It is estimated that sub-Saharan Africa’s infrastructure needs exceed US$93bn annually for the next few years, according to the Africa Infrastructure Country Diagnostic. From transport to power to ICT, the continent’s massive infrastructure deficit is limiting its growth potential, with governments alone unable to fund these projects. However, one way of financing them is through public-private partnerships (PPPs).
In March, UAE-based water solutions company Metito signed a PPP agreement for a $75m water project with the Rwandan government. The project will develop a new water supply plant to serve 40% of Kigali’s potable water
How we made it in Africa speaks to Metito’s managing director, Rami Ghandour, about how PPP projects such as these generate returns for private companies and why success in Africa requires an in-depth understanding of the market.
How exactly are returns generated on a PPP project like this?
For a project of this nature, revenues to the developer [in this case Metito] are generated over the life of the project (contract period), which could be up to 30 years. The developer submits an invoice to the client [in this case the Rwandan government] for services rendered, which is the agreed tariff multiplied by the total volume of water consumed by the client. The method of calculation can vary depending on the tariff structure agreed with the client, whether it is a flat tariff with a guaranteed off-take, or a tariff that is broken down to capture fixed costs (which do not vary with consumption), and variable costs which do.
The benefit to the client is that they only pay when the service is available after commercial operation, thus eliminating a significant upfront capital investment they would have had to make if they adopted a traditional procurement process. In essence the client ends up paying for receiving a service (over a longer period of time) as opposed to receiving an asset.
It is also worth mentioning that typically ownership of the asset under a PPP is transferred to the client at the end of the contract period.
Are there any short term returns or benefits?
Typically for a project of this nature, returns are made over a long period of time. We always look at a project’s overall viability in the long run, as such, and as an investor our gains are realised over the life of the project.
Aside from this, we’ll also see returns in the form of additional business leads in Africa. The announcement of this PPP was high profile, and as a result it helps generate new business leads and other potential projects, both PPPs and private partnerships. We have already been in contact with other entities in East Africa following the Rwanda announcement, and we expect some of these to develop into new agreements.
What are some of the major risks facing PPP projects like this? And how can they be mitigated by a private company?
Often one of the major risks and challenges for governments involved with infrastructure projects under PPP models is obtaining financing, especially if a particular technology will be required or the suitable solution isn’t too clear.
The main risk, particularly across most emerging markets, is ensuring the project is sustainable and affordable. A project that is not structured in such a manner could potentially result in payment risk from the off-taker. The Kigali project has been structured in such a way whereby all the necessary analysis has been conducted where all parties are satisfied with the project’s viability, and the government has engaged with us to ensure that documentation provides adequate protection to all parties and appropriate risk allocation.
There are also potential engineering, procurement and construction (EPC) risks such as delay in construction due to most materials being imported. In case some items are missing and you cannot get it from local markets, delays could be expected. In such cases, we make sure the EPC contractors are ahead of schedule and proper project planning is implemented.
With this project this risk is mitigated as we have hands on experience in developing tailored water management solutions for varying environments and markets backed by a proven track record of identifying the correct solutions and technologies, and successful delivery and operation of similar projects. This has aided Metito in forging a strong and longstanding relationship with the IFC for financing such projects, mitigating typical risks of uncertain financing.
Another concern can be that when a private sector company comes in, especially a foreign one, then employment opportunities for locals will diminish. With Metito, we are always committed to developing an operation that is, as much as possible, operated by people from the market we’re working in. This is the case in all our markets globally, including Indonesia, China, Thailand and Egypt. Our motto is “local presence, global know-how” and it’s something evidenced by the establishing of Kigali Water, the company that will cement our commitment to the people and country of Rwanda.
Are there any major differences between PPP projects with African governments and those elsewhere in the world?
Every country is unique, and as such dealing with each government is different, just as is dealing with various private sector partners.
In some parts of Africa, the concept of a PPP (particularly in the water sector) is fairly new, so there is a bit more effort involved by all concerned to ensure the project is made bankable. Often this means longer lead times in developing such projects. However, with time, and with more projects achieving financial close, there will be enough precedents to make the overall transaction process smoother in the future.
Also there is a need to ensure that the project is affordable; where you find most of the proposed tariff is not equal to, or is less than, the local tariff. Usually the Ministry of Finance guarantees the gap.
What advice do you have for other global companies looking to enter win-win PPPs with African governments?
Doing business in Africa is very different to other parts of the world. Though there are some similarities to other emerging markets, one needs to understand the local requirements of each potential market within the continent, as these could differ significantly. It takes an in-depth understanding of the market, persistence, determination, and patience in turning project concepts to reality.