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Infrastructure in Africa: procurement, planning and pricing

Why has the underdeveloped state of infrastructure in sub-Saharan Africa not galvanised significant investment opportunities? Bowmans head of infrastructure Shamilah Grimwood explains.

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Much has been written from various perspectives on this conundrum.  From a legal perspective though, this state of underdevelopment can best be understood by reference to three separate but related themes, procurement, planning, and pricing. Each theme provides examples of the challenges to infrastructure development and how these can be translated into investment opportunities. 

Procurement

Successful private sector investment in sub-Saharan infrastructure, particularly in power generation, transportation and mid-stream oil and gas, generally tends to be under “concession” type arrangements with procuring government institutions, on a by-invitation basis, and typically under competitive bid arrangements.  To the extent that projects originate from unsolicited bids from the private sector, these often don’t end well. This may well be because during the course of negotiations, the procuring institution increasingly realises that, in the absence of competing bids, it has no clear way of knowing whether the deal will deliver value for money or not (i.e. if it is the most efficiently priced, having regard to the allocation of project risks between the bidder and the procuring institution).

Competitive bid arrangements tend to bring the best results, as demonstrated by the competitive independent power producer (IPP) programmes in Kenya in the early 2000s, the renewable energy IPP programme in South Africa and Getfit in Uganda.  These, however, are the exception rather than the rule and more generally procurements, even when open to competition, have often not been successful in sub-Saharan Africa.  

The reasons for this lack of success include the fact that many countries in sub-Saharan Africa do not have the processes and/or systems in place to attract and evaluate optimal bids for capital intensive infrastructure requirements. This leaves them wholly under-prepared to properly assess the real implications of unsolicited bids. Even where bidding is properly solicited under competitive bidding arrangements, inadequate preparation is reflected in poor bidding documentation, including the poor articulation of service outputs and functional specifications. As a result, bids are very difficult to compare and evaluate. 

The poor resourcing of procurement teams, whether by the absence of necessary skills and experience and/or an over-layering of complicated administrative procedures as well as inconsistent or poorly understood evaluation methodologies, also pose problems in this regard. In particular, the failure to coordinate intra-government conflicts arising from unclear division of powers can create further challenges.

Planning

Proper planning for critical infrastructure sectors is more likely to result in procurement systems that successfully articulate policy goals for the sustainable development of infrastructure. This type of planning includes implementing ongoing processes for market sounding and consultation, so that what is required is commercially available from the market. This is also necessary so that the market can be responsive to the minimum requirements for each procurement. It is also important that affordability levels are determined up front. Planning facilitates the staggered roll-out of the procurement of critical infrastructure in achievable “chunks”.

Pricing

To address the “off-take challenge” of infrastructure projects there would need to be clearly articulated policy commitments regarding "cost reflectivity" in tariffs that flow down to end users, together with the regulatory infrastructure to implement same.  Cost reflective pricing is the biggest challenge in sub-Saharan African power markets, where collection risk is significant and end tariffs charged by incumbent utilities have historically been discounted with inadequate provision for new infrastructure or major maintenance. In addition, pricing increases are deferred over time. Of course, investors expect to pass through unforeseeable pricing increases to their customers.  This is problematic, particularly for government utility offtakers who have to accommodate such increases even when they themselves cannot readily pass on their own increased costs through their own regulated recoveries.

Government policy and action are key in creating an environment conducive to long-term investment in infrastructure and one in which partnerships between public and private sectors are encouraged. In addition, and possibly more importantly, government execution capacity is a key success factor in successful infrastructure projects.

Shamilah Grimwood heads the Bowmans Infrastructure Sector Group. She acts as counsel to developers, sponsors, commercial banks, multilateral finance institutions, development finance institutions, utilities and government institutions on a range of large-scale energy and infrastructure-related matters.

Posted by:

Shamilah
Grimwood

15 December 2016

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