Financing Public Private Partnerships
The role of the capital market
Botswana, like most developing countries, still needs substantial investment in key infrastructure. More recently, the financing of infrastructure has increasingly taken the form of project finance through the Public Private Partnership ( PPP) model – an arrangement where Government and a private corporation combine to provide a public service through the creation and use of new assets for a set time period. In the 2022 Budget Speech, the Minister of Finance and Economic Development highlighted the progress being made with respect to utilising the PPP model for financing and implementation of infrastructure projects, ranging from power to housing projects. The PPP model has been an increasingly popular technique to attract private capital and a number of countries in the region have deployed the technique in project financing. There is abundant Emerging Market experience and there are various PPP projects within SubSaharan Africa in countries such as South Africa, Cameroon, Tanzania and Kenya which provide valuable insights and lessons into how the capital markets can be leveraged to support PPPs, lessons which are important for Botswana in progressively deploying the PPP model.
The concept and use of PPP is not new to Botswana, albeit very slow. The adoption of the Privatization Policy in 2000 aimed at providing an optimal balance between the public and private sector to achieve sustainable economic growth is one indication of the acceptance of PPPs as an investment model. Lately, PPP has been formally recognized as a procurement model through the amendment of the Public Procurement and Asset Disposal Board ( PPADB) Act, but formally this notion comes from as far back as the 9th National Development Plan ( 2003 to 2008). The 10th National Development Plan ( 2009 to 2016) began the process of establishing the PPP delivery mechanism. To date, two projects have been implemented through the PPP model in Botswana, namely; Ombudsman and Land Tribunal Office Accommodation Project which was a 10- year concession that was handed over in 2017, and the SADC Headquarters Office Accommodation Project which is a 17- year concession.
In the 11th National Development Plan ( 2017 to 2023), the government of Botswana explicitly reiterated its commitment to developing public infrastructure through the use of PPP as a means of procurement and financing of projects. This has been reiterated in the 2022 Budget Speech wherein, Government outlined several projects that will be implemented during 2022, using a PPP model covering power, waste water, roads, railway and housing. These have fiscal implications on the side of Government, carry intense capital requirements on the side of the private partner, and these capital requirements can be complemented by accessing the deeper pools of liquidity through the Botswana Stock Exchange ( BSE).
Infrastructure can be financed using different financial structures and instruments. Typically, these instruments include Project Bonds, Infrastructure Bonds and Infrastructure Funds. Depending on the issuer and the securities markets regulation, some are listed on the stock exchange while some can be offered privately, including through Collective Investment Undertakings ( CIUs). Experiences in countries such as Brazil, Costa Rica, South Africa, Kenya, Mexico is predominantly that of both Project Bonds and Infrastructure Bonds that are offered through the public market and listed on the respective stock exchanges and this IS largely explained by the well- developed pension schemes in such countries, a phenomenon prevalent in Botswana.
South African pension funds have extensive experience investing in infrastructure, generally through issuances of bonds by the National Treasury, Government Owned Entities, Provincial Government, Mayoral Cities, Municipalities as well as the private sector. Notably, the South African National Road Agency Limited ( SANRAL), City of Johannesburg, City of Cape Town are some of the significant players in this space. For example, since 2004, the City of Johannesburg has issued in excess of six bonds. Cape Town and Ekurhuleni have also issued such bonds. Almost all the funds raised by these bonds go into financing infrastructure, and interestingly all municipal bonds are listed on the Johannesburg Stock Exchange ( JSE). Some of the key infrastructure projects in South Africa financed through a PPP model include the Gautrain project and the Bakwena Platinum Corridor. The Gautrain project is a 15- year contract for the maintenance and operation of the Gautrain rapid rail system. The Bakwena Platinum Corridor is a 30- year concession contract with SANRAL to construct, manage, maintain and upgrade the N1 and N4 roads. In its inception, the N1 and N4 road network was financed through 79 percent equity and 21 percent debt, much of which was raised through bond issuances.
Kenya has a well- developed history of raising capital from the public through the issuance of Infrastructure Bonds which are then listed on the Nairobi Securities Exchange ( NSE). In addition, Kenya has a successful track record in infrastructure projects that have been built using PPPs.
These include the Port of Mombasa Grain Terminal that was built in 1998; the Malindi