A conversation with Chris Olobo, Investment advisor, PPP transaction advisory, IFC

We spoke recently with Chris Olobo, the investment officer responsible for road project development with the IFC and a speaker at this year’s African Road Infrastructure and Investment Congress.

In part one of this two part series, we talk PPPs and local currency markets.

What is your mandate in your role at the IFC?

I sit within the PPP transaction advisory team. The team’s primary mandate is to advise government on how to bring private sector involvement and investment into traditionally publicly financed infrastructure.

In the road section, typically government has financed road infrastructure with their own budgets, but this is not delivering the number of roads needed quickly enough.

There is so much that still needs to be done.

In order to get the financing needed to bring the road infrastructure up to scratch, government have some options - they could continue to utilise their own budgets or they could look at multi-lateral development agencies like the World Bank or African Development Bank, but these options haven’t provided the scale of investment that is needed on the Continent.

That leaves government needing to engage with the private sector.

We act as the interface between government and the private sector to make sure that the projects governments bring to the table are actually bankable.

In the road space, we would typically look at having the private sector invest into road infrastructure, and then ensure they get their investment back.

Part of what we do is fairly apportion project risk to the party that is best able to manage that risk.

Is there an appetite for PPPs in Africa at the moment?

Yes, there are many countries that have either undertaken PPPs, that are thinking about doing so, or are in the middle of undertaking a PPP project. Leaving South Africa out of this equation, there are countries like Zambia, Namibia, Zimbabwe which are talking about undertaking PPPs.

Kenya, Uganda, Rwanda and Tanzania have PPP projects in process; in Ethiopia we are working on a potential project and in West Africa there are projects in Senegal, Cameroon and Nigeria.

Across Africa many governments want to undertake PPPs which I believe represents good opportunities for private sector.

Why aren’t there more PPPs taking place in Africa?

There are a number of issues at stake here.

Firstly, how do you apportion the risk and reward between the government and the private sector?

Traditionally, governments have been responsible for these types of projects, and they tend to be very clear on the kinds of risk they feel they can accept.

Generally, they are very apprehensive about taking on risk items like termination or demand risk. However, those are the kind of risks that quite frankly determine the bankability of a project.

The private sector are hesitant to take on things like traffic risk, or not to be covered for any termination events. Generally, there is a mismatch between how we correctly apportion the risk and the reward in these projects.

Secondly, one of the things that is hampering development is that road projects are very capital intensive. We are talking about projects of $500 million or more. When that kind of money is at stake, there are many things that come in to play.

Has sufficient due diligence been done? Does the proposed project meet the needs of the country? Is it affordable? Is there a demand for it?

The feasibility and due diligence studies need to be done by independent parties, but often there is a reluctance to put in the time that it takes to do these studies and undertake the various background requirements. Time pressure - either driven by a political cycle or by some other reason - and the rush to undertake projects makes the credible private sector partners shy away; they don’t want to commit to something that they aren’t sure has been properly considered and undertaken.

Lastly, these capital intensive projects are being undertaken in hard currency - either US dollars or Euros generally. This is where there is another very big issue.

Governments can’t continuously be borrowing in hard currency for infrastructure projects like roads, where payment is done in local currency.

There is already a big mismatch due to exchange rates, but additionally, over the past five year, African currencies have dropped between 3-10% annually against the US dollar. This means that whatever has been borrowed over that five year period is now a bigger contingent liability than it was previously.

We need to try and finance more infrastructure projects with local currency, but at the moment the local capital markets are not sufficiently developed - either they don’t understand the PPP process, or there is a regulatory issue.

Local commercial markets typically will only finance a project for between 5-7 years, and that kind of tenure is not sufficient for infrastructure projects, hence you need local capital markets like pension funds and insurance companies to be involved.

However, they either don’t understand this market, or they are risk adverse, or the regulatory environment does not allow them to be involved in these types of projects. This situation is really hampering investments in the road sector.