African (frontier market) risks associated with PPP infrastructure

and how they can be mitigated.

Compiled by a PPP transactions advisor to Rwanda (me).

Barriers to private investment in African infrastructure:

  • Country political risk

–          Eg. medium or high likelihood of terrorist attacks, war, corruption, riots, strikes

  • Risk of expropriation
  • Payment risk
    1. Insolvency for state off-takers such as state utilities
    2. Inflation/currency depreciation
    3. Currency convertibility

Risk mitigants and Rwanda’s experience:

  • Country political risk

– Solution: State to improve security internally by having a strong law enforcement agency and also by pursuing sustainable and fair domestic and foreign policy

– Rwanda surveyed as the African country where citizens feel most safe according to Gallup

– Alternative solution: Get political risk insurance for these events from institutions such as MIGA, OPIC, ATI

– Rwandan political risk events are covered by Africa Trade Insurance Agency (ATI) because Rwanda is a donating member

  • Risk of expropriation

– Solution: Have state of investor’s home state sign a Bilateral Investment Treaty (BIT) with the investment host state to give international courts standing to arbitrate

– Alt solution: Sign into the contract that these international courts will have standing to arbitrate These courts can then use their influence at multilaterals such as the World Bank and IMF to apply pressure on the host state to pay the investor in case of expropriation

– Rwanda has both signed BITs with several countries as well as signed into its PPP agreements provisions allowing for international arbitration

– Rwanda, as a donating member of ATI, is further incentivised to not expropriate in the case of companies insured by ATI

– Rwanda, as a country concerned about its credit rating with the IMF and a recipient of World Bank funds, is further incentivised not to expropriate

  • Payment risk

i. State utility is not solvent

–  Solution: State to work in collaboration with IMF to understand how it can achieve a good credit rating, and then offer a sovereign guarantee to the state utility

– Alt solution: State utility to charge consumers a sustainable rate higher than what it costs them to produce and deliver energy. State utility to put savings in a reserve account to use to pay Independent Power Projects (IPPs) and water projects

– Alt solution: State collects foreign exchange royalties/profit share from resource extraction and uses it to pay developers of PPPs

ii. Inflation/currency depreciation

– Solution: Accept payments in a reference currency, such as the USD

– Alt solution: Accept payments denominated in a reference currency but paid in local currency (because the state utility does not earn revenues from end-consumers in foreign currency) at an agreed upon currency reference rate

iii. Currency convertibility

– Solution: Accept payments only in a reference currency such as the USD

– States could collect foreign exchange royalties/profit share from resource extraction and use it to pay developers of PPPs

Also read my article in The East African: Is your local public-private partnership going to be a happy one?


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