On track for success - reasons to be positive about the roads sector in Africa

04 July 2016


Africa urgently needs to develop or improve its national and international road corridors in order to facilitate connectivity. The correlation between economic growth and reducing the length of travel between people, markets, services and knowledge is strong - there is huge growth value in getting people connected.

International corridors are critical in allowing landlocked countries easier access to ports and trading partners. Domestic corridors are needed between major cities and to connect agricultural and mining areas.

A lack of Government infrastructure funding in the amounts required means alternative solutions will play a key role in the development and financing of the roads network across Africa, and here we set out some of the factors which are contributing to an increase in private sector involvement in the sector.

The development of roads, particularly toll roads, in Africa is now considered "high priority" by Governments and multi-lateral organisations alike

Stakeholders are keenly aware that a lack of transport infrastructure adds "economic distance" to trade, lowering agricultural yields, significantly increasing the cost of goods and hindering education uptake and health provision. Streamlining trade, increasing linkages and creating intermodal transport hubs has become a focus of African development planning and financing.

More than $93 billion of infrastructure investment is required each year for the next decade from a variety of sources in an attempt to solve Africa's infrastructure deficit. The lack of roads is seen as a key constraint on economic growth and prosperity. Funding deficits mean that private investor structures such as PPPs are expected and tolling likely.

The sector has the attention of African Governments, their development partners and the private sector. Successes in Senegal and South Africa and a pipeline of projects (Kenya, Uganda) mean that well known developers, advisers and funders are involved in structuring, developing or funding roads projects across Africa.

Governments are starting to get serious about private investment, enabling frameworks and sensible risk allocations

Across Africa, the time and resource invested into building the required capacity within Governments to facilitate large-scale private investment is paying off. Several countries have established PPP Units which are launching major roads programmes, supported by an enabling legal environment.

Kenya is an example - following a detailed feasibility process and the drafting of a national tolling framework, several roads projects are due. The projects will share a common risk allocation and project documentation, creating a standardised process. The PPP Act provides guidance as to how PPPs should be identified by the Kenyan Government and procured, another boon to investors.

Many countries which haven't yet launched PPP Acts, or the equally as important implementing regulations which support and complement primary legislation (such as Zambia), are in the process of doing so. To facilitate private investment in the roads sector, particularly on a PPP basis, legislation and regulation needs to provide for an appropriate procurement process, concessions or availability based PPPs, allowing the Government to accept contingent liabilities and a means by which to fairly (but finally) expropriate the land required for the road corridor.

Donor funded institutions and development banks are ready to provide transaction support and funding, and African governments are mirroring those commitments with promises of their own

Organisations such as the IFC/World Bank and African Development Bank are keenly aware of the importance of good transport links in stimulating economic growth, and the last decade has seen a renewed focus on investment into infrastructure development.

The IFC is advising the Government of Uganda on the Kampala-Jinja expressway. Its reputation as a well-respected adviser has attracted significant investor attention to the transaction. The World Bank now dedicates 25% of Ugandan aid to road building, a commitment that the Ugandan Government has mirrored - it will be the sole funder of the final phase of the expressway. The experienced advisers add legitimacy to the process, generating investor confidence and making it more likely a bankable project is delivered. Equally important is sound and experienced legal and technical advice for Governments and bidding consortiums alike.

The interest of development finance institutions (DFIs) and Multi-Laterals in funding projects acts as a cornerstone for other commercial banks, as the former group can bring risk mitigation products such as partial risk guarantees to cover payment defaults or credit support to provide comfort against war, terrorism or civil disturbance. Export credit or credit guarantee institutions are increasingly looking to unlock investment into the African infrastructure sector, such as EPC or political risk guarantees.

Governments (and citizens) are taking a pragmatic approach to tolling and payment risk

In a country with no history of tolling, the Dakar-Diamniadio toll road in Senegal has been accepted by the population, who welcome the three-hour time saving it can provide each day in return for a modest toll.

After an upfront payment from Government, and likely aided by the strong involvement of DFIs in the development and financing of the project, the concessionaire was persuaded to take full construction and traffic risk while charging only a modest toll.

Elsewhere, the public sector has proved accepting of availability payments, or at least a certain level of payment support. We believe this will be the case in Kenya, where the responsibility for toll collection will be split from construction and operation, and while the collected tolls will be ring-fenced and used to pay availability payments, the Government is expected to provide a level of guarantee should the collected tolls fail to cover the level of availability payments that have been set in the concession agreements.

The "sector specific" issues of roads development are being grappled with and solved

In addition to structuring payments correctly, Governments are starting to take the steps needed to ensure road maintenance is properly provided for and capable of being carried out.

In land-locked countries such as Uganda, 90% of freight and passenger traffic is by road, often in overloaded and poorly maintained vehicles which damage roads. The Tanzanian Government, among others, is tightening up its relevant legislation, but where a private concessionaire is charged with the maintenance of a highway (and particularly where its revenue is linked to performance standards) it must also be delegated the unfettered authority to enforce road regulations.

The development of a clear framework which envisages and provides solutions to issues such as land acquisition, development near the roads corridor, toll collection (if required) and the enforcement of safety regulation will be key to continued development in the sector. Securing the support of relevant trade associations is also important, given that associations which represent freighting organisations are often influential, a result of the sector's contribution to developing economies. Some countries are attempting to tackle this head on at a national and regional level, by engaging with these associations and asking them to sign voluntary charters in an attempt to foster a spirit of co-operation.

Gowling WLG's Africa Group contains infrastructure development and financing experts, who have advised Governments, developers and lenders on the feasibility, procurement, development and financing of roads and other infrastructure projects across Africa and elsewhere. The firm's Africa Group is operated from London, Paris, Dubai, Montreal, Calgary and Toronto and is currently working on several live mandates in Africa (as well as placing members in partner firms in Africa). Please contact Jonathan Brufal for any further information.


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