Executive Summary
The public-private-partnership (PPP), or private-finance-initiative, model has been used since the early 1990s to finance and procure infrastructure projects around the world. In Australia, Britain, Canada, parts of continental Europe, and, more recently, in the United States, the use of private-sector capital and expertise has helped to fund many high-quality infrastructure assets.
In Australia and Canada, such analysis has been carried out. Essentially, agencies in both countries have concluded that, while private finance is more expensive, the government gains private-sector innovation, transfers substantial risk, receives efficient whole-of-life treatment of the asset, and, ultimately, generates more value than if the government financed the project itself. Partnerships British Columbia and Infrastructure Ontario, which are responsible for the vast majority of Canadian PPP projects, as well as Infrastructure Australia, have published comprehensive methodologies that compare the private-financing premium with the value of the benefits that PPPs can provide. All three agencies found that using PPPs or alternative financing and procurement methods can be cost effective.
As the Parliament of Ghana deliberates on the Public Private Partnership (PPP) Bill, 2016, I will like to add my 2 cents to the Bill through this article. This article seeks to encourage Ghana public policy makers to include a PPP tax credit as an incentive to unleash private investment into public infrastructure.
Specifically, I propose the following
- PPE investor’s incentive– Tax holiday should be given to PPP investors by allowing 100% income tax deduction for equity investments for persons investing in companies that enter into PPP with Government. This translates into a general 25% tax credit
- PPE Company’s incentive: Increase the thin capitalization threshold of 3: 1 to 4:1 for PPE companies in order for them to deduct more of their debt interest as tax deductible.
Below are questions and answers to give explanation on the proposed plan above.
- What is infrastructure?
Infrastructure is the fundamental facility and system serving a country, city, or other area, including the services and facilities necessary for its economy to function. It typically characterises technical structures such as roads, bridges, tunnels, water supply, sewers, electrical grids, telecommunications (including Internet connectivity and broadband speeds), and so forth, and can be defined as “the physical components of interrelated systems providing commodities and services essential to enable, sustain, or enhance societal living conditions.
Infrastructure may be owned and managed by governments or by private companies, such as sole public utility or railway companies. Generally, most roads, major airports and other ports, water distribution systems, and sewage networks are publicly owned, whereas most energy and telecommunications networks are privately owned. Publicly owned infrastructure may be paid for from taxes, tolls, or metered user fees, whereas private infrastructure is generally paid for by metered user fees. Major investment projects are generally financed by the issuance of long-term bonds.
- Why infrastructure matters
The provision of public infrastructure and services is one of the prime mandates of Governments all over the world. Infrastructure (such as roads, power, rail, water and sanitation, sea and airports, among others) is a fundamental prerequisite for economic growth and development. In addition, social and community infrastructure including education and health facilities, public housing and buildings, social, cultural and commercial facilities and infrastructure are essential in modern societies. All over the world studies have consistently shown the close relationship between infrastructure and economic output[1].
- The state of Ghana’s infrastructure
| Current state | |
| Air transport | Low volumes in the air transport sector offer vast future potential. |
| ICT | Very competitive market with high levels of mobile penetration at relatively low cost |
| Ports | Domestic maritime trade is served by two ports: Tema, around 25km east of Accra, the capital; and
Takoradi, 230km to the west. The two ports handle more than 90% of foreign-trade volume |
| Power | Well-endowed with generation capacity Good electrification rate |
| Railways | Rail freight and passenger volumes are negligible |
| Roads | Road transport is by far the most important means of moving freight in Ghana and is the sector that requires the greatest consideration. Roads carry 95% of passengers and 98% of the country’s freight. The Government is spending on average 1.5% of GDP on roads, one of the highest levels in West Africa |
| Water resources | Substantial volume of water storage available by Africa standards. |
| Water and sanitation | Reached MDG for water
Significant improvements in utility finances |
Source:
https://www.pwc.com/gx/en/transportation-logistics/publications/africa-infrastructure-investment/assets/ghana.pdf
- Ghana infrastructure compared to other countries in Africa
Below is a PwC infrastructure index assessment of countries in Africa. As noted below, Ghana ranks very low among a lot of Africa countries.
Source: https://www.pwc.com/gx/en/issues/strategy/emerging-markets/africa/assets/into-africa-launch-presentation.pdf
- Funding of infrastructure in Ghana
The source of financing of infrastructure in Ghana varies significantly across sectors. Some sectors are dominated by government spending, others by overseas development aid (ODA), and yet others by private investors.
During the five years from 2003 to 2007, Ghana’s economy grew at an average annual rate of 5.6 percent, which accelerated to 7.3 percent in 2009. Ghana’s infrastructure improvements added just over one percentage point to the per capita growth rate for the period 2003 to 2007.
As of 2008 in the United States for example, public spending on infrastructure has varied between 2.3% and 3.6% of GDP since 1950. In addition to government’s investments, many financial institutions in the US have investments in infrastructure. Thus, there is high level of private sector investments in infrastructure projects in the US.
- Public Private Partnership Bill 2016
Currently, before the Parliament of Ghana is the Public Private Partnership Bill.
The Public Private Partnership Bill, 2016 has gone through its second reading granting it a safe passage into the consideration stage for discussion and approval of proposed amendments by parliament.
The bill seeks to establish a legal framework for the development, implementation and regulation of Public Private Partnership (PPP) arrangement and projects between public institute and private entities for the provision of public infrastructure and services.
The introduction of the bill forms part of government’s efforts to protect the investments of private entities involved in the PPP and boost investor confidence to improve quality and affordability of public infrastructure and services. The bill establishes the Ghana Partnership Agency (GAP) to take up the responsibility of spearheading the development of PPP programs; the GAP will be made up of professionals with the requisite expertise to take up the responsibility for continuity and effective implementation of PPP. The Agency will be responsible for issuing standardised PPP provisions, manuals and guidelines for the effective management of PPP projects. Namibia in 2016 passed a similar Bill[2]
In the 2017 Government Budget[3], the Government signaled its commitment to pass the Bill quickly, and any amendments are likely to be minor as the Bill is in line with international best practice, and with other PPP legislation in Africa. The Budget noted that Under the Ministry’s Public Private Partnerships (PPP) programme, feasibility studies for the Accra–Takoradi and Accra-Tema Motorway projects will be completed in 2017. A procurement process is currently underway for consultancy services for preparing the regulations under the Act, with work expected to begin in October. The passage of the Bill will ensure strict compliance in the provision of public goods. The state currently requires GH¢1.5 billion every year over a 10-year period to meet its infrastructure needs. As such, the absence of an effective legal framework for Public Private Partnerships (PPP) has also been of major concern to investors.
The Ministry of Finance is using the Ghana PPP programme to attract public and private sector resources and expertise to close the country’s infrastructure gap, estimated at $40 billion, or between $3.9 billion and $5.5 billion each year until 2026.
Scope of the Bill
It is necessary to establish which type of projects will fall under the definition of a PPP, to give a clearer idea of what sorts of project structures will be viable under the PPP Act, and an indication of how closely the new regime accords with that under the PPP policy.
The PPP Bill contains a more detailed definition of PPPs than the PPP policy, and applies to any “public sector project undertaken in the form of a partnership arrangement between a public authority and a private entity”.
The concept of a “public sector project” refers to projects identified in one of several government infrastructure planning documents, including the National Infrastructure Plan. This will provide investors with confidence, knowing that a project has been sanctioned as part of a broader infrastructure planning process.
A private entity is defined as a “person from the private sector” who enters into a PPP. A public authority, on the other hand, encompasses a wide range of entities, which would traditionally be considered state institutions, including state-owned enterprises and government departments, ministries and agencies.
A “partnership arrangement” is the key concept in the definition of a PPP, defined as “the legal, regulatory, contractual, financial, administrative and other arrangements for and in respect of [public private] partnerships”. PPPs, in turn, are defined as “a form of contractual arrangement between a public authority and a private entity for the provision of public infrastructure or public services traditionally provided by the public sector, as a result of which the private entity performs part or all of the service delivery functions of government, and assumes the associated risks over a significant period of time”.
Accordingly, the applicability of the PPP Act remains effectively similar to the PPP policy and accords with regional best practice, as it remains focused on the same key elements of public infrastructure or public services, provided by the private sector, with significant risk transfer over a long term.
The Bill identifies certain set forms of project structures to which it will apply. These range from infrastructure development arrangements such as the simpler “build and transfer” agreements to more complex “build, own, operate and transfer” contracts. The Bill also describes more specialised arrangements such as indefinite length “rehabilitate, own and operate” contracts, management contracts for the management of PPPs, and “supply, operate and transfer” contracts for the provision of equipment and machinery as well as training on their operation.
Another important aspect is to identify which projects will not amount to PPPs.
Projects where the functions of one institution are provided by a state-owned enterprise or other public authority will never be considered a PPP. This is clear from the use of the term ‘private party’, either directly in the application section, or in the definition of a partnership agreement.
Projects where technical, operational and financial risk is not transferred to a private entity for a sufficiently long period of time will not be considered PPPs. This remains consistent between the PPP policy and the PPP Bill, and is one of the fundamental purposes of a PPP. This excludes short term projects, where the “sufficiently long period of time” criterion is not met, and small procurement contracts such as those where the term is less than 15 years.
It will also exclude traditional outsourcing arrangements, where a contractor merely performs a public function for remuneration but does not take on risk, such as a security contractor at a public building.
Ordinary lending by the government, except where it relates to a PPP, will not be considered a PPP. Privatisation, in the form of complete divestiture of a state function, and joint ventures between the public and private sectors, are also not considered PPP.
- My proposal: Unleash the potential of private investors to finance infrastructure in Ghana
Specifically, I propose the following
- PPE investor’s incentive– Tax holiday should be given to PPP investors by allowing 100% income tax deduction for equity investments for persons investing in companies that enters into PPP with Government. This translates into a general 25% tax credit
- PPE Company’s incentive: Increase the thin capitalization threshold of 3: 1 to 4:1 for PPE companies in order for them to deduct more of their debt interest as tax deductible.
H. A winning game plan: key questions that needs to be answered
To take advantage of the opportunities in infrastructure in the next few years, infrastructure investors and developers, tax equity providers, local governments, and policymakers should be developing answers to a few key questions.
Infrastructure per funds and private project developers
- How much tax appetite do we have? Could we directly monetize the proposed tax credit?
- Do investors in our funds have substantial tax appetites? If so, how would we structure our funds to efficiently allocate tax credits?
- If we can neither use the tax credit directly nor pass it efficiently to our investors, how can we tax equity? What are the project attributes that would make a project more or less appealing to tax equity?
Tax equity providers
- What contacts do we have in the infrastructure world? What can we do to establish our credibility there?
- How much tax capacity do we have? How much could we have? Assuming a large increase in tax equity required by the market, are there opportunities for us to syndicate tax capacity rather than simply using our own?
Policymakers
- What types of infrastructure should be eligible for the tax credit?
- How do we ensure the tax credit only incentivizes infrastructure that would not be built otherwise?
- How do we design a tax credit that makes it easier—not harder—for project developers and investors without their own tax appetites to efficiently partner with tax equity investors?
[1] http://www.mofep.gov.gh/?q=news/060713
[2] http://www.parliament.na/phocadownload/bills/2016/b24.pdf
[3] http://www.mofep.gov.gh/sites/default/files/budget/2017%20BUDGET%20STATEMENT%20AND%20ECONOMIC%20POLICY.pdf
