The infrastructure gap continues to grow

Transport infrastructure stands as a core driver of growth and prosperity, and railways as the backbone of sustainable transport, being a key enabler for sustainable development. However, major infrastructure is so capital-intensive that in many countries the public-sector struggle to meet the need. Despite the sustained efforts of governments, donors and development banks, the gap between available resources and those needed to build infrastructure keeps increasing - $1 trillion to $1.5 trillion annual gap in developing countries according to the UN Action Agenda of the Third International Conference on Financing for Development - especially knowing that infrastructure development generally requires large-scale projects, substantial investment and long-term financial set-ups.

What is needed is a better use of public sector revenue sources together with greater recourse to private finance. New approaches with private sector participation (PPPs) appear to be the way forward in developing countries to unlock capital and expertise, while they are increasingly used in the OECD bloc.

Achieving bankability requires capacity building

The UN High Level Advisory Group on Sustainable Transport recalled in a recent report the magnitude of investment required for sustainable transport in developing countries. It is critical that national governments achieve the optimum leverage of the available resources, especially in countries with limited access to investment.

The global trend, and particularly in developing countries, confirms the emergence of private sector partnering as a serious component to financing and risk management, where models such as PPPs constitute a promising and important solution to attract private investment. The UNCTAD 2016 report on African economic development says regulation reforms are also, slowly, but increasingly emerging in favor of private investment in infrastructure, which could boost the attractiveness of regional infrastructure projects. What’s more, the use of PPPs in infrastructure development is already an international a widespread practice, for a total of $750 billion corresponding to 2,500 projects according to the World Bank figures. This mode remains however underutilized in some regions, such as Africa, compared to others of the world. According to the recent report of McKinsey Global Institute, it represents in value only 4.5% of the portfolio of infrastructure between 2000 and 2014 within the continent.

“It’s common today to hear that too much capital is chasing too few infrastructure assets. But the problem is not a lack of worthy projects; it’s a lack of expertise and, perhaps, daring. Investment opportunities need to be appraised and prepared properly, and investors need to educate themselves. Marrying investors to assets will require more effort, more innovation, and more thoughtfulness on the part of government and business, but this is vital in order to ensure that there is sufficient investment in infrastructure to support global growth”. Mckinsey, Global Infrastructure Initiative

One major barrier against infrastructure private, but also effective public investment, is the acute shortage of well structured projects, in order to be bankable, especially for funding partners - bankability is a concept mainly used in project management and finance. A bankable project is a project that is structured to be profitable for the developer while allowing the debt to repaid on time. Note that a profitable project may not be bankable because the risk is too high for lenders - Challenges include the lack of public capacity, the poor locally available expertise and the low recourse to international aid instruments.

According to the Executive Secretary of the New Partnership for Africa's Development (NEPAD), Ibrahim Mayaki, the challenge is indeed not the lack of financial resources for infrastructure development, but the shortage of bankable projects. "The big problem we face is to prepare projects adequately so that they can be financed by the private sector".

"Put simply, a PPP project is considered bankable if lenders are willing to finance it" EPEC PPP Guide

It may sound obvious, but needs to be said : for both having a global whole-of-life view of rail projects and fostering effective private investment, the requirement is to build a greater capacity of anticipation and follow up within national organisations, and in our context national railways.

In the purpose of tackling the lack of access to centralized guidance and best practices, especially with regards to rail PPPs, as well as the need to reach a more mature understanding of PPP models, risk sharing and long-term management, this capacity building is dependent on wider dissemination of best practice, benchmarking, exchange of experience and development of necessary capabilities within organisations.

In this regard, specialized international organisations like UIC #UICrail can have a decisive role to play. There are many examples from the rail sector that illustrate the difficulty of setting successful and well managed PPPs, and UIC is particularly well positioned to identify and document the fundamental points to consider when addressing a PPP in rail. One major step is to look across the regional and national levels and consider worldwide experiences of members, including the various possible techniques and approaches applied to different types and locations, and provide a collaboration platform with all the stakeholders. Ultimately, UIC could direct tailored guidance to its members (railway companies,operators and infrastructure managers) on PPPs, for both decision making and implementation.

UIC discussion towards a Centre for Rail PPPs* 

"The infrastructure-finance market is plagued by a lack of information. Governments and businesses aren’t in the habit of sharing best practices or benchmarks with each other, much less the details of what went wrong (or even right). Governments, investors, developers, and operators alike would benefit from sharing more information and in more structured ways"   Mckinsey, Global Infrastructure Initiative

*Note : this content is for discussion purposes only

A sustainable development approach is also crucial

Long term investments and PPPs are known to be risky, and many of these partnerships would not accordingly be eligible for financing in the traditional sense. PPPs are financially viable only because governments protect investors from the various risks associated with these projects. It is therefore even more important that the guarantor governments understand the overall risks involved in such partnerships, including those related to climate change and infrastructure adaptation.

Actions Needed for Integrating Climate Resilience in PPPs (Source: PPIAF - Climate Risks and Resilience in Infrastructure PPPs: Issues to be Considered – 2016)

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A brief look at African railways

In Africa, ICA confirms the verdict previously mentioned in its recent publication on infrastructure financing trends, stating that, besides the usual obstacles related to bureaucracy delays, policy uncertainty, lack of transparency and institutional capacity, the private sector is mostly concerned about identifying bankable infrastructure projects. To address the project preparation challenges, ICA members implore initiatives and programs aiming to improve project preliminary phases and increase the likelihood of financing. Other instruments such as the Africa50 Fund are also emerging to help the continent to develop transformative and bankable projects. The following figure shows that for the 2009-2013 period, the compound annual growth rate (CAGR) of the investment resources engaged by ICA members equaled 6% while it stood at -1% as for effective investments.

Available funds vs investment (source #McKinsey and #ICA)

This bankability barrier is particularly true for Sub-Saharan African railways. Furthermore, most concession issues in Africa find their origins in the lack of proper preparation, resulting sometimes in underestimating the required amount of investment, not considering low traffic consequences and balanced risk sharing. For this reason, many private operators have been struggling with unsustainable infrastructures in the long term. “The level of private investment that was initially planned when the concessions were launched has not been reached. And most of the concessions have not managed to be financially viable in the long term without support from public authorities. Transport markets have been overestimated, when it is not the poor state of infrastructure that has been minimized” said Benjamin Neumann, Private Sector & Development Magazine’s Editor in Chief, on African rail concessions.

A recent World Bank report on PPPs in Uganda underscores that the main lesson learned from the unsuccessful experience in Kamplala-Mombasa PPP is the importance of building coherent frameworks to enable proper identification, preparation and oversights to reduce the risk of project failure or cancellation. One of AfDB recommendations is to explore new approaches to railway PPPs and concessions, given that success largely lies in the capacity to raise both equity and debt required to the project, at a reasonable cost of capital. As mentioned, this is closely linked to the project preparation and structuring so that investors’ risk perception is favorable. Thus, the awareness of project bankability and the analysis of risks and their mitigation strategy becomes a fundamental point of a railway investment. Of course, this particularly applies for a PPP scheme.

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