Interview with Aravind Manoharan

Alternative Resources Investment Co. LLC (ARI) is an offshoot of Ali Omran Al Owais Investments Co. LLC (AOG) as an investment arm focussed on principal investing for infrastructure projects primarily in aviation and energy. Geographically, our focus has always been EMEA, AP and Eastern Europe Region.

Aviation and energy related sectors have always shown impeccable progress in developing countries with an average yearon- year growth of 8 to 10%. My approach has been very straight — numbers are everything in this industry and having a de-risked approach always helps. We always target investments or infrastructure projects which cater an Internal Rate of Return (IRR) of more than 15 – 18%. I prefer looking at the business which is stable and has strong cash inflows. For any given new project, we try our best to minimise the CAPEX to the maximum extent possible. Our maximum equity exposure in any company is not more than 30%. This allows us to have our exit options more structured and efficient. Apart from the number-centric approach, we also take socio factors into consideration as well. More preference is given where there has been a counter reference from the side of the government for further job-creation and skillgrowth in the Greenfield and Brownfield projects.

The African infrastructure financing gap is estimated to be around $100 billion per year, as per the African Development Bank estimates. The region faces biggest infrastructure deficit in the sector of roads and power. Road connectivity continues to remain a major issue with only one-third of rural population connected with an all-season road. In addition, 53% of PUBLIC – PRIVATE PARTNERSHIP MODEL PROJECTS Aravind Manoharan Vice President, Principal Investments at Alternative Resources Investment Co LLC (ARI), Dubai 44 Africa does not have access to regular electricity and needs large investment in the power sector. There are a number of infrastructure development projects which have been stuck in the conceptual phase for too long across the region. To move these projects from that theoretical stage, new sources of financing is required and PPPs can play a major role in addressing this financing gap.

The Public – Private Partnership model is set to become a major tool to address the infrastructural financing gap, which is estimated to be around $46 billion annually by the World Bank. The PPPs can address this gap by leveraging the capabilities of both the private and the public sector. The private sector provides the required financing, operational experience and technical know-how, while the public sector contributes by providing institutional clarity and transparency.

This depends on several factors. There have been cases where several government entities in Africa have overstretched their balance sheet by having more and more soft loans for executing the desired infrastructural projects. The shift has been driven by factors such as insufficient investment, constrained government budgets, a need for greater efficiency and for the enhancement of service delivery.

The two major factors that continue to hinder the growth of PPP in Africa are firstly, the lack of legal and regulatory frameworks for the PPPs and secondly, the lack of technical skills to manage PPP projects. Other factors such as country risk, a small market size, political instability, limited infrastructure and financial markets.

Funding for PPP projects is not an issue in Africa as there are a range of financial institutions such as the Development Funding Institutions (DFIs), Development Banks, hedge-fund groups, private companies and commercial banks that are ready to make investment in these projects. The only hitch is the lack of a legal framework. The projects, which do not find investors are largely those that are non-bankable as the PPP underline risk is not duly balanced or there is a lack of an acceptable risk framework.

Over the last decade, governments in the African region have taken initiatives to make the regulatory environment more conducive for PPPs by passing a centralized PPP framework, creating laws and developing institutions. However, still a lot needs to be done from the government side in this respect. For instance, they need to harmonize the PPP regulations at the sub-national and ministerial level as well as they need to empower the institutions with regard to resources and independence to ensure adherence to the laws in practice.

The usage of PPP model, especially the transport PPPs, is largely focussed on sectors such as ports, rails and roads. But, there are only a handful of countries which have sufficient demand level to attract bankable PPPs. However, governments across the African region have begun to realize the benefits of this model and have started offering airport development projects under it. In 2016, the Bugesera International Airport PPP was signed between the government of Rwanda and the Mota Engil Engenharia e Construcao Africa SA. In addition, there are four international airport PPP projects in Nigeria which are currently under the planning stage.

As indicated earlier, the biggest hurdle towards leveraging the PPP model for reducing the infrastructure gap in Africa remains the lack of well-structured PPP projects. However, some countries are trying to indicate the size of well structured PPP project pipeline by hiring transaction advisors to overcome the lack of expertise in structuring the PPP projects. Further, the governments are trying to make the environment more conducive for PPPs by introducing more transparency and PPP specific legal reforms as well as through the development of technical skillsets in-house.