In recent years countries around the world have met the challenge of developing and maintaining critical infrastructure by restructuring public utilities and private sector participation in the infrastructure sectors. Given the constraints on public budgets to finance these growing infrastructure needs, governments have sought to shift part of the burden of new infrastructure investment to the private sector. Many countries, Zambia included have enlisted private sector participation in infrastructure using concession contracts with private operators and developers.
What is a Concession?
A concession is a type of contract between a private company and a government that allows the private company to operate and maintain a public asset for a specific period. The private company is granted the right to use the public asset for a specified period in exchange for making significant investments in the asset’s construction, operation, and maintenance. The private company is also responsible for generating revenue from the asset and paying a portion of that revenue to the government in the form of fees or royalties.
Though concession arrangements can take any number of forms involving the shifting of risks and responsibilities from the public to the private sector, they entail a myriad of legal and economic issues including the organization of government entities responsible for concession programs. Theoretically, or at least in principle, risks should be borne by the party best able to control, manage or hedge against those risks. But in practice, numerous issues arise such as distinguishing between costs that are truly exogenous to the operating firm and those that are not. The flexibility of the concessionaire’s operations should be maintained with focus being on the result and not the means to be used. Regardless, performance targets can be designed to allow for renegotiation under specific preestablished procedures.
Even if detailed and specific rules are incorporated in the agreement, there is still need for some degree of regulatory discretion. As part of the debate for whether PPPs are generally beneficial is the argument PPPs provide ‘additionality’ of investment in public infrastructure. If the initial investment in a PPP falls outside the public budget, this enables the public sector to make (or accelerate) investments in infrastructure which would not otherwise have been possible. Investors are incentivized to design it to produce the best ‘whole-life’ cost as this will result in a greater saving in maintenance costs over the life of the PPP Contract. Regardless of the arguments for PPPs, the complexities as well as the higher financing costs that may be implicit in PPPs should not be overlooked.
The type of concessional arrangement that the Government of Zambia has decided to enter with Macro-Ocean Investment Consortium has left many experts bewildered. It is not because it will fail or otherwise, but because it flips the usual textbook way of looking at things. Macro-Ocean Investment Consortium is a group of Chinese Companies, headlined by Aviation Industry Corporation (AVIC International) and China Railways Seventh Group. The consortium will be tasked with the construction and management of the Lusaka-Ndola dual carriage way for a concessional period of about 25 years, with construction scheduled to start in September 2023. Generally, a private company given rights to perform a service that is generally a public one must be responsible for the financing and all other risks involved. However, the consortium will not be required to come its own funds. The consortium will be required to borrow locally from National Pension Scheme Authority (NAPSA), Workers Compensation Fund Control Board (WCFCB) and Stanbic Bank to total about $577m.The rationale is that if Macro-Ocean consortium was going to borrow fund to finance the construction of the road, why not borrow locally anyway? And if so, why not borrow from Pension Funds and some other equity partners within? As counterintuitive as this all may appear, it presents with some pretty good merits for the country, some of which are outlined below.
- Since the company enlisted to construct the road would still have needed to be paid by someone, the government may have been required to get a loan to finance the project. But in this case, instead of the government getting a loan either foreign or local, Macro-Ocean Investment Consortium will have to borrow locally to finance the project. Macro-Ocean Investment Consortium will then have 25 years to raise the money to pay back the loan with interest to the lending parties. This may be the first road loan arrangement that brings a profit to the country. Usually, financing was through foreign debt which pushed government to buy dollars when paying back, depreciating the kwacha in the process.
- Since the company will be responsible for the road for 25 years, they will have to make sure it is of highest quality as a poor road will not be profitable or good for their business as they will need to ensure they cut out on many costs, particularly of constant maintenance. And believing that a good road at the end of the concession is part of the terms, the country will have benefited from not having to draw out resources to maintain the road for 25 years. Also, the 25-year concession period means tolls may not have to be increased as it is good enough time for all parties involved to make profit.
Fiscal Sustainability
The transaction between the republic of Zambia and Macro-Ocean Investment Consortium appears to be Fiscally Sustainable. According to experts, how a government finances its budget deficit matters greatly. Any type of financing has economic consequences, but some types are particularly worrisome among which foreign financing is at the helm. In the case of the construction of the Lusaka-Ndola dual carriageway, all the financing will be obtained locally. Although domestic financing is also precarious, the government will have no hand in borrowing as the borrowing will be done by the Consortium. This means money that would need to go out of the country and the Government will not have to buy dollars that in turn affect the strength of the local currency. The road being a major route to Congo DR once fully functional may help increase traffic and cut out waiting time. It must be borne in mind that Macro-Ocean investment Consortium will only oversee approximately 380km and not the entire road network in the country. The Government will still have plenty more roads to collect tolls from. It can therefore be concluded at present that the Lusaka-Ndola dual carriageway concession agreement will have minimal to no effect on the fiscal sustainability of the country despite major financing being drawn from pension funds. This loan deal will go in the books of the financing entities as investments like many others they have undertaken in time past. Should things go awry, the investors can take over collection of tolls to recoup their investment. But ultimately, the concession is poised to not inconvenience users as toll fees will likely be maintained. And since no drastic policy change will be required, as it doesn’t affect the liquidity or solvency of government, I personally believe this to be a beneficial and fiscally sustainable venture and will be interested to see how it pans out to be able to draw meaningful lessons.