Governmentsall over the world push to satisfy a social contract with its citizens byproviding infrastructure. However, manytimes (especially in developing countries) this quest is to no avail. There isalways pressure on government treasury. The need to provide roads is held incheck by an equally pressing need for good healthcare facilities, good schoolsetc. Accordingto a study conducted by the ministry of finance in 2016 indicatedthat Government of Ghana needs 7.
3 billion dollars to improve the country’sinfrastructure deficit. Also, McTernan (2014) reportthat the Ghana government is required to spend an average of $1.2 billion ayear from 2014 to 2024 to fill infrastructure gaps. The government clearly isfailing in this pursuit. In 2010, the National Development Planning Commission(NDPC) reported that out of 66,220km road network, only 41% was in good condition.A huge factor which is indicative of how the government is struggling toprovide good transportation infrastructure is the duration or time it takes tocomplete a road project. As reported by McTernan (2014), theKpando-Worawora-Dambai highway for example, which is 70km, was still underconstruction ten years after it was launched. Centralgovernment coffers have many times turned out to be inadequate in financinghuge projects and the stress emanating from the inadequacy of funds creates delaysin project delivery.
This is typified by the Achimota – Ofankor road projectwhich by all accounts is one of Ghana’s important road infrastructure projects.According to the Auditor General (2013), the Achimota – Ofankor road projectwas started in November 2006. It is a 5.7km stretch and it forms part of theKumasi-Accra highway which joins the two biggest cities in Ghana. Thegovernment embarked on the project at an estimated cost of GHC 40.4million.Project completion date was scheduled for November 2009. However, as stated inthe 2013 report of the Auditor General, as of December 2011, two clear yearsafter the project completion date, the project was just about 88% completed.
Theafore-stated factors can adequately be eliminated if the government can find analternative funding source for infrastructure development.Infrastructurecan be financed through one of the following ways: 1. PublicFinance: In this kind of arrangement, the government funds the project throughits own equity or through borrowed funds. 2.
CorporateFinance: This is the kind of financing in which a private company borrows fundsto construct a project which is very likely not too capital intensive. Itrepays borrowed money from operating income. 3. ProjectFinance: Project finance involves a consortium of firms that establish aspecial purpose vehicle (SPV) to build a large project which most than likely,is very capital intensive. Funding is from equity contributions from eachsponsor and funds from lenders.
Sponsors can also choose to become lendersProject financing has evolved through the centuries intoprimarily a vehicle for assembling a consortium of investors, lenders and otherparticipants to undertake infrastructure projects that would be too large forindividual investors to underwrite. Project finance is the financing oflong-term infrastructure, industrial projects and public services based upon anon-recourse or limited recourse financial structure, in which project debt andequity used to finance the project are paid back from the cash flow generatedby the project. Project financing is a loan structure that relies primarily onthe project’s cash flow for repayment, with the project’s assets, rights andinterests held as secondary security or collateral. Project finance isespecially attractive to the private sector because companies can fund majorprojects off balance sheet.The World Bank defines projectfinance as the “use of nonrecourse or limited-recourse financing.” Furtherdefining these two terms, “the financing of a project is said to be nonrecoursewhen lenders are repaid only from the cash flow generated by the project or, inthe event of complete failure, from the value of the project’s assets. Lendersmay also have limited recourse to the assets of a parent Company sponsoring aproject.
“Theadvantages of project finance as a financing mechanism are apparent. It canraise larger amounts of long-term, foreign equity and debt capital for aproject. It protects the project sponsor’s balance sheet. Through properlyallocating risk, “it allows a sponsor to undertake a project with more riskthan the sponsor is willing to underwrite independently.” It applies strong disciplineto the contracting process and operations through proper risk allocation andprivate sector participation. The process also applies tough scrutiny oncapital investment decisions. By involving numerous international playersincluding the multilateral institutions, it can provide a kind of de facto politicalinsurance.
Kensinger and Martin further argue that the finite life and fixeddividend policy aspects of project finance “mean that investors rather thanmanagers get to make the decisions about reinvesting the cash flows from theprojectOnthe other hand, the financing technique also presents certain disadvantages. Itis a complex financing mechanism that can require significant lead times. Hightransaction costs are involved in developing these one-of-a-kind,special-purpose vehicles.
The projects have high cash flow requirements andelevated coverage ratios. The contractual arrangements often prescribeintrusive supervision of the management and operations that would be resentedin a corporate finance environment.In conclusion, in 2011, aNational Policy on Public Private Partnership Policy (PPP) was developed toguide the implementation of projects in the country under project finance. The Policy would ensure compliance andsafeguards at the work place, risk sharing and allocation, affordability andsustainability. Under PPP arrangement, there would be transparency andfairness, while relevant procurement procedures would be followed. The PPPpolicy would enable the Government to leverage on the private sector financialresources for infrastructural development. The PPP programme would have theProject Development Facility, which would enable the funding agencies to haveaccess to funds and the Viability of the Project, which requires job creationand open-up of the country to the international community.