Public private partnerships (PPP) in the developing world: mitigating financiers’ risks

Abstract

A major challenge for foreign lenders in financing PPP infrastructure projects in an emerging 4 market is the bankability of country-related risks. Despite existing studies on country risks in 5 international project financing, perspectives of foreign financiers on bankability of country-6 specific risks in an emerging market is yet to be explored. Hence, using a mixed methodology 7 approach to research, three PFI/PPP projects in Sub Saharan Africa (Nigeria) were used to 8 investigate the bankability requirements for political risk, sponsor, concession and legal risks 9 in PPP loan applications. Focus group discussions and loan documentations obtained from 10 foreign project financiers with experience in PPP financing in Nigeria were used as sources 11 of evidence. Results identified 22 bankability criteria for evaluating country-related risks 12 (political risk, sponsor, concession and legal risks). These criteria were later put in a 13 questionnaire survey to local and international project financiers with experiences in PPPs 14 within Nigerian. Reliability analysis and significance index ranking were carried out. The 15 significance index ranking helped ascertain the top 7 criteria influencing bankability of 16 country-specific risks in emerging market PPPs. A conceptual "Risk and Bankability 17 Framework" was then constructed from the findings and validated with new data from other 18 PPP financiers in emerging markets. The proposed conceptual framework represents critical 19 parameters for winning foreign financiers' approval for PPP loan applications from emerging 20 market.

The challenges of access to local finance for PPP infrastructure project delivery in Nigeria

“…PPP has equally enhanced infrastructure provision in developing countries through private sector-led initiatives in the procurement of social and economic facilities (Owolabi et al,2019;Dolla and Laishram, 2019). According to Hammami et al (2006), the World Bank estimates that PPP amounted to US$850bn, which was about 20% of the global infrastructure investment in developing countries within the first decade of its existence and has remained relevant as a procurement mechanism for public utilities.…”

“…However, notwithstanding its acknowledged acceptance, PPP has performed differently across middle-and low-income countries with varying success rates (Li et al, 2005;Chou and Pramudawardhani, 2015;World Bank,2016). For instance, while the "BRIC" nations of Brazil, Russia, India and China witnessed a growth of over 60% in infrastructure funding through PPP as of 2008, PPP constitutes only about 5%-10% of infrastructure funding in SSA (Owolabi et al, 2019). Among other global regions, SSA has the lowest market growth in PPP infrastructure procurement (Foster and Briceño-Garmendia, 2009;Shendy et al,2011), with Nigeria being the largest economy in the region (World Bank, 2019).…”

“…Among other global regions, SSA has the lowest market growth in PPP infrastructure procurement (Foster and Briceño-Garmendia, 2009;Shendy et al,2011), with Nigeria being the largest economy in the region (World Bank, 2019). Despite this, SSA has the highest record of PPP contract termination and disputes arising from poor legal framework and finance arrangements (World Bank, 2016;Owolabi et al, 2019).…”

“…Indeed, the current state of infrastructure shortfall in Nigeria is perhaps the utmost hindrance towards the realization of the country's vision of becoming one of the 20 largest economies in the world (Sanusi, 2012). Studies such as Onwukwe (2015), Babatunde and Perera (2017) and Owolabi et al (2019) have attributed the menace of infrastructure deficit in Nigeria to inadequate project finance arrangements. While the traditional practice, wherein the government (public sector) solely funds infrastructure directly from the fiscal budget still subsist as the primary infrastructure finance option in the country (Mudi et al, 2015), Ibrahim et al (2006) opined that this funding approach has failed to keep pace with rising demand for infrastructure facilities in Nigeria.…”

“…Since its inception, scholars have documented issues relating to poor legal framework, political instability and inadequate access to finance as some of the factors hindering the delivery of PPP infrastructure projects in Nigeria (Badu et al, 2013;Ojo et al, 2015). Among these challenges, inadequate access to funding is more pronounced (Aruomoaghe and Olugbenga, 2014;Ojo et al, 2015;Owolabi et al, 2019). Although there are existing partnership arrangements between the Nigerian Government and foreign organizations such as the World Bank (WB) and the International Monetary Fund (IMF) in funding infrastructure amenities in the country, overreliance on foreign financial institutions has been reported to exacerbate interest rates, exchange rates and inflation (Tenuche,2010;Onwukwe, 2015).…”