An evaluation of the implications of equity foreign direct investment risks in BOT infrastructure projects for overseas contractors in sub-Saharan Africa

• Main Author: Kapambwe, Frank Chisanga
• Published: University of Reading 2003
• Subjects: 338.43624
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.553105

Governments in the sub-Saharan African region are facing enormous pressure to remedy the deficiencies in infrastructure facilities and to improve the efficiency of public services. However due to budgetary and fiscal constraints nearly all governments in the region are unable to raise the massive financing needed for large-scale investment in the rehabilitation and expansion of public infrastructure facilities and to achieve improvements in services provision. The rising demand for infrastructure facilities and public disenchantment as a result of the inefficiencies and poor services provision in the face of severe capital shortages have compelled many governments in the region to look to the private sector as a means of financing infrastructure development and public services provision to supplement public expenditure. The options for private financing and provision of infrastructure facilities and services is broad ranging from public sector provision to public/private partnership to fully privately owned and operated infrastructure. Concession contracts under the Build Operate and Transfer (BOT) option have become the popular and most widely applied method for financing the expansion, rehabilitation and raising the efficiency of infrastructure facilities and public services provision in sub-Saharan Africa. The required debt and equity finance for BOT projects in sub-Saharan Africa is raised from abroad due to undeveloped financial markets. Overseas construction organisations have been the prime investors of the equity finance; the essential requirement for raising the necessary debt finance for the implementation of BOT infrastructure projects in the region. This research reviews the potential of equity foreign direct investment in BOT infrastructure projects in sub-Saharan Africa and identifies and evaluates the major risks of investing in such projects in the region. The research shows that that project specific risks (including cost overruns, design and technical and construction related delays and risks, operational risks and the uncertainty of the revenue stream) and country risks (including political, economic, financial payment, legal, corruption and market risks) are the greatest challenge facing overseas construction firms seeking to invest in BOT projects in sub-Saharan Africa. The research develops a framework within which overseas contractors seeking to invest in BOT infrastructure projects can identify, evaluate and manage these risks. The equity foreign direct investment risk management process model has been developed. using the fundamentals of the standard risk management process and the flow chart technique. The model captures and evaluates the risks with the view of putting in place suitable and effective countermeasures. An evaluation of the model demonstrates that it can be a useful tool for managing equity foreign direct investment risks from the early stages when the critical decisions to invest in a project are being made up to and including the operating stage of the facility. It provides a foundation that could be applied on BOT projects in sub-Saharan Africa in general.