institutions, and others in designing and well designed and essen- implementing strategies to tap the full potential of private involvement in infrastructure. The views are those of the authors and do not necessarily reflect c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA the views or the policy of PPIAF,the World Bank, the World Bank, Phone (+1) 202 458 5588 fAX (+1) 202 522 7466 or any other affiliated organization. PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY GenerAl eMAIl ppiaf@ppiaf.org WeB www.ppiaf.org