The role of the capital market
Botswana, like most developing countries, still needs substantial investment in key infrastructure. More recently, the financing of infrastructure has increasingly taken the form of project finance through the Public Private Partnership (PPP) model – an arrangement where Government and a private corporation combine to provide a public service through the creation and use of new assets for a set time period. In the 2022 Budget Speech,
the Minister of Finance and Economic Development highlighted the progress being made with respect to utilising the PPP model for financing and implementation of infrastructure projects, ranging from power to housing projects. The PPP model has been an increasingly popular technique to attract private capital and a number of countries in the region have deployed the technique in project financing. There is abundant Emerging Market experience and there are various PPP projects within Sub-Saharan Africa in countries such as South Africa, Cameroon, Tanzania and Kenya which provide valuable insights and lessons into how the capital markets can be leveraged to support PPPs, lessons which are important for Botswana in progressively deploying the PPP model. The concept and use of PPP is not new to Botswana, albeit very slow. The adoption of the Privatization Policy in 2000 aimed at providing an optimal balance between the public and private sector to achieve sustainable economic growth is one indication of the acceptance of PPPs as an investment model. Lately, PPP has been formally recognized as a procurement model through the amendment of the Public Procurement and Asset Disposal Board (PPADB) Act, but formally this notion comes from as far back as the 9th National Development Plan (2003 to 2008).
The 10th National Development Plan (2009 to 2016) began the process of establishing the PPP delivery mechanism. To date, two projects have been implemented through the PPP model in Botswana, namely; Ombudsman and Land Tribunal Office Accommodation Project which was a 10-year concession that was handed over in 2017, and the SADC Headquarters Office Accommodation Project which is a 17-year concession. In the 11th National Development Plan (2017 to 2023), the government of Botswana explicitly reiterated its commitment to developing public infrastructure through the use of PPP as a means of procurement and financing of projects. This has been reiterated in the 2022 Budget Speech wherein, Government outlined several projects that will be implemented during 2022, using a PPP model covering power, waste water, roads, railway and housing. These have fiscal implications on the side of Government, carry intense capital requirements on the side of the private partner, and these capital requirements can be complemented by accessing the deeper pools of liquidity through the Botswana Stock Exchange (BSE). Infrastructure can be financed using different financial structures and instruments. Typically, these instruments include Project Bonds, Infrastructure Bonds and Infrastructure Funds. Depending on the issuer and the securities markets regulation, some are listed on the stock exchange while some can be offered privately, including through Collective Investment Undertakings (CIUs). Experiences in countries such as Brazil, Costa Rica, South Africa, Kenya, Mexico is predominantly that of both Project Bonds and Infrastructure Bonds that are offered through the public market and listed on the respective stock exchanges and this IS largely explained by the well-developed pension schemes in such countries, a phenomenon prevalent in Botswana.
South African pension funds have extensive experience investing in infrastructure, generally through issuances of bonds by the National Treasury, Government Owned Entities, Provincial Government, Mayoral Cities, Municipalities as well as the private sector. Notably, the South African National Road Agency Limited (SANRAL), City of Johannesburg, City of Cape Town are some of the significant players in this space. For example, since 2004, the City of Johannesburg has issued in excess of six bonds. Cape Town and Ekurhuleni have also issued such bonds. Almost all the funds raised by these bonds go into financing infrastructure, and interestingly all municipal bonds are listed on the Johannesburg Stock Exchange (JSE). Some of the key infrastructure projects in South Africa financed through a PPP model include the Gautrain project and the Bakwena Platinum Corridor. The Gautrain project is a 15-year contract for the maintenance and operation of the Gautrain rapid rail system. The Bakwena Platinum Corridor is a 30-year concession contract with SANRAL to construct, manage, maintain and upgrade the N1 and N4 roads. In its inception, the N1 and N4 road network was financed through 79 percent equity and 21 percent debt, much of which was raised through bond issuances.
Kenya has a well-developed history of raising capital from the public through the issuance of Infrastructure Bonds which are then listed on the Nairobi Securities Exchange (NSE). In addition, Kenya has a successful track record in infrastructure projects that have been built using PPPs. These include the Port of Mombasa Grain Terminal that was built in 1998; the Malindi Water Utility which was built in 1999 on a 5-year management contract; the Jomo Kenyatta International Airport Cargo Terminal (JKIA Cargo) which was built in 1998; the Kenya-Uganda Railway Concession in 2006, among others. Kenya’s Vision 2030 blueprint seeks to make the country an industrialized middle income economy by the year 2030 and the Government of Kenya has planned to spend an estimated sum of USD 60 Billion to put up infrastructure whilst relying heavily on PPP arrangements to achieve that goal.
Through the Public Private Partnerships Act of 2013, the Government has created an enabling legal and regulatory environment for PPPs to thrive in Kenya. While the Government of Botswana has not specifically issued Infrastructure and Project Bonds themed as such, Government has raised in excess of P15.0 Billion on the BSE to finance an array of development projects, mainly infrastructure projects. Botswana has a huge potential in terms of utilising the stock exchange to raise infrastructure finance, by both the public and private sector – and especially now and going forward in the context of the increased ceiling of the Government Note Programme to P30.0 Billion as well as the pipeline of projects envisaged under this model. Botswana has deeper pools of liquidity from pension funds in excess of P109 Billion, and empirical evidence has shown that the use of bonds to finance PPP projects is more extensive among countries with significant pension schemes having long-term liabilities that need to be matched to long-term assets. As it stands, the capital market regulations are supportive of the development of infrastructure financing through bonds issued by Government, Development Banks, local authorities as well as corporate bodies and also through pooled investment vehicles that can be listed on the stock exchange, or remain off-market. Given the abundance of capital in Botswana vis-à-vis the availability of investment instruments, project sponsors and issuers should explore Botswana’s deeper pools of long term capital to support PPP projects.
Stock exchanges, as capital raising avenues, can enable the efficient raising of both equity and debt finance usually used in PPP project financing. The BSE has a key role to play in ensuring that the domestic securities markets can be used for capital raising in respect of infrastructure development, through models such as PPPs. Over time, the BSE’s regulatory regime has been modernized to ensure that it appropriately addresses the need to raise capital by various forms of institutions, including Government, and vehicles such as Special Purpose Vehicles (SPVs) and to ensure that it does not unintentionally hinder the use of the BSE for accessing infrastructure finance. From a regulatory point of view, just like any issuance of a debt instrument, the offering of such instruments considered for PPP financing requires the submission of a series of information to the BSE, including a Programme Memorandum or a Circular (referred to as Disclosure Documents), which entail provisions for disclosure of elements such as information about the issuer, information about the instruments and the financial information.
In addition, the issuer is subject to periodic and ongoing disclosure requirements, including submission of periodic financial statements and annual audited financial statements and material events disclosure. The BSE’s Debt Listings Requirements are very detailed in terms of the contents to be included, at a minimum, in the Disclosure Documents.
The execution of infrastructure projects through PPP has proven to not only create value in the form of quality public goods such as infrastructure but also enables sustainability and maintenance of infrastructure assets in the long-term. The model allows for private sector development while the Government achieves its objective of addressing infrastructure needs sustainably. As demonstrated, the capital market, both private and public can play a supporting role in the implementation of PPP project financing. The Ministry of Finance has mentioned that PPPs still involve costs to the budget, thus the need for risk-sharing through the capital market cannot be overemphasized. Further, there is some form of relieve from the burden of immediate implementation of projects and evidently the scope to modernize infrastructure projects.
the Minister of Finance and Economic Development highlighted the progress being made with respect to utilising the PPP model for financing and implementation of infrastructure projects, ranging from power to housing projects. The PPP model has been an increasingly popular technique to attract private capital and a number of countries in the region have deployed the technique in project financing. There is abundant Emerging Market experience and there are various PPP projects within Sub-Saharan Africa in countries such as South Africa, Cameroon, Tanzania and Kenya which provide valuable insights and lessons into how the capital markets can be leveraged to support PPPs, lessons which are important for Botswana in progressively deploying the PPP model. The concept and use of PPP is not new to Botswana, albeit very slow. The adoption of the Privatization Policy in 2000 aimed at providing an optimal balance between the public and private sector to achieve sustainable economic growth is one indication of the acceptance of PPPs as an investment model. Lately, PPP has been formally recognized as a procurement model through the amendment of the Public Procurement and Asset Disposal Board (PPADB) Act, but formally this notion comes from as far back as the 9th National Development Plan (2003 to 2008).
The 10th National Development Plan (2009 to 2016) began the process of establishing the PPP delivery mechanism. To date, two projects have been implemented through the PPP model in Botswana, namely; Ombudsman and Land Tribunal Office Accommodation Project which was a 10-year concession that was handed over in 2017, and the SADC Headquarters Office Accommodation Project which is a 17-year concession. In the 11th National Development Plan (2017 to 2023), the government of Botswana explicitly reiterated its commitment to developing public infrastructure through the use of PPP as a means of procurement and financing of projects. This has been reiterated in the 2022 Budget Speech wherein, Government outlined several projects that will be implemented during 2022, using a PPP model covering power, waste water, roads, railway and housing. These have fiscal implications on the side of Government, carry intense capital requirements on the side of the private partner, and these capital requirements can be complemented by accessing the deeper pools of liquidity through the Botswana Stock Exchange (BSE). Infrastructure can be financed using different financial structures and instruments. Typically, these instruments include Project Bonds, Infrastructure Bonds and Infrastructure Funds. Depending on the issuer and the securities markets regulation, some are listed on the stock exchange while some can be offered privately, including through Collective Investment Undertakings (CIUs). Experiences in countries such as Brazil, Costa Rica, South Africa, Kenya, Mexico is predominantly that of both Project Bonds and Infrastructure Bonds that are offered through the public market and listed on the respective stock exchanges and this IS largely explained by the well-developed pension schemes in such countries, a phenomenon prevalent in Botswana.
South African pension funds have extensive experience investing in infrastructure, generally through issuances of bonds by the National Treasury, Government Owned Entities, Provincial Government, Mayoral Cities, Municipalities as well as the private sector. Notably, the South African National Road Agency Limited (SANRAL), City of Johannesburg, City of Cape Town are some of the significant players in this space. For example, since 2004, the City of Johannesburg has issued in excess of six bonds. Cape Town and Ekurhuleni have also issued such bonds. Almost all the funds raised by these bonds go into financing infrastructure, and interestingly all municipal bonds are listed on the Johannesburg Stock Exchange (JSE). Some of the key infrastructure projects in South Africa financed through a PPP model include the Gautrain project and the Bakwena Platinum Corridor. The Gautrain project is a 15-year contract for the maintenance and operation of the Gautrain rapid rail system. The Bakwena Platinum Corridor is a 30-year concession contract with SANRAL to construct, manage, maintain and upgrade the N1 and N4 roads. In its inception, the N1 and N4 road network was financed through 79 percent equity and 21 percent debt, much of which was raised through bond issuances.
Kenya has a well-developed history of raising capital from the public through the issuance of Infrastructure Bonds which are then listed on the Nairobi Securities Exchange (NSE). In addition, Kenya has a successful track record in infrastructure projects that have been built using PPPs. These include the Port of Mombasa Grain Terminal that was built in 1998; the Malindi Water Utility which was built in 1999 on a 5-year management contract; the Jomo Kenyatta International Airport Cargo Terminal (JKIA Cargo) which was built in 1998; the Kenya-Uganda Railway Concession in 2006, among others. Kenya’s Vision 2030 blueprint seeks to make the country an industrialized middle income economy by the year 2030 and the Government of Kenya has planned to spend an estimated sum of USD 60 Billion to put up infrastructure whilst relying heavily on PPP arrangements to achieve that goal.
Through the Public Private Partnerships Act of 2013, the Government has created an enabling legal and regulatory environment for PPPs to thrive in Kenya. While the Government of Botswana has not specifically issued Infrastructure and Project Bonds themed as such, Government has raised in excess of P15.0 Billion on the BSE to finance an array of development projects, mainly infrastructure projects. Botswana has a huge potential in terms of utilising the stock exchange to raise infrastructure finance, by both the public and private sector – and especially now and going forward in the context of the increased ceiling of the Government Note Programme to P30.0 Billion as well as the pipeline of projects envisaged under this model. Botswana has deeper pools of liquidity from pension funds in excess of P109 Billion, and empirical evidence has shown that the use of bonds to finance PPP projects is more extensive among countries with significant pension schemes having long-term liabilities that need to be matched to long-term assets. As it stands, the capital market regulations are supportive of the development of infrastructure financing through bonds issued by Government, Development Banks, local authorities as well as corporate bodies and also through pooled investment vehicles that can be listed on the stock exchange, or remain off-market. Given the abundance of capital in Botswana vis-à-vis the availability of investment instruments, project sponsors and issuers should explore Botswana’s deeper pools of long term capital to support PPP projects.
Stock exchanges, as capital raising avenues, can enable the efficient raising of both equity and debt finance usually used in PPP project financing. The BSE has a key role to play in ensuring that the domestic securities markets can be used for capital raising in respect of infrastructure development, through models such as PPPs. Over time, the BSE’s regulatory regime has been modernized to ensure that it appropriately addresses the need to raise capital by various forms of institutions, including Government, and vehicles such as Special Purpose Vehicles (SPVs) and to ensure that it does not unintentionally hinder the use of the BSE for accessing infrastructure finance. From a regulatory point of view, just like any issuance of a debt instrument, the offering of such instruments considered for PPP financing requires the submission of a series of information to the BSE, including a Programme Memorandum or a Circular (referred to as Disclosure Documents), which entail provisions for disclosure of elements such as information about the issuer, information about the instruments and the financial information.
In addition, the issuer is subject to periodic and ongoing disclosure requirements, including submission of periodic financial statements and annual audited financial statements and material events disclosure. The BSE’s Debt Listings Requirements are very detailed in terms of the contents to be included, at a minimum, in the Disclosure Documents.
The execution of infrastructure projects through PPP has proven to not only create value in the form of quality public goods such as infrastructure but also enables sustainability and maintenance of infrastructure assets in the long-term. The model allows for private sector development while the Government achieves its objective of addressing infrastructure needs sustainably. As demonstrated, the capital market, both private and public can play a supporting role in the implementation of PPP project financing. The Ministry of Finance has mentioned that PPPs still involve costs to the budget, thus the need for risk-sharing through the capital market cannot be overemphasized. Further, there is some form of relieve from the burden of immediate implementation of projects and evidently the scope to modernize infrastructure projects.
