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Unchartered waters:  Public Private Partnerships

Unchartered waters: Public Private Partnerships

Ethiopia’s experimentation with developmental state model has been under the spotlight for more than a decade now. Over the years, debates have moved from delivering the needed development outcomes to that of sustainability; especially in terms of financing. Finally, the government looks to be accepting the problem and hence the new buzz word in town is PPP. But, the implementation of the PPP framework might not be that easy, observes Brook Abdu.

Since its incumbency, the EPRDF-led Ethiopian government is distinguished by its near-obsession drive to develop infrastructure. Indeed, in the past 26 years, huge amounts of investment went into the infrastructure sector.

Yes, by all counts, the incumbent is a road building government. Maybe it is the party’s experience during the struggle days where it experienced firsthand how the majority is languishing in remote and detached areas without access to roads or markets; but still road infrastructure is on top of the government’s to-do list. Nevertheless, power and telecom also have their fair share of attention.

And the funds for these huge infrastructure investments are pooled from government coffers. The country’s budget evolution in the two decades clearly attests to the weight attached to infrastructure investment. A large chunk of the country’s budget goes to capital expenditures as the past twenty-two years budgetary allocation clearly shows. The smallest slice of the budget which was allocated to capital expenditure was recorded at 16.9 percent in 2000/2001; while the maximum was as high as 46.6 percent of the total budget approved for the Fiscal Year (FY) 2010/11.

Since 1996/97, the country has slotted 709.3 billion birr for capital investment out of the total 1.8 trillion birr budgetary spending. Larger portion of this capital expenditure goes to infrastructure development.

Among the publicly financed infrastructure developments roads in different parts of the country, the sequential Gibe I, II and III and other hydroelectric dams and power plants, low-cost housing projects, the Addis Ababa City tap water projects, airports development in different parts of the country including the Bole International Airport expansion project, the Jimma, Jigjiga, Hawassa and the other 20 airports in the country are just a few of them.

True to form, the government’s drive towards infrastructure has managed to narrow down decades-worth of deficits in just a few years. Ethiopia is yet below most of its sub-Saharan peers in terms of infrastructure density and access.

Hence, there is still a lot to accomplish in this regard, but the infrastructure drive looks to be running out of steam. The problem obviously is finance. Finally, the government’s wallet and its support base with regard to financing all appear to be coming to a squeaking halt.

In retrospect, this is not something unexpected. For years, this infrastructure development model has been criticized for being unsustainable.

“The demand of the public is growing much faster; although the government has been spending much on infrastructure development, its capacity to generate resources could not cope up with the rising demand,” Teshome Tafesse (PhD), an assistant professor at the Civil Service University, says. This too has been echoed in the past by both scholars and development partners.

Apart from this, the publicly financed infrastructure projects are the reasons behind the country’s 30 billion dollars external loan stockpile. Because of this, pretty large amount of the federal budget is allocated for debt servicing. In the 2017/18 fiscal year’s budget allocation, 17 billion is allocated to serve this debt, the majority of which is non-concessional loans from China.

To finance its ambitious infrastructure projects, which are also behind the country’s acclaimed double-digit growth rate over the past 14 years, the government tapped into the opportunities that bilateral and multilateral partners avail in terms of financing. Concessional loans with longer repayment periods and less than one percent interest rates sourced from both bilateral and multilateral partners and the non-concessional kind with relatively shorter terms and higher interest rates were exploited diligently by the government.

But, these would not quench the country’s financing needs. And that is when the government turned it face to the international debt market. In 2014, Ethiopia followed neighboring Kenya in issuing its first ever international sovereign bond in order of one billion dollars. Its oversubscribed coupon finally settled at an interest rate of 6.25 percent, much higher than what it used to be.

The piling debt of the country has been worrying for different development partners including the World Bank and the International Monetary Fund both of which have been putting various remedial recommendations. Granted, Ethiopia is still mildly debt-stressed but the speed of its debt accumulation and its future expenditure plans do warrant a concern, they cautioned.

According to the United Nations Development Program (UNDP), generally, infrastructure investment remains as the primary responsibility of the government because of the high investment requirement and longer time needed to realize the return on investment. And that poses a difficult dilemma since governments in the developing world do not have the resources to address all the infrastructure gaps. On top of that, there are always constraints in the form of funds, corrupt processes, poor planning and project handling and limited capacity of government’s executing agencies.

“There is always gap in this kind of investment model,” Teshome asserts.

So, what is growing to be the new frontier in financing infrastructure is a partnership between the public and the private sectors- often referred to as Public Private Partnership (PPP).

“PPPs have emerged as one of the ways to overcome these constraints,” states UNDP’s document. “PPPs are now used in more than 134 developing countries, contributing about 15–20 percent of the total infrastructure investment.”

Over the past ten years alone, the World Bank indicated, the total private sector capital has contributed 15 to 20 percent of infrastructure investment in developing countries shedding lightupon what the future of infrastructure development holds.

“The contribution of the private sector is an option to expand the finance base and meet capital demands of government-led developmental projects,” Abdulaziz Mohammed, the then Minister for Finance and Economic Cooperation, said while he presented his office’s six months’ report for the year 2016.

The Ministry of Finance and Economic Cooperation (MoFEC), hence, had developed PPP proclamation and it is tabled to the Parliament for approval.

“The need for this came as the demand from the public is growing and in order to satisfy this demand, we have to leverage what the private sector has to provide,” Hajji Ibsa, the Ministry’s Communications Director, explains. “The government alone does not bring about development.”

“In spite of a growing interest in the use of the PPP model around the world, its adoption in Ethiopia remains limited,” UNDP’s document affirms. “Ethiopia has good prospects for the development of PPPs in the infrastructure sector particularly roads, railway, energy, telecommunications and transport, to mention a few.”

The use of PPPs can bring efficient resource allocation and better value for money for taxpayers’ money, according to the same document. The combined strength of the private sector’s efficiency in project handling, innovation and technological advancement as well as finance coupled with the public’s leverage of having regulatory authority and budget support is the success factor for PPPs. Hence, the second Growth and Transformation Plan (GTP II) gives due attention for the involvement of the private sector in the development endeavors.

However, the capacity of the local private sector has always been questioned in regards to executing investment projects successfully.

The PPP bill that the Ministry prepared and is now tabled to the Parliament’s relevant standing committee is one step forward towards realizing this. Before preparing the draft bill, the Ministry had conducted feasibility study for two years to assure its applicability to the country and if there is enough capacity in the country to handle such effort. The study was financed by the UK Department for International Development (DFID), the African Development Bank (AfDB) and the government.

Although there were some PPP initiated projects in the past, they could not be realized because of the lack of relevant legal and institutional frameworks in the country. One of the sectors that the government is engaged to leverage PPP is the development of Power Plants from geothermal, wind and solar sources. Lehulu, a network of centers providing a unified billing system which allows one to pay all utility bills in one window, can only be said to be a successful endeavor in the PPP experiment.

The notable Corbetti Geothermal power project and the Metahara Solar power project are under the Power Africa Initiative which former President of the United States, Barack Obama, introduced during his tenure in office.

“In June 2013, Power Africa (PA) was launched with the goal of doubling access to electricity in sub-Saharan Africa by increasing installed generation capacity by 30,000 megawatts (MW) while adding 60 million new households and business connections by 2030,” Power Africa’s 2017 report states.

In line with this, PA supports five geothermal projects in Ethiopia with a total of more than 1,200 MW of generation capacity developed in an Independent Power Project (IPP) scheme.

“Completion of the Corbetti and Metahara IPPs will show potential private investors that Ethiopia is ready for private sector capital investment in the energy sector,” Gene Lin, Senior Energy Advisor, Power Africa in Ethiopia, says.

One of the necessities for such kinds of investments is the availability of finance for these investors. Among the institutions that avail finance to investors involving in the PPPs is the European Investment Bank (EIB), which has been financing such demands in Europe. EIB provides finances through senior loans and equity financing.

“Although there are no concluded PPP investments in Ethiopia yet, it is the way forward that the government is looking to leverage to develop infrastructure,” Christophe Litt, Head of EIB Representation Office to Ethiopia and the African Union, told The Reporter. “It is a great initiative as the idea of those projects is to transfer risks to the private sector and helps the government minimize its debt.”

The same feeling is also shared by Teshome; and he has the same stance with Litt on the difficulty of PPP implementation in contrast to its allure.

“PPP can possibly succeed in Ethiopia as it is proven in other countries like South Korea,” he stressed. But there are some prerequisites to be fulfilled in order to succeed.

The first necessity is the establishment of a dedicated and autonomous government agency that can oversee the PPPs. The other one is preparation and enactment of legal frameworks. The third one includes provision of revenue guarantee for investors that come to invest in the sector. There also needs to be efforts to bring the potential private sector investors in the sector.

Litt also sees that the country needs to provide equal access to foreign currency for potential investors and guarantee liquidity to the private sector and work to reduce the investors’ risk.

“PPP is a difficult process as it involves lots of discussions and contractual agreements,” Litt warns. “Even in Europe, it takes lots of time to make real moves as it involves many stakeholders and because of the existence of competition.”

Although PPP is seen as the next frontier in infrastructure financing in the country, it is not snow clean as there are criticisms surrounding it.

The first one is that, as PPP has a capitalist nature, private investors will focus only on their profit. Others also view PPPs as the government’s effort to move jobs to the private sector thus reducing cost of wages.

But, the legal and institutional frameworks should be strong to govern this, many agree.

Apart from the power sector, Litt and Teshome see the future of PPPs expanding to education, health, transport and other sectors as seen in other countries worldwide. PPPs are going to be one of the mechanisms of financing infrastructure developments.

“The government would benefit more if it gives such services to the private sector than the reverse,” Teshome says.

But, selection of sectors is vital to ensure effective Public Private Partnerships and beginning late brings opportunities of experience sharing both from success and failure stories of different countries.