According to a recent Deloitte research study, 77 percent of senior global business executives believe that the current level of global public infrastructure investment is inadequate to support their companies’ long-term growth, adding that over the next five years, infrastructure will become a more important factor in determining where they locate their operations.
The credit crisis has, however, meant that there are a greater number of priorities competing for public funds, therefore traditional models of financing and delivering infrastructure must give way to new models and a portfolio of hybrid approaches, each with its own distinct mix of public and private participation.
Globally, governments are increasingly forging relationships with private sector specialist companies to render service delivery initiatives for infrastructure and public services. This practice is gaining momentum in many African countries as well, with public-private partnership (PPP) frameworks being established in a number of jurisdictions.
Under these arrangements, private sector business acumen, technical skills and finance are combined with public sector strategic insights on service delivery, as part of a collaborative effort to optimise efficiency in public sector service delivery. Many new projects being conceptualised are cross-border, regional or pan-African, thus increasing delivery complexity.
The central question facing infrastructure policymakers today is: what should the optimal mixture of public and private sector participation be in the project to maximise public value?
Most infrastructure projects are composed of five elements for which responsibility must be assigned: design, finance, construction, operation and maintenance. Theoretically, any of these elements and their related risks can be allocated to either the public or private sector.
The shape of that risk allocation determines the structure of the partnership and the costs. Agreeing this risk-sharing allocation has often been a stumbling block.
In order to ascertain the right mix of public and private involvement in infrastructure financing and delivery, there are three steps that one should follow.
First, what are you allowed to do?
Are there political, legal or policy constraints that would make it difficult to use certain partnership structures, or are regulatory changes needed to follow the PPP route?
Second, what do you want to do? In defining the project goals, initially the need must be defined, followed by the service solution and the assets required to meet that need. Once policymakers have decided how the solution will be delivered and funded, the political will to drive the project to a speedy conclusion is important.
Finally, who can and should do what? A partnership implies a sharing of risks and rewards, so one party cannot carry all the risk in a successful PPP. The public entity’s capabilities to deliver or manage the various phases of the project should be determined, and then the methods of risk transfer and compensation can be allocated.
It is estimated that for every R1 spent on infrastructure, R1.40 is added to a country’s gross domestic product.
PPPs are the ideal vehicle for funding the gaps in infrastructure in Africa, but principled and informed choices are needed to drive this growth.
Click here to connnect with André Pottas (Infrastructure Advisory Leader for Africa at Deloitte) on LinkedIn
Read the the Deloitte blog post titled Infrastructure Finance, the changing landscape in South Africa
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