AfCFTA, transportation infrastructure and the role of PPP

Africa still trades mainly primary raw materials and has a nascent processing sector. The success of Africa’s intra-trade would be partly due to value addition by industrialisation to increase the ubiquity of made-in-Africa goods. Currently, many prefer importing their commodities from outside Africa, as opposed to importing from another African country producing same products due to the ease and lower cost of importation from outside Africa. A key contributor to this is the inefficient transportation route, Infrastructure and processes that add to the total cost of goods.

Africa Continental Free Trade Agreement (AfCFTA) would have tremendous effect on the domestic manufacturing as this would result in more “Made in Africa products” in line with the rules of origin under the free trade agreement. To achieve this, there is a need to close the rural infrastructure gap to facilitate easier movement of raw commodities to localities of processing and manufacturing, and conveyance of processed foods all across Africa for retailing.

Trade facilitation can potentially be hindered by lack of transportation infrastructure. Data of a recent World Bank document provided a scorecard on infrastructure development in Sub-Saharan Africa along four sectors (transportation, telecommunications, electric power, and water and sanitation). It highlighted the existence of a large gap in not only quantity but also quality and access to infrastructure in the region.

Africa’s transportation sector is characterized by inadequate transportation networks, poor rural links as well as an exploding population in urban centres without corresponding expansion of transportation infrastructure.

Just like Africa as a whole, Nigeria also faces the issue of infrastructure deficit, and this has been degenerating. For instance, the Logistics Performance Index (LPI) a weighted average of six key dimensions, one of these dimensions is the quality of trade and transport related infrastructure (e.g., ports, rail, roads, and information technology). This LPI data highlights that Nigeria has declined by approximately 10%; and has de-ranked 35 positions in just four years. As at 2014 Nigeria had a LPI of 2.81 and ranked 75th, but in 2018 fell to a LPI of 2.53 and then ranked 110th.

To counter the infrastructural decay it would take an estimated $100 billion (N36 trillion) annually, as disclosed by the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed. There is therefore a critical need to provide a more compelling terrain that enjoins private investors, to foster private partnerships in Infrastructure projects.

Africa’s infrastructure deficit has a knock-on effect on several sectors, Africa should thus increasingly fund infrastructure projects by Public Private Partnerships (PPPs) with inputs from the Regional Development Bank and multilateral lenders to generate local currency long horizon funds for its proposed capital projects.

In recent times, the Nigerian government has increasingly utilized PPPs and have partnered with the private sector on public infrastructure projects. A pioneer example in road transportation is the Lekki Toll Road. This was a successful PPP project in Nigeria with financing of N46.8 billion which was made available via debt and equity financing, with a laudable 68% contributions from private investors. It is safe to say that without private participation, such infrastructure projects would have been impossible for government to pull off.

Various African countries have utilized PPP in varied degrees. Some more successfully than others. As a case in point, from 2009-19, the number of successful infrastructure deals involving private participation in Nigeria was just 21, way behind South Africa’s 93 infrastructure deal count within the same period. Also, concerning infrastructure deal value, Nigeria spent about $7.369 billion as opposed to South Africa’s $16.519 billion. It’s no surprise South Africa has been able to attain a LPI rank of 33rd as opposed to Nigeria’s 110th.

For Nigeria, some drivers that may have impacted the success of PPP may be that investors’ perception of Nigeria as a PPP destination was not as favourable as South Africa’s. To elucidate, for PPP to work a country must demonstrate macro level factors like political stability, a pipeline of viable projects, a transparent procurement system, enforceability of contracts, equitable risk sharing with government and certainty of envisaged future cash flow. Some of the above may be lacking; also, Nigeria’s poor corruption perception, insurgency, weak institutions etc. may have been some impediments to private investors’ perception of the PPP landscape in Nigeria. Several other African countries may fall into this category and many may even be worse.

Overall, private investors are in it for the money. They would not invest in a bad project or an unprofitable one. So, a major challenge is that some projects would not just be profitable perhaps because it would never repay the investors funds in a reasonable period. Africa must take a deliberate path to building a viable project pipeline that would work under the AfCFTA.

A major solution is to, better resolve concerns around risk. Potential investors typically face many risks. Typically, government and Development Finance Institutions (DFIs) assist financing to de-risk projects. The de-risking efforts could be by guarantees to mitigate specific risks associated with the PPP project. Guarantees make accessing private finance easier to access because the guarantor (typically government) promises to cover defaults if the PPP company defaults on the guaranteed risk, thus reducing the risk borne by the lenders. The success of Lekki–Epe Toll road was attributed to the full guarantees from federal government and the coverage of the political risk by Export Credit Insurance Corporation of South Africa. Overall, there is need for more private establishments that are capable of providing local currency guarantees and project bonds to de-risk bonds.

Another important consideration is to foster collaboration among neighbouring countries to provide efficient trade corridors between high transacting nations for seamless movement of the goods; with important consideration given to the differential in nations wealth and private sector financial capabilities.

Another way to improve PPP utilization for transport infrastructure is by leveraging knowledge of past successful PPP project by post-PPP evaluation and case studies to learn key factors and metrics that contributed to it’s successful implementation from project initiation through contractors bidding and financial closure to handover. The hindrances faced should also constitute valuable lessons for subsequent PPP projects in the pipeline.

Truly, Africa cannot just build physical transportation infrastructure (roads, rails, ports etc) without evaluating its current border management system. It should look into common pain point in trade like congestion by resolving the poor border procedures that create bottlenecks during trade flow.

Overall, it is important that African leaders strive to create a terrain that enjoins the private sector to come on board. This can be done by building transparency and trust. Leaders should be willing to waive their sovereign immunity to jurisdiction and execution if need be as a way to allay fears of potential investors and grant them access to fair judgement in event of a future misunderstanding

Jesudurotimi is a Lagos-based architect and building construction expert.