Clouds hang over govt’s pursuit of PPP billions

Mbongeni Mguni | Tuesday July 26, 2022 06:00

At the recent funders’ conference called by government to test the private sector’s appetite to invest in public infrastructure, Finance Minister Peggy Serame painted a bleak picture of the country’s fiscal future.

According to Serame, between 2012–2013 and 2021–2022, government funded 95% of the total development spending of P108 billion, with the balance coming from project-specific loans and donors.

“This situation is not sustainable,” she said.

“Government revenues are declining, as a share of GDP, as the diamond industry matures and costs of production increase, while the recurrent budget is continually increasing.”

Botswana has one of Africa’s highest sovereign credit ratings, but traditionally shuns debt, preferring to rely on the savings government has been accumulating over the decades of diamond mining and budget surpluses.

Serame said while government’s savings had recovered after being depleted by COVID-19, the Russia-Ukraine conflict, a shaky post-COVID recovery and the growing impact of climate change were major risks.

“And yet, Botswana still needs high-impact infrastructure projects to underpin economic diversification and faster growth of an average 5.7 percent (in order) to reach high-income status in 2036,” she said, referencing the National Vision 2036 target set five years ago.

Despite having launched the Public Private Partnership (PPP) policy in 2000 and establishing a dedicated unit in 2010, only two projects have thus far been developed involving direct funding from the private sector, largely because healthy government savings have papered over delays in implementing the policy.

PPPs involve a contractual arrangement between a governmental institution and the private sector, where the private sector party provides public infrastructure and/or infrastructure-related services.

Typically, government’s contributions, over and above equity in the venture, may include subsidies, incentives, provision of service, the cost of providing the service, and others. The private sector can be asked to contribute up to 80% of the project’s funding.

Besides reducing government’s direct expenditure on public infrastructure, PPPs are expected to enhance the efficiency of both project development and operation, a challenge that has haunted nearly every major state-sponsored project over the decades.

At the recent conference with funders who included the World Bank, International Finance Corporation, African Development Bank, and several major local and regional banks, government unfurled its list of 15 projects it expects to pursue under the PPP model in the National Development Plan (NDP) 12 which kicks off next April.

The list includes the $2.5 billion coal to liquids project and the long-anticipated construction of a pipeline to draw water from the Zambezi to the countries' drier south, estimated at $1.6 billion in 2015. Other projects involve key road and railway lines, expanded national oil storage facilities and public infrastructure.

However, while a weaker fiscal outlook and political willpower around “private sector-led development” are behind the renewed push for PPPs, critics suspect that getting any deals done will prove a mountain to climb.

Local pension funds held just over P73 billion in offshore assets as at March or 63% of their total funds, and the opening up of public infrastructure to the private sector will not have a lack of funds as one of its problems.

Analysts say instead, the challenges include the slow progress in rolling out the PPP policy over the years, which is likely to dampen private sector enthusiasm for the new rollout of projects. Had government successfully closed several PPP projects after the policy’s launch in 2010, this would have shown the market that the technical expertise, regulatory framework, and political willpower are in place. This would also have allowed the testing in real-time of the economics of such projects while observing and proving their performance over time.

Major obstacles to the PPP programme, the analysts say, include the high-level technical expertise required to structure the deals specifically for each programme, within the framework adopted by government.

The key question is around risk and how to share it between government and the contracting private parties. The question of risk was seen a few years ago when the proposed expansion of the 600MW Morupule B power station by another 300MW failed, after the bidders who won the tender asked for an P8 billion sovereign guarantee before starting the project.

Typically, PPP deals will involve the ministry relevant to the project, such as Minerals and Energy in the case of the failed Morupule B transaction. The implementing agency that signs the deal will be the actual state-owned entity involved in the deal, such as the Botswana Power Corporation (BPC) in the case of the Morupule B transaction.

The Japanese and South Korean joint venture which won the Morupule B expansion tender wanted a government guarantee to cushion them against the risk of the BPC defaulting on future payments for power from the proposed new units at Morupule B.

While government enjoys one of Africa’s highest sovereign credit ratings, most state-owned entities have sullied balance sheets, which for the private sector, raises the risk of entering into a long-term PPP. The BPC posted losses of nearly P500 million in the 2021–2022 financial year and is still reliant on hundreds of millions of pula per annum in government subsidies.

In addition, while the most clear-cut PPPs for Botswana are in electricity and water, tariffs in both are regulated by government, which presents a profitability challenge for any partnering companies.

“My worry is that we talk about Botswana’s credit rating being high but we struggle to get things done and perhaps it could be because of government,” a Stanbic Bank representative said at the funders’ conference.

“The ‘borrowing’ will be by state-owned entities and that’s why we need government guarantees to link that credit rating to the projects that we want to do.

“If you take Water Utilities Corporation and BPC, it’s difficult to give them any funding without that government connectivity.

“The other option is to release the tariffs to be competitive although socially, it could be difficult.”

For Nathan Tuimising, a PPP expert at the World Bank, guarantees are a complex issue where high-level expertise is required.

“One of the challenges is when guarantees or other government support is not measured to the actual risk and is used for market entry, rolling that back becomes a challenge,” he said.

“Ask whether the project is one that will need a sovereign guarantee or any other measure of government support because a lot of times, risk mitigation can be achieved through less pervasive measures.

“You have to determine the precise risk you are trying to address.”

Government has generally been reluctant to issue sovereign guarantees out of fear of mortgaging the country to exorbitant risks. Even issuing letters of comfort to the private sector for specific projects has been the source of much debate within government, as these could find the state bound to imprudent financial commitments.

Finance ministry senior policy advisor, Keith Jefferis, who acknowledges that the rollout of the PPP policy has been slow over the years, says government has engaged with the private sector over guarantees, looking at the strength of the particular state-owned entity’s balance sheet.

According to Jefferis, the engagement of Independent Power Producers (IPP) is evidence that the PPP policy is bearing fruits.

“For us, we talk in terms of government support and with the BPC, we have given them a lot of comfort and these are not legal contracts,” he said.

“The BPC has said that’s fine and the IPPs have said that is all they need.

“These are not guarantees. With other state-owned entities with weaker balance sheets, which are perhaps struggling with controlled tariffs, maybe we can talk about government support and the type of guarantee.

“There is a range of support that can be done.”

For Jefferis, who is one of the country’s most prominent economists and a former deputy governor of the Bank of Botswana, the reason why the billions of pula pension funds held offshore are not coming home to public infrastructure is basic.

“The reason that 60% of their funds are held offshore is because that is where the returns are better and that money will come back if there are opportunities for investment here that can give higher returns,” he said.

“Part of what we are talking about is to come up with the financial assets and instruments that will provide that incentive.

“It’s not always easy. If we look at the past five years, the returns on the Botswana Stock Exchange have unfortunately been negative and if those pension funds had invested all their assets there, they would have negative returns.

“Money follows returns, so make viable instruments and the money will come.”

The technical structure of establishing these instruments, sharing the risk, weighing their legal enforceability, and testing commercial terms, particularly where the most obvious projects are in tariff-controlled sectors, is a test for both public policymakers and the private sector going forward.

For Jefferis and the Ministry of Finance, the challenge is adapting the Public Investment Programme (PIP) to accommodate the PPPs. The PIP is the core of each NDP, detailing the projects to be developed in each plan, the expected cost and the source of funding, which for decades has been government.

“Transitioning from the PIP to PPP has to be done and the PPP has to be built into projects from the word go,” Jefferis said.

“You cannot retrofit conventional government projects into a PPP structure.

“We are hopeful and the way we have gone about the project design for NDP 12 is that we gave a template to ministries and asked for the information we require.

“For every project we have asked them to propose how it can be done on a PPP basis and we are still waiting for the responses, but at least we are building that into the process and are hoping we will get project proposals under NDP 12 that will be suited for PPPs.”

With the diamond mines that have supported the PIP for decades maturing and government savings still recovering from the COVID-19 impact, the urgency of PPPs is growing for government. The possibility of a global slowdown due largely to the war in Ukraine, does not bode well for the fiscus in the short term, threatening to stub out the recovery that the economy has been on from the pandemic.

For the private sector, which has long complained that government is crowding it out of opportunities in the economy, the renewed PPP is a godsend, but Ts and Cs apply.

“To the financiers, those who are ready, let’s talk,” says PPP Unit coordinator, Boniface Mphetlhe.