From an investor’s point of view, the biggest risk in PPP bid participation is often not competing bidders, but rather the process failing to reach a conclusion. For this reason, investment committees sometimes regard PPP bid participation as a form of venture capital investing. With sovereign wealth funds now investing directly in infrastructure as cornerstone investors, co-investors, and lenders, these funds play a key role in mitigating risk, and can provide a major boost to future PPP programs in Africa.

By nature, sovereign wealth funds (SWFs) are trusted partners of sponsor governments and international investors, have top-level political support, and employ private equity and industry specialists. State agencies are increasingly looking to new capital structures to meet needs best suited for long-term investors—especially in areas such as transport, healthcare, and education. This is part of a growing trend in emerging markets to expand social benefits, as there is a recognition that these benefits are vital to support economic growth. Some SWFs are taking leadership roles in the development of these new capital structures.

In Russia, this trend is supported by the Russian Direct Investment Fund (RDIF), and is capitalized with $10 billion. RDIF was established in June 2011 to make investments, primarily in the Russian Federation, and act as a catalyst for direct investment into the Russian economy. The fund invests alongside qualified foreign investors.

Experience & expertise

In developing PPPs and private infrastructure, Russia has the advantage of being among the top emerging markets for private infrastructure ownership/investment. Russia has a successful track record in privatizations and sector reform, along with several significant PPPs that reached financial close. However, Russia’s PPP program has had growing pains, in part due to the 2008 financial crisis.

Having gained experience, the Russian government is now embarking on a new wave of PPPs for major roadways, bridges, rail, ports, and other vital infrastructure. The need for such assets is acute. Russia’s per capita road density is one-fourth that of some developed markets, and Russia’s rail sector carries over 80 percent of industrial production.

Applying solutions

Unsuccessful PPP programs in emerging markets often follow a similar pattern: an initial PPP program is attempted, the project does not reach financial close for a variety of reasons, and the PPP program needs to be restarted. The restarted program is then considered a risk among investors. This uncertainty is priced into the revived program or results in lack of bidder interest.

In the upcoming Russia PPPs, RDIF will play a key role as an investor. RDIF’s participation in a PPP bid is intended to signal to the market that:

  • the project is vital to the Russian economy and has strong support;
  • uncertainty in the process is greatly mitigated; and
  • the PPP bid process, preferred bidder selection, and project implementation all follow best practices.

In Africa, Nigeria is supporting infrastructure development through the newly established Nigeria Sovereign Investment Authority (NSIA). Nigeria’s GDP is growing at 8 percent, and is successfully diversifying its economy through industrialization, agriculture, and a rapidly developing consumer sector. Having recently privatized its power industry, Nigeria attracted strong interest from regional and international infrastructure investors.

And, while the recent focus by investors has been electricity, Nigeria is in urgent need of expanded infrastructure for highways, rail, water, healthcare, and agriculture supply chain infrastructure. NSIA will play a major role in supporting PPP development by providing investment platforms to promote investment, economic growth, and help the government fulfill its vital social responsibilities.

The potential for African governments to utilize State-sponsored investment funds to support PPP programs is great, especially in markets in which investors may attach a high risk premium. There is also the potential for SWFs in different regions to cooperate, co-invest, and help bring global expertise. For the African infrastructure market, SWFs have the benefit of being able to reduce project risk, lower financing cost, and enhance the overall project structure for investors and the public.