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BUSINESS INTELLIGENCE
Privatising Infrastructure
Nick Allen
Published: 04-JUN-04

Whether you are in Kenya, Zambia, Mozambique or Nigeria, less than 40 per cent of rural populations have access to safe drinking water, less than 10 percent of urban and rural populations have access to electricity, and journey times for getting produce to market are 3.5 or even 10 times longer than they could be. There are many reasons why our infrastructure is in the state it is, but there is only one way to fix it. With capital.

But where is that capital going to come from? It could, in theory, come from the public sector and our co-operating partners, as it has done until now. There is certainly a need for continued public sector funding.

However, the size of the investment required to restore and expand our infrastructure means that it is not possible to finance it through public borrowing or increased taxes. The gap between need and availability is too wide. In sub-Saharan Africa, this gap works out to around 5.5 percent of the region's GDP, compared with one percent in high-income countries.

The World Bank estimates that sub-Saharan Africa requires more than $26 billion in 2005 -2010, to maintain and expand its infrastructure to meet the growing population demand, excluding the significant additional amounts required to rehabilitate existing infrastructure.

So there is no alternative but to seek private sector capital. We only have to look at the telecoms sector to see the benefits. In less than a decade, Africa's privately financed GSM operators have overtaken their fixed line, mostly state-owned, competitors, and despite the well documented congestion problems, service quality has improved.

However, there are many who still argue that private capital and management is not the answer, but that simply changing management will do the trick. If funding is available from investors such as the World Bank, they argue, why not use it? There are answers.

Why not just change management?

Partly because new management is not our most urgent need. Our most urgent need is capital. Further, experience tells us that management teams held to account for their performance by private sector providers of capital perform better than their public sector counterparts. Managements do what shareholders tell them to do, and they respond to incentives provided by their shareholders. In a privately financed business, where capital is at risk, the financiers incentivise management to perform.

In theory, governments should be able to create the same incentives framework in a public sector environment. However this is rarely achieved, and when it is, it is rarely sustained. The problem is that governments are not very good at behaving like commercial shareholders. Government funding is not risk capital, so government itself does not have the same incentive to improve performance.

Governments find it difficult to replicate the discipline of management teams. They also have conflicting priorities: for example, what happens to the promised investment capital for the telephone company when a school needs to be built? The private sector is not faced with choices such as these. So simply changing management is not the answer.

World Bank or donor money?

There is simply not enough of it. Also, it is not free and has to be repaid, just like private sector money. Another problem is, again, the question of the financial discipline of management teams. How often have we seen donor money being ploughed into a new road, or a water treatment plant, only for the asset to deteriorate through lack of maintenance?

Private sector capital would never allow that to happen. The best use of such finance is to fund projects where the private sector won't go. Or donor money could be used to finance alongside the private sector, to make unviable projects bankable.

Poor hit by high costs

The cost of capital depends upon the risk profile of the investment. Some blue chip international corporates can borrow more cheaply from commercial sources than many African governments, since they have a higher credit rating.

However, governments can do much to reduce the risk profile of investments for the private sector, so reducing the cost of borrowing (for example by guaranteeing to pay their utility bills), but often choose not to. The poor are suffering anyway because of a lack of access to water, electricity, transport, or communications. Many, perhaps, would like to be given the choice of paying a little more, simply to receive the service.

The key issue here is subsidy. If there is an affordability issue, then subsidising the service to the socially needy is an appropriate use of public funds - contrast that with a common situation, for example, where the well-off have the access to piped water and receive the subsidy. Similar anomalies apply in other sectors.

What about well-run utilities?

Of course these exist. Eskom is an example. Just as there are examples of poorly run private utilities. But why pursue a policy which, if successful, would be bucking the trend? Why not go for the tried and tested?

Singapore, like other countries whose publicly owned utilities perform well, benefits from far fewer constraints on the public purse than we do. Eskom and the Egyptian Electricity Authority benefit from a number of unique advantages which are not easily replicable in most countries in sub-Saharan Africa:

�Both utilities have economy of scale advantages that many of us do not

�Historically, Eskom has not been required to provide a commercial return on its assets, so has been able to pass on this benefit through low tariffs

�The Egyptian government subsidises fuel for electric power plants in order to keep tariffs low

We have not yet managed to follow these role models. So, rather than asking "why should we involve private finance in our infrastructure", let's start asking "why not?"

�Nick Allen is the partner in charge of PricewaterhouseCoopers' Privatisation and PPP practice in sub-Saharan Africa. He has worked exclusively advising governments and private sector in the UK, Eastern Europe and Africa on Private Sector Participation (PSP) and Public Private Partnerships (PPPs), and is acknowledged as one of Africa's leading authorities on privatisation and PPPs.

Nick Allen ([email protected]) is the partner in charge of PricewaterhouseCoopers� Privatisation and PPP practice in sub- Saharan Africa. He has worked exclusively advising governments and private sector in the UK, Eastern Europe and Africa on Private Sector Participation (PSP) and PPPs and is acknowledged as one of Africa�s leading authorities on privatisation and PPPs.