Africa: The high return PPP Market of tomorrow.
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these are needed to meet growing demand
The continent has fully emerged from the painful yet beneficial structural adjustment programmes, SAPs, prescribed by the IMF. SAPs implemented between the mid-1980s and much of 1990s involved privatisation of State owned Enterprises, SOEs among other structural reforms. Africa reluctantly adopted this prescription but has emerged from it stronger, wiser, and prosperous.
SAPs had several positive lessons emerged from privatization to wit; disposal of loss making SOEs plugged a hole in government budgets resulting in lower donor dependency. Some of the privatized SOES have turned the corner and are making profits and paying taxes and dividends to the government. The private sector has proved that it is the engine of economic growth creating wealth, jobs and affordable services.
The telecoms sector is a good example of the benefits of privatization. Africa now boasts of more than 600 million cellular phone handsets. The number is expected to hit 675 million by the end of this year. This is a 67 per cent penetration rate in just about 20 years. Landlines, which were in the public sector, had a penetration rate below 10 per cent.
The industry has also proven quite adept at innovations that serve Africa’s practical needs. Among these is the Mobile money transfer developed in Kenya. M-Pesa as the service is called became an informal banking service where one could deposit cash their phone accounts and walk around with it rather than carrying cash. The mode is now used to pay utility bills, pay for shopping and transfer funds. The hand set is now business tool for the informal sector as artisans can be reached by their clients on phone anytime.
And should one need cash, there are agents allover including the rural areas, to pay cash. Started in 2007 by Safaricom, East Africa’s largest cellular services provider M-Pesa has spread to other networks and is the largest Cash transfer system in the country.
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The companies churn out large chunks of profits and pay huge chunks in taxes. In fact upstarts, meaning companies that are hardly 15 years old, have become giants in their areas.
In this category are such giants as Kenya Airways and Safaricom. Kenya Airways is the third largest and the only privatized airline in Africa. In fact it is a case study successful privatization. Privatized in 1996, the airline has turned from the sick man of Africa, to the pride of Africa. The airline is now gunning to be the largest airline in Africa. See http://eaerb.blogspot.com/2012/02/kenya-airways-in-largest-rights-issue.html
Another benefit of privatization is policy reforms. The private sector is now viewed as a serious partner in Africa’s development by the governments. The capital markets have gained from this paradigm shift. Now government securities such as long term bonds are traded in the local securities exchanges.
Even innovative companies can borrow from the local securities exchange using debt instruments such as long term bonds to finance their expansion. Safaricom the local cellular operator was the first company to break the glass ceiling. It was only two years old when it floated a commercial paper, the largest in the market then, to finance its operations.
With a growing Middle class, growing economies and growing demand for such infrastructure as housing, water and sewerage system, roads, airports, sea ports, Railways lines and even new cities, the stage is now set for the private sector to do more in Africa’s development than in the past. See http://eaers.blogspot.com/2012/01/africa-next-big-investment-story.html
The leading economies in the continent are adopting Private-Public-Partnerships, PPPs, as a new development model.Already Nigeria, among the giant economies in Africa, has approved three bridges to be built on PPP basis. South Africa is already a front runner in this area while Kenya and Egypt are not too far behind.
Kenya has already slated a number of large infrastructure projects for development on PPP basis. It has awarded a U S$640 million Airport terminal on a Design Finance Build and Operate basis. See http://eaers.blogspot.com/2012/02/authority-awards-640-m-contract-for.html. Other projects in the pipeline using this development model is the Lamu-South Sudan Ethiopia transport Corridor (LAPPSET). See http://eaers.blogspot.com/2012/02/kenya-to-begin-construction-of-gateway , The Konza ICT city, see http://eaers.blogspot.com/2012/02/kenya-rearing-to-launch-ict-city.html. Robust studies show that, in US dollar terms, these projects have an IRR of 18-20 per cent
The trend in Africa is for the weak economies to first let the stronger ones to employ certain models. Once the weak economies see case studies in their neighbourhood, they pick-up. Now that the larger economies have embraced PPP, the rest will soon follow suit.
This far, China, has stood slowed down Africa’s adoption of PPPs as a development model. China, driven by its search for raw materials, has built roads, railways, sea ports, hydro dams in Africa as Public assets.
However, say analysts in Africa, demand for infrastructure in Africa will soon exceed China’s ability to finance. This will open the way for profitable participation in Africa’s development by the Private sector. Already fund managers in the west have indicated that they will take long-term positions in Africa, beginning this year. See http://eaerb.blogspot.com/2012/02/kenya-rated-second-best-investment.html. Since China is also under pressure to reform its house, it will soon tighten its purse strings. Bold investors, who have already read the writing on the wall are rushing to be on the ground building various projects.