“The cost of financing for African projects is largely inflated by the negative perception. A few years ago Italy’s debt to GDP ratio was about 140% yet they were able to borrow money at interests of less than 1%. African countries don’t come anywhere near 140 per cent debt to equity GDP ratio and yet we pay upwards of 6% on our debt.
The international community must come together to address the risk premium for African countries. If this is not addressed, I don’t see us getting access to affordable debt anytime soon. In Kenya today, we are spending a third of our tax revenue to service debt and this is not sustainable.”
AfricaLive.net discusses accelerating Africa’s infrastructure development with Paul Karekazi, Executive Chairman of Kenya-based Gibb Africa.
AfricaLive: Please introduce Gibb Africa to our readers and tell us what makes up the DNA of the organisation.
Paul Karekezi: Gibb Africa Limited has it roots in a British partnership, Sir Alexander GIBB & Partners (Africa), which started its operations in Africa back in the 1940s. It went from a partnership to a limited liability company, decades later. In 1990, a Kenyan member of the management acquired 49% of the company’s shares. Today Gibb Africa Limited is a 100% Kenyan-owned company, following the completion of a management buyout in 2003. Our headquarters is in Nairobi, Kenya.
We operate across the continent which includes Eswatini in Southern Africa and Sierra Leone in West Africa. Primarily we are consulting engineers that also provide environmental services and architectural services through our subsidiary. Our focus is mostly on public infrastructure but we have also carried out agricultural projects and various social infrastructure, including hospitals and educational facilities.
The majority of our clients are public sector entities because it so happens that on the continent the biggest employer is the public sector, particularly for large projects. Private sector investment in infrastructure is relatively underdeveloped in Africa when it comes to roads, water supply, and rail network development.
We see ourselves as partners of various governments when it comes to offering localised solutions to public infrastructure challenges. By localised I mean offering tailor-made solutions of first-world quality.
AfricaLive: In your development over the years, what projects would you point to as some of your most significant?
Paul Karekezi: There is quite a number, especially in the agricultural arena. We have worked to build smallholder farming systems where we work with governments to uplift farmers. Here, we devise irrigation methods to provide water to farmers while also advising on the best crops given the spoils type
Our outreach in agriculture has extended to Malawi, Tanzania, and Kenya as well. In construction, we have been involved in major road and airport projects as well as projects involving renewable energy, including solar and geothermal power projects.
Whilst agriculture projects were not the biggest projects we’ve done, in my opinion, they have been some of the most impactful.
AfricaLive: Have you done significant work in the water and sanitation sector?
Paul Karekezi: Yes, one of the biggest projects we did was a water transfer project from Lake Victoria into Northern Tanzania. This project connects several towns in Northern Tanzania with piped water. We also worked on the largest sewerage scheme in Kenya on sanitation which involved the construction of the largest sewage ponds in Nairobi, as well as a reticulation system in greater Nairobi.
We have also been involved in small but impactful sanitation projects. One of these is the ongoing fecal sludge and solid waste management project in four towns in Rwanda.
Sanitation projects have a huge impact considering the population growth and urban migration on the continent. Working to ensure people have access to basics such as water and sanitation has a bigger impact than many other infrastructure projects.
AfricaLive: What do you consider the investment priorities to be when it comes to infrastructure in East Africa?
Paul Karekezi: Transportation must be a priority in the East African region because it drives commerce. However, water and sanitation must be a close second, followed by irrigation, particularly in Kenya and certain parts of Tanzania. Let me address what I see as a problem then suggest what could be done going forward. In my view, three problems plague the East African and even African infrastructure as a whole. The first one is the capacity of the public sector to develop bankable projects. The second one is the issue of corruption in the procurement process and the third is the financing of infrastructure. All these issues are interrelated.
African governments have realised that they cannot finance infrastructure projects based on tax revenues and loans. They now realise that they must look into working with the private sector. A recent report by the Africa Development Bank stated that African countries need to invest between $130 to $150 billion a year to close the infrastructure gap. Taxation and loans cannot fill this gap; the private sector must come into play.
The first challenge of capacity begins with weakness in feasibility studies and business plans. Projects are rushed through by politicians to help swing an election. Poorly planned projects do not attract sufficient funding, so we end up with many stalled projects. Continuity is also needed in projects to help sway serious buyers to invest. In some countries, risk allocation becomes an issue because politicians do not understand the PPP model that well. All these issues have to do with capacity, which we lack in our public sectors. If addressed, floodgates of funding can come our way from the insurance firms and pension funds, for instance, that have access to trillions of dollars.
Corruption in the public sector remains a serious challenge for many African Governments. For example, it was recently reported that Kenya loses some USD 20 million a day (or some 30% of its tax revenue) to corruption. Management of public finances must be a top public policy priority. However, as these countries struggle to reduce corruption in the public sector, there is an urgent need to invest in the provision of basic infrastructure, which is the foundation for sustainable economic growth and development.
Whilst many African governments recognize the critical role they have to play in the provision of a solid foundation for national economic transformation by providing the social capital to anchor sustainable economic growth and enhance human development, their efforts are hamstrung by the high cost of “perception premiums,” which is based on overinflated risk perception assigned to the region and countersigned year after year by rating agencies, irrespective of improving macroeconomic fundamentals, the global economic environment, and individual countries’ growth prospects.
A comparison of borrowing rates incurred by African governments on their sovereign debt to those borne by more advanced economies, most of which have significantly higher debt-to-GDP ratios is very instructive.
As the United Nations Secretary-General, Mr. Guterres, has stated in many instances in the recent past, what is needed is a globally coordinated financing mechanism that fosters transparency and strengthens the regulatory environment to address growth-crushing and default-driven rates, with the intention of equalizing access to affordable development finance and accelerating the process of global income convergence.
AfricaLive: Do you believe that the private sector has a role to play in solving these issues?
Paul Karekezi: I agree that we have a role to play, but I think that the public sector has an even bigger role. We can package a good project but then when it comes to selection, prioritisation, and time allowed for projects; it’s all in the hands of the public sector. A few years back, the Kenyan government embarked on a project to build roads 10,000 kilometres in 5 years under public-private partnerships (PPP) arrangements. The initial phase entailed 2,000 Kms which eventually crept to 4500 Kms.
This initial phase of the project was divided into 48 lots each. When we looked at the project documents, it became evident that the lots were poorly prepared. The timelines for submission of bids were also quite restrictive which put a lot of pressure on an already problematic process. In the end, only 1 lot out of the 48 lots has to date achieved financial close. The point here is that the public sector has to do more when it comes to preparing bankable projects that can attract private sector investment. The choice must primarily be driven by economics in the broad sense, not by political expediency.
AfricaLive: African infrastructure is less risky than commonly perceived. According to Moody’s, default rates at less than 6 percent are half of those of Latin America. This negative and inaccurate perception of the continent-often promoted by the international media- is known as Afro-pessimism.
How can you play a role in fighting Afro-pessimism?
Paul Karekezi: The cost of financing for African projects is largely inflated by the negative perception. A few years ago Italy’s debt to GDP ratio was about 140% yet they were able to borrow money at interests of less than 1%. African countries don’t come anywhere near 140 per cent debt to equity GDP ratio and yet we pay upwards of 6% on our debt.
The international community must come together to address the risk premium for African countries. If this is not addressed, I don’t see us getting access to affordable debt anytime soon. In Kenya today, we are spending a third of our tax revenue to service debt and this is not sustainable.
AfricaLive: As part of our digital roundtable debate, please give your response to the following opinions relating to the development of African infrastructure:
On funding: Anshul Rai, Chief Executive, Nigeria Infrastructure Debt Fund: “Even in 2021, the financing model for Africa is stuck in the 1990s. Government must insist on foreign investors accepting at least a part of the currency risk. We need funding models that match the realities of modern Africa.”
Paul Karekezi: I agree with the second part of the statement but not the first. Somebody must carry that infrastructure risk. There is no “free lunch”. If foreign investors accept some of the forex risks, they will price it and it would most certainly be more expensive than the government assuming the risk as it provides certainty. Forex swaps are very expensive. In the case of availability PPP models, governments will end up paying more and in the case of user-pay PPP models, the users will end up paying more, which will impact tax revenue – users will forego some other consumptions.
The risk transferred to private investors should be such that the private investors are best placed to manage it – forex risk cannot be one of such risks for the time being.
The second part is in order because funding models must be in tune with the needs of modern Africa. In other words, we need some realism in these financial models. Some countries in Africa handle their financial matters poorly while others have done very well over the years. The debt levels on the continent were at an all-time low in 2010 before that started to change around 2012. The overall point is that debt premiums should be applied on a country basis instead of a universal approach across the board.
AfricaLive: On the role of African firms: From the CEO of an emerging Kenyan engineering firm: “With the stringent requirements for bidding for World Bank and other MDBs and IFIs, local companies cannot gain the required track record to jump from the category of a subcontractor to a contractor, or even less to EPC contractor. That introduces a significant restriction to the possibilities of African development.”
How do you react to that statement?
Paul Karekezi: Mine is a mixed reaction. Some of the requirements are indeed out of reach for local contractors. On the other hand, a lot of our contractors have not performed well when they have had the chance to prove themselves. In defense of local contractors, I have to revisit the corruption issue.
Some of the local contractors that get work and disappoint because of incompetence, get the jobs through corruption. Apart from the corruption aspect, there is the funding aspect. Even in projects financed by multilateral organisations, payment delays do occur and that can cripple operations. The biggest problem for me though is the advent of Chinese contractors. These companies have taken over the construction sector in Africa because, in most tender projects, there are always 5 to 6 Chinese companies on the tender list.
Chinese companies are taking business away from local companies while also doing nothing to help local contractors boost their capacity. African governments must put forward policies that create an even playing field for local contractors to build capacity. We are beginning to see movement in this regard. For example, Kenya has a public procurement provision that requires all government-funded projects to give at least 30% of their value to local contractors. In my view, this needs to be extended to projects funded by MDBs and IFIs, where such a provision does currently not apply.
AfricaLive: What are your thoughts in relation to skills development and training in the sector and how can this be developed more efficiently in East Africa?
Paul Karekezi: A couple of years ago in Kenya, programmes financed by multilateral agencies were doing a good job of building capacity. As soon as that multilateral support went away, the programmes died. Such programmes are helpful but we must find ways to fund them sustainably. When it comes to tertiary level training in East Africa, Kenya, Uganda, and Tanzania are doing a good job. What is missing is the opportunity for graduates to access the job market. We have an influx of Korean, Indian consulting, and other foreign consulting firms who are winning MDB-funded projects and provide very limited opportunity for our young engineers to grow. This is not a sustainable situation – we have to develop local capacity.
AfricaLive: What does sustainability mean to you?
Paul Karekezi: The definition of sustainability, in the context of development, which goes back to 1987 is meeting the needs of the present generation without compromising the ability of future generations to fulfill their needs and destiny.
This concept is gradually being extended to infrastructure projects developed through the public-private partnership arrangements by integrating sustainability concepts in PPP projects to compel the private sector to devise project proposals that are sustainable. One of the key pillars in this process is to require the private sector to consult and engage stakeholders, particularly those directly affected by the project in order to secure their interests.
Years ago, a wind power worth millions of dollars in Kinangop, Kenya stalled mainly due to inadequate consultation and engagement of the local community. It never got off the ground after the private party had mobilised his wind turbines to the site because the local population protested and drove the developers away. Such things can happen when both the public and private parties don’t consult widely and engage local communities.
AfricaLive: Do you believe there is adequate consultation with local communities before commencing projects?
Paul Karekezi: We don’t have enough consultations yet in my opinion. I think the realisation is now setting in and private entities see it as a way to reduce risk. Project companies are consulting more and looking to have the support of local communities by engaging more and doing more on the corporate social responsibility front.
AfricaLive: After a tough two years occasioned by the pandemic, how do you see things going in the sector?
Paul Karekezi: It’s quite unclear because we still do not know the full impact of the pandemic. Assuming that the data we are seeing is correct, we should be in the clear for now. We are not sure though if we have dodged a bullet or if one is on its way coming to hit us. The World Health Organisation seems to be concerned about the increase in COVID-19 infections in Africa. If COVID begins to affect Africa the same way it has affected other parts of the world, then things could look bleak.
However, even before COVID-19, Africa was facing serious problems closing the infrastructure gap. No doubt the advent of COVID-19 exacerbated the situation.
However, it is reassuring that world economies are beginning to pick up, although the events in Ukraine will impact African economies negatively given the rising cost of fuel and grain.
Another thing giving me hope is the AfCFTA agreement. If that is executed correctly, then things could improve significantly. Access to other African markets, trading in local currencies, will no doubt help African contractors expand their horizons.