all over the world push to satisfy a social contract with its citizens by
providing infrastructure. However, many
times (especially in developing countries) this quest is to no avail. There is
always pressure on government treasury. The need to provide roads is held in
check by an equally pressing need for good healthcare facilities, good schools
to a study conducted by the ministry of finance in 2016 indicated
that Government of Ghana needs 7.3 billion dollars to improve the country’s
infrastructure deficit. Also, McTernan (2014) report
that the Ghana government is required to spend an average of $1.2 billion a
year from 2014 to 2024 to fill infrastructure gaps. The government clearly is
failing 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 to
provide good transportation infrastructure is the duration or time it takes to
complete a road project. As reported by McTernan (2014), the
Kpando-Worawora-Dambai highway for example, which is 70km, was still under
construction ten years after it was launched.
government coffers have many times turned out to be inadequate in financing
huge projects and the stress emanating from the inadequacy of funds creates delays
in project delivery. This is typified by the Achimota – Ofankor road project
which by all accounts is one of Ghana’s important road infrastructure projects.
According to the Auditor General (2013), the Achimota – Ofankor road project
was started in November 2006. It is a 5.7km stretch and it forms part of the
Kumasi-Accra highway which joins the two biggest cities in Ghana. The
government embarked on the project at an estimated cost of GHC 40.4million.
Project completion date was scheduled for November 2009. However, as stated in
the 2013 report of the Auditor General, as of December 2011, two clear years
after the project completion date, the project was just about 88% completed.
afore-stated factors can adequately be eliminated if the government can find an
alternative funding source for infrastructure development.
can be financed through one of the following ways:
Finance: In this kind of arrangement, the government funds the project through
its own equity or through borrowed funds.
Finance: This is the kind of financing in which a private company borrows funds
to construct a project which is very likely not too capital intensive. It
repays borrowed money from operating income.
Finance: Project finance involves a consortium of firms that establish a
special purpose vehicle (SPV) to build a large project which most than likely,
is very capital intensive. Funding is from equity contributions from each
sponsor and funds from lenders. Sponsors can also choose to become lenders
Project financing has evolved through the centuries into
primarily a vehicle for assembling a consortium of investors, lenders and other
participants to undertake infrastructure projects that would be too large for
individual investors to underwrite. Project finance is the financing of
long-term infrastructure, industrial projects and public services based upon a
non-recourse or limited recourse financial structure, in which project debt and
equity used to finance the project are paid back from the cash flow generated
by the project. Project financing is a loan structure that relies primarily on
the project’s cash flow for repayment, with the project’s assets, rights and
interests held as secondary security or collateral. Project finance is
especially attractive to the private sector because companies can fund major
projects off balance sheet.
The World Bank defines project
finance as the “use of nonrecourse or limited-recourse financing.” Further
defining these two terms, “the financing of a project is said to be nonrecourse
when lenders are repaid only from the cash flow generated by the project or, in
the event of complete failure, from the value of the project’s assets. Lenders
may also have limited recourse to the assets of a parent Company sponsoring a
advantages of project finance as a financing mechanism are apparent. It can
raise larger amounts of long-term, foreign equity and debt capital for a
project. It protects the project sponsor’s balance sheet. Through properly
allocating risk, “it allows a sponsor to undertake a project with more risk
than the sponsor is willing to underwrite independently.” It applies strong discipline
to the contracting process and operations through proper risk allocation and
private sector participation. The process also applies tough scrutiny on
capital investment decisions. By involving numerous international players
including the multilateral institutions, it can provide a kind of de facto political
insurance. Kensinger and Martin further argue that the finite life and fixed
dividend policy aspects of project finance “mean that investors rather than
managers get to make the decisions about reinvesting the cash flows from the
the other hand, the financing technique also presents certain disadvantages. It
is a complex financing mechanism that can require significant lead times. High
transaction costs are involved in developing these one-of-a-kind,
special-purpose vehicles. The projects have high cash flow requirements and
elevated coverage ratios. The contractual arrangements often prescribe
intrusive supervision of the management and operations that would be resented
in a corporate finance environment.
In conclusion, in 2011, a
National Policy on Public Private Partnership Policy (PPP) was developed to
guide the implementation of projects in the country under project finance. The Policy would ensure compliance and
safeguards at the work place, risk sharing and allocation, affordability and
sustainability. Under PPP arrangement, there would be transparency and
fairness, while relevant procurement procedures would be followed. The PPP
policy would enable the Government to leverage on the private sector financial
resources for infrastructural development. The PPP programme would have the
Project Development Facility, which would enable the funding agencies to have
access to funds and the Viability of the Project, which requires job creation
and open-up of the country to the international community.