Financing & developing public infrastructure in a challenging economy

By Ferdinand D. Adadzi

Introduction

The economy is going through challenges. The government has admitted this, knowing this is an election year. The opposition has trumped it as the basis of voting them back into power. Both the government and the opposition are, therefore, in agreement on this. If there is no faith in their agreement, our submission to the International Monetary Fund programme is a clear confirmation of the current economic challenges we face as a country.

Notwithstanding the economic challenges, the already wide infrastructure gap cannot be widened further. Infrastructure, transport infrastructure (road, lorry parks and stations, rails, and ports), health facilities, housing (emphasis on affordable housing), markets, sports infrastructures, educational institutions, residential and commercial, water and power infrastructures, agriculture, industries, among many, must be developed. The question is how the government continues to finance these infrastructures despite the economic challenges.

This article argues that the best option for financing infrastructure development should shift from government funding to private sector-led funding under a well-regulated and streamlined contractual arrangement between the public and private entities.

Challenges

There is a wide infrastructure gap in Ghana, as in many African countries. Such a gap exists in many sectors, including housing, transport (roads, ports and rail), utilities (water and power), health, education, etc. Increased expenditure is required in order to bridge the infrastructure gap. It has been suggested that for Ghana to make a meaningful attempt at breaching the infrastructure gap, it must raise annual expenditure on infrastructure development to $2.3 billion annually from the current $1.2 billion.[ii] However, such increase in expenditure is unlikely to be realized given the current economic challenges the country faces.

The World Bank captures the economic risk and challenges of the country as follows: “Risks to the outlook include financial sector stress following the DDEP, contingent liabilities in the energy and cocoa sector, domestic policy slippages with the 2024 elections being a particular risk, delays in external debt restructuring, commodity price and other external shocks, and sharper-than-expected monetary policy tightening in advanced economies.”[iii] These risks and challenges have resulted in Ghana seeking assistance from the International Monetary Fund (IMF) under an IMF programme with a bailout package of some $3 billion, which has so far seen disbursement of two tranches of $600 million each for a total of $1.2 billion[iv]. All these are likely to affect infrastructure development.

These economic challenges are going to widen the infrastructure deficit in Ghana as it makes it difficult not only to increase the annual infrastructure expenditure but even to maintain the current level of expenditure. Since 2024 is an election year, there is likely to be increased demand for infrastructure and added pressure on the Government to find a way to meet such demand. However, if the Government is to maintain the resolve not to give in to overspending leading to a wider budget deficit, there is the need to find alternative ways to deal with infrastructure demands than through Government direct budgetary expenditure.

Private Sector Involvement

The most viable option available for the Government is to look to the private sector beyond what is currently the practice. The Government must deliberately seek to share responsibility for infrastructure development and related services with the private sector. The private sector has always been seen as a partner in the economic development of the country. The 1992 Constitution provides the basis for this in the directive principles of state policy when it provides as part of the economic objectives that steps to establish a sound and healthy economy shall have the underlying principles of “ensuring that individuals and private sector bear their fair share of social and national responsibilities including responsibilities to contribute to the overall development of the country”.

 

There are many examples of government-private sector collaboration for infrastructure development in this country. The financing and construction of the Akosombo dam is a prime example. This is in addition to private finance initiatives in the generation space that resolved the ‘dumsor’ crisis. A not-too-distant example is the Tema port expansion and the implementation of the Ghana card programme. Such private sector-led infrastructure development is not limited only to what may qualify as major projects but can also be used in community-based infrastructure projects such as community centres, health posts, irrigation infrastructure, housing, off-grid power projects, etc.

The important role of the Government in achieving the objective of effective private sector involvement in infrastructure development is to create an enabling environment. A government-implemented public procurement process to engage private parties in the development of infrastructure does not create as much challenge as private finance initiative (PFI) and public-private partnership (PPP) arrangements. There should not be a situation where scarce unavailable government fund is spent on building astroturf parks, community housing, boarding-house facilities at schools, community markets, etc. This needed community-based infrastructure can be financed through a PFI and PPP arrangement. This is in addition to major national infrastructure developments. The Government need to create the enablers for private sector participation.

Enablers

An enabling environment for PFIs and PPPs, as a minimum, must be based on clear regulations, capable implementing agencies with capacity, political will, and properly drafted contractual documents that clearly assign rights, obligations, proper risk allocation, and a monitoring and evaluation system to ensure execution of the project in accordance with the contract. These are the main success factors for the government to get the private sector involved in infrastructure development beyond the usual process of government-financed infrastructure development through public procurement. A brief overview of the factors will be helpful.

• Legal framework – a collaboration between the government and private sector should be based on clear regulations that provide for clear processes and requirements for project initiation, procurement, contracting and implementation. Whilst Ghana has passed the Public Private Partnership Act, 2020 (Act 1039), which came into force at the end of December 2020, it has not seen full deployment and not many projects have been implemented under that Act as one would have envisaged. In order to give effect to the Act, detailed regulations, guidelines and implementation documents must be developed. More importantly, there must be a step-by-step manual that guides both the private and public sector parties on the implementation of PPP projects with clear timelines. Perhaps if the process provided under the Act is simplified with clear guidance, one may see traction in the space.

There are some notable exclusions from the scope of the Act, which requires directives for the purpose of clarity. This will include a purely public finance initiative that is implemented by the public sector.

• Capacity – secondly, the knowledge of the actors is a key success factor. The individuals to implement must have the capacity to do so. The capacity of the implementing entities – ministries, departments and agencies (MDAs) and metropolitan, municipal and district assemblies (MMDAs) – must be built. The implementers must have full knowledge of the process, from project identification, preparation, procurement, contracting to implementation. There must not only be capacity building but a shift in the mindset of officials from the usual public procurement process. Currently, both public and private sector parties shy away from implementing projects under the PPP process, given its complexities in the requirements and approval processes. In building the capacity of the officials, emphasis must not only be on the process but on the mindset needed to get private involvement, which will be helpful to boost private involvement.

This should be a customer-centric approach rather than a regulator-centered approach. That is, the role of the public sector officials should not only be as a gatekeeper but must be geared towards the achievement of the end objective of ensuring the delivery of the needed infrastructure. This will require the public sector to provide the assistance required to ensure the relevant requirements are met rather than simply reject private initiatives.

Public sector capacity must be complemented by experts who understand their context. This calls for the engagement of transaction advisors with the required technical and local context expertise to structure and guide the process through project inception, preparation, procurement and contracting to implementation.

• A champion – related to the above recommendation to ease the complexities is the need to have a private sector participation champion within the Government. The champion must not only be knowledgeable in requirements for PFIs and PPPs but must have the political leverage or clout to ensure the usual public sector inertia and bureaucracy do not frustrate or slow down the process. Implementing a project as a PFI or PPP project generally involves the coordination of a number of separate MDAs and/or MMDAs. A single high-ranking official with the knowledge and the political backing to ensure efficient collaboration on the public sector side and the ability to push through the process based on stated timelines in an efficient and transparent manner is a major success factor.

Whilst we need strong institutions, there is the need for a strong man or woman to ensure the institutions function properly, having a mindset of achieving a particular objective. In this case, that objective is to get the private sector to lead the infrastructure development agenda. That requires a complete mindset and attitudinal change in the role of the public sector. A champion is needed for that effort.

• Procurement and contractual framework – a critical aspect of regulating PFI and PPP initiatives is a transparent procurement process that ensures value for money. The framework should deal with project selection, project preparation and packaging prior to the launch of the procurement process. The procurement process must be transparent and based on a clear process with criteria for selection at each process. Criteria for prequalification and selection at the expression of interest and proposal stages must be well set out. Each stage must be based on definite timelines. There must be a step-by-step guide that guides both the public and private entities. In order to allow for innovation, there should be a process for considering alternative proposals that are not compliant. In addition, there must be a process for considering unsolicited proposals that do not disadvantage proponents or sponsors of such proposals since they take the burden – financial and otherwise – from the public sector in the preparation of the project.

Standard contractual documents must be developed. The use of standard contractual documents simplifies and avoids delays in reaching an agreement between the public entity and the private party. The Government, through the regulator, must develop standard contractual documents that are adopted depending on the type of project, complexities, optimum risk allocation and value for money. The contract must provide for clear project requirements and key performance indicators. These are dependent on the nature of the project. However, the standard contract must provide a guide on the drafting of such requirements.

• Monitoring and evaluation framework – contract administration is a must for a PFI or PPP project. Since the project execution is under the purview of a private sector party whose motive is to make profit, the public sector must have an effective monitoring and evaluation process to ensure the project is implemented first in accordance with the contract and the interest of the public. In most cases, the private party funds the project, design and construct, and operate and maintain the project. The public entity must ensure the project is executed in accordance with the project scope and requirement and achieve the required level of performs. There must, therefore, be effective contract administration, which ensures KPIs are being met at each stage – design, construction, operation and maintenance.

An enabling environment that will attract private sector parties to invest in the development of public infrastructure and provide related services must have the above elements. These together provide a system that incentivises the private sector-led public infrastructure development. Therefore, if the Government, in view of the current economic challenges, seeks to adopt this option for addressing the widening infrastructure gap, it must create and streamline the enablers. However, there is no need to wait. Even in the current environment, the government can still get the private sector involved once the government focuses on this alternative option for the delivery of public infrastructure. What is required is the political will.

Conclusion

The current economic challenges call for the adoption of alternative approaches to public infrastructure investment. A viable option is getting the private sector parties on board, not just as contractors, but in a manner that they lead the funding of the infrastructure projects without recourse to public funds or government-led borrowing from domestic or international financial markets. The use of PFIs and PPPs provides this option. Whilst the Government has continuously talked about this, the current challenges may force the government to move to the next stage of putting in place the enablers and moving to the next stage of actual use to at least close the widening infrastructure gap. The time to embrace private sector-led public infrastructure development is now.

[i] Ferdinand D. Adadzi is a Partner at AB & David, a multi-specialist pan-African business law firm practising in many jurisdictions in Africa, including Ghana. He is a member of the firm’s Energy, Infrastructure & PPP Group, Corporate & Finance Group and Government Business Group. Ferdinand has over twenty years’ experience advising both government and private sector entities on infrastructure transaction and public private partnership arrangements. He is also a senior lecturer at GIMPA Faculty of Law, lecturing in Company Law and Contract Law. He has many publications to his credit, including a seminal textbook on Company Law titled ‘Modern Principles of Company Law in Ghana (R. Ed)’.

Contact: Tel: 233 (0)24 226 2180; Email: [email protected]

[ii] https://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-5600

[iii] https://www.worldbank.org/en/country/ghana/overview

[iv] https://mofep.gov.gh/news-and-events/2022-01-22/ghanas-secures-second-tranche-of-imf-us$600m-for-disbursement

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