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Sep 28, 2012

PPPs will contribute to future prosperity in Africa – advisory firm

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Africa is entering a 20- to 30-year infra- structure development boom, with governments on the continent committing to developing infrastructure worth billions of dollars; however, funding remains a challenge.

“African governments have historically financed a sizeable share of the continent’s infrastructure development on balance sheet,” says global financial advisory firm Deloitte Corporate Finance advisory leader for sub-Saharan Africa André Pottas.

This means there is a limit that can be spent to fund backlogs and develop new infrastructure projects.

He says there is a limit to National Treasury’s capacity to issue government bonds to raise revenue for funding infrastructure projects, before it impacts negatively on South Africa Incorporated’s (SA Inc’s) credit rating, which will lead to higher sovereign borrowing costs.

This is why South Africa’s planned infrastructure roll-out scheme will be constrained by budgetary restrictions unless government turns to the private sector and private sector partnerships for a portion of the required funding, says Pottas.

“Local banks are often not able to supply the tenor of loans needed for long-term infrastructure investment; therefore, for the continent’s infrastructure backlogs to be cleared, some form of collaboration with other private sector players is a necessary and important precondition.”

Pottas lays out a variety of financing instru- ments and structures, including public- private partnerships (PPPs), which will allow government to take on infrastructure projects that exceed National Treasury’s borrowing capacity.

He believes PPPs will achieve greater delivery in a shorter period than simply relying on the fiscus and says the first step is to identify and analyse a potentially successful project to define the most appropriate funding mix between government resources and the variety of private financing instruments available on the market.

“Just as government has the opportunity to move beyond balance-sheet finance, so does the private sector need to be creative in how it partners with government,” says Pottas.

“Both government and the public sector are currently bearing a level of frustration and mistrust, which needs to make way for an open, transparent and honest partnership and risk-sharing ethos if PPPs are to deliver their true capacity to add value to projects,” he adds.

Implementing PPPs in South Africa

Deloitte Corporate Finance associate director JP Labuschagne believes the PPP market is one of the most underdeveloped areas in finance with the greatest potential for infrastructure delivery.

“A PPP gets government to look at a defined construction cost, as well as the maintenance and full life-cycle costs of large infrastructure projects. It’s also an effective way to leverage government money through private sector financing, enabling government’s budget to go further.”

However, Labuschagne acknowledges that the delivery of PPP projects in South Africa has been erratic and that the projects take a while to come to fruition. He attributes this not only to the complexity of the projects, but also to the varied skill levels, or lack thereof, in the private and public sectors.

Projects in Progress

“PPPs can be applied across a variety of projects across various sectors, ranging from brick-and-mortar projects to information and communications technology projects. This demonstrates the suitability of PPPs for government service delivery,” says Labuschagne.

He tells Engineering News that Deloitte’s current advisory projects cover broadband infrastructure roll-outs and the establishment of national emergency call centres.

The advisory firm is also supporting the national Department of Health (DoH) on the procurement of two hospital projects, King Edward VIII in KwaZulu-Natal and Nelson Mandela Academic Hospital in the Eastern Cape. These projects form part of the DoH’s hospital revitalisation programme, which comprises the refurbishment of six facilities.

Further, Deloitte is supporting the KwaZulu-Natal Department of Education regarding its plans to build and refurbish a number of schools using a PPP model.

In the corporate realm, the firm is raising funds for a plant expansion on behalf of a cement manufacturer in sub-Saharan Africa and is advising several mining houses in the region on their capital programmes.

It is also advising on a large mixed-use property development in West Africa, besides other large capital project advisory mandates.

Pottas stresses that the Deloitte Infrastruc- ture and Capital Projects team operates as an integrated sub-Saharan Africa team, with resources in East and West Africa in addition to the Southern Africa team.

The Infrastructure and Capital Projects team includes engineers, quantity surveyors, bankers, economists, masters of business administration, lawyers, actuaries and tax- ation specialists.

“We, therefore, have a comprehensive in-house transaction advisory capability across the full life cycle of a capital project,” he says.

SA’s Evolving Financial Landscape

Pottas tells Engineering News that Deloitte plans to introduce several funding instruments to the South African market to support the financing of infrastructure projects.

Prevalent overseas, these instruments will be tailored for local market conditions and investor appetite, he says.

This will make more projects a reality. Pottas notes the National Treasury’s 2012 Budget Review, which reports a R3.2-trillion infrastructure expenditure plan over the next ten years.

However, of the current infrastructure projects in the pipeline, only 25% are said to be financed and currently being implemented, while the remaining 75% are still being assessed by National Treasury for financial feasibility and funding.

“National Treasury has acknowledged that government will not be able to fund all the projects by itself and they will, therefore, require private-sector financing to be con- sidered for implementation,” says Pottas.

“This supports the contention that innovative new funding models and financing instruments need to be developed, and new pools of infrastructure investors and financiers need to be sought to deliver the required infrastructure needs without putting undue additional strain on the national fiscus and the credit rating of SA Inc.”

He outlines some key funding tools prevalent in developed financial markets, such as project-specific financing, which allows entities to raise funds for specific projects with the cash flow from the project. The cash flow is ring-fenced to secure the repayment of interest and capital to the lenders.

“This allows corporates and governments to fund large capital projects without impacting on their balance sheet credit rating,” says Pottas.

He predicts that this type of funding will soon become prevalent in Africa. “We will start to see more innovative funding tools and the two we need to keep an eye on are infrastructure fund investments and project bonds,” he says.

“Pension funds are also likely to move into infrastructure investing, given the attractive matching of long-term liabilities with the typical long-term return associated with infrastructure assets.”

Pottas also highlights increasing interest from foreign infrastructure investors and other institutional investors.

Edited by: Chanel de Bruyn
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