Public private partnerships (PPP) in the developing world: mitigating financiers’ risks
| DOI | https://doi.org/10.1108/WJSTSD-05-2018-0043 |
| Date | 08 July 2019 |
| Pages | 121-141 |
| Published date | 08 July 2019 |
| Author | Hakeem Adedayo Owolabi,Lukumon Oyedele,Hafiz Alaka,Obas John Ebohon,Saheed Ajayi,Olugbenga Akinade,Muhammad Bilal,Oladimeji Olawale |
| Subject Matter | Public policy & environmental management,Environmental technology & innovation |
Public private partnerships (PPP)
in the developing world:
mitigating financiers’risks
Hakeem Adedayo Owolabi and Lukumon Oyedele
Big Data Analytics Laboratory, Bristol Business School,
University of the West of England, Bristol, UK
Hafiz Alaka
Faculty of Engineering and Computing, Coventry University,
Coventry, UK
Obas John Ebohon
School of The Built Environment and Architecture,
London South Bank University, London, UK
Saheed Ajayi
School of Built Environment and Engineering,
Leeds Beckett University, Leeds, UK, and
Olugbenga Akinade, Muhammad Bilal and Oladimeji Olawale
Big Data Analytics Laboratory, Bristol Business School,
University of the West of England, Bristol, UK
Abstract
Purpose –A major challengefor foreign lenders in financingpublic private partnerships(PPP) infrastructure
projects in an emerging market (EM) is the bankability of country-related risks. Despite existing studies on
country risks in international project financing, perspectives of foreign lenders on bankability of
country-specific risks in an EM is yet to be explored. Hence, using a mixed methodology approach, three
private financeinitiatives/PPP projects in Sub SaharanAfrica (Nigeria) were used to investigate political risk,
sponsor, concession and legal risks in PPP loan applications. Thepaper aims to discuss these issues.
Design/methodology/approach –The study adopted mixed methodological approach comprising focus group
discussions and analysis of loan documents obtained from foreign project lenders,in addition to the questionnaire
survey distributed to local and international project financiers with experiences in PPPs within Nigeria.
Findings –Results identified seven topmost bankability criteria for evaluating country-related risks
(political risk, sponsor, concession and legal risks) in EM PPPs. In addition, a “Risk and Bankability
Framework Model”was developed from the study presenting critical parameters for gaining foreign funding
approval for EM’s PPP loan applications.
Research limitations/implications –Since the study only explored bankabilityof PPPs in Sub Saharan
Africa with the exclusion of other geographical regions, the proposed framework model should be taken in
contextof EMs as a mind-map for foreign lendersand local private investorsseeking to finance PPPs in an EM.
Practical implications –Results from the study represent critical parameters for winning foreign loan
approval for PPP infrastructure projects within an EM context.
Originality/value –Study proposed “Risk and Bankability Framework Model”relevant for evaluating PPP
loan applications at the pre-approval stage for EM PPPs.
Keywords Emerging markets, Risks
Paper type Research paper
1. Introduction
Despite the huge record of project finance investments in emerging markets (EMs) so far
(Babatunde and Perera, 2017), financing infrastructures through public private partnerships
(PPP) remains risky for foreign lenders (Ameyaw and Chan, 2015). Studies such as Kayaga (2008)
and Ameyaw and Chan (2015) have once attributed the associated risks to country-specific
World Journal of Science,
Technology and Sustainable
Development
Vol. 16 No. 3, 2019
pp. 121-141
© Emerald PublishingLimited
2042-5945
DOI10.1108/WJSTSD-05-2018-0043
Received 26 May 2018
Revised 1 August 2018
Accepted 27 August 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2042-5945.htm
121
PPP in the
developing
world
factors relating to the macroeconomic conditions of the project host nations. According to
Atmo and Duffield (2014), out of all the current EMs (i.e. Brazil, India, Russia, Indonesia, etc.), Sub
Saharan Africa has a higher country-related risk perception. This situation has therefore
hindered her capacity to attract sufficient foreign inflows for prosecuting her PPP
infrastructure development ambitions (Briceño-Garmendia et al., 2008). Yet, with an estimated
annual investment of $93bn finance gap required to meet current infrastructural
deficit (Gutman et al., 2015), PPP remains the only viable option for Sub Saharan Africa
(Salawu and Fadhlin, 2015).
Several studies have argued that, foreign financiers’interested in African PPPs must
pay attention towards not only projects’commercial risks but the bankability of country-
related risks (Al Khattab et al., 2007; Busse and Hefeker, 2007; Mills, 2010). According to
Ncube (2010), bankability in PPP project financing is a big concern despite active roles of
multilateral and bilateral agencies in Sub Saharan Africa. In many instances, risks
associated with weak credit capacity to obtain foreign loan by indigenous sponsors
usually give rise to sponsor risk (Mills, 2010). From foreign financiers’perspective,
sponsor risk discourages lenders from financing or compels them to reduce the size of loan
to invest in a project’(Mills, 2010). In addition, scenarios such as civil unrest, currency
devaluation, leadership instability, weak legal framework for PPP, etc., generate a real
threat of political risk inprojectfinancing(Binget al., 2005; Carrieri et al.,2006;Busseand
Hefeker, 2007). According to Kayaga (2008), expropriation and government repudiation of
contracts seriously limited Africa’s PPP growth, with 80 per cent of PPP contracts
attracting disputes and cancelled between 1990 and 2004. Such cancellations usually have
sustained impact on a nation’s PPP initiative by dampening market confidence in
government’s commitments (Ncube, 2010).
One of the fundamental aspect of PPP arrangements is full compliance with project’s
output specifications, performance contracts and concession termination clauses
(Oyedele, 2013; Khadaroo, 2014). However, given the relatively weak PPP culture,
institutional and regulatory frameworks in many Sub-Sahara African economies, failures
of compliance may create threats of concession-related risks. With huge lender’s
investments usually at stake in PPPs, contractual infractions and consequent statutory
deductions will jeopardise foreign financiers’investments on such projects.
Other important risk factors may emerge in form of legal or regulatory ri sks. In most
cases, such risk arises in situations where construction or operations of PPPs contravene
domestic laws of host nations, or problems relating to approval and permits of projects
(Sachs et al., 2007; Oyedele, 2013).
The overall consequence of these identified country-speci fic risk factors on foreign
financiers’investments in sub Saharan African PPPs can be quite damaging. As such, a
framework for evaluating the bankability of country-related risks in PPPs within an EM
context has been canvassed (Olsson, 2002; Atmo and Duffield, 2014; Giannetti and
Ongena, 2012). Albeit, enormous literatures abound on risks in private finance initiatives
(PFI)/PPP generally (Bing et al., 2005; Eaton et al., 2006; Hoffman, 2008; Quiggin, 2004;
Hardcastle et al., 2005; Hammami et al., 2006; Khadaroo, 2014). However, much of these
studies have focussed on projects in advanced economies like the UK, Australia, Canada,
USA, etc. (Demirag et al., 2011; Grimsey and Lewis, 2002; Bing et al., 2005; Khadaroo,
2014). Although few studies exist on risks in PPP in some emerging economies i.e. China,
Indian, Turkey, etc. (Quiggin, 2004; Chan et al., 2014; Sachs, 2007; Giannetti and Ongena,
2012), there is currently no research exploring the bankability of country-related risks in
PPP projects in Sub Saharan Africa, especially from foreign financiers’perspectives.
This therefore represents a significant gap in knowledge on which basis the current study
emerged. The overall aim of this study is to investigate the bankability criteria
and associated risk mitigation strategies used by foreign financiers to evaluate
122
WJSTSD
16,3
To continue reading
Request your trial