Much of the urban infrastructure African cities need will never pay for itself through user charges. Street lighting has no user to charge. Fares on a bus rapid transit line are set with affordability in mind and rarely cover the cost of the infrastructure. A ring road may carry heavy traffic, but tolling it can be politically impossible. For these assets the availability payment model is the natural candidate. A private partner designs, builds, finances and maintains the asset, and the public authority pays a regular amount for as long as the asset is available and performing to standard.
In principle it is simple. In practice it moves the hard question from whether users will pay to whether the city will, for twenty years or more, through changes of mayor and finance minister. Most of our work on these mandates goes into answering that second question in a way lenders accept.
When availability payments suit, and when they do not
They suit assets where the authority wants to keep control of the service and where demand is either hard to forecast or beside the point: urban roads without realistic tolling, street lighting, BRT corridors and depots, hospitals and schools. Where users can and will pay a cost-reflective charge, as with a container terminal, an airport or a well-used intercity toll road, a user-pays concession keeps the liability off the public accounts and should be preferred.
Transit often needs a hybrid. The city pays an availability fee for the dedicated lanes, stations and depots, while fare revenue goes to the authority or to a bus operator under a separate contract. Putting infrastructure availability and fare risk in one contract tends to confuse both the lenders and the performance regime.
The fiscal commitment is debt in all but name
An availability payment is a long-term, fixed obligation. Finance ministries are right to treat it much like borrowing, and the IMF and rating agencies increasingly look at PPP commitments alongside public debt. Before a project goes to market, the authority should be able to show the payments in its medium-term expenditure framework, quantify the contingent liabilities (termination payments, compensation events, any currency indexation) and obtain approval from whoever manages the national PPP programme and debt limits. The PPP Fiscal Risk Assessment Model developed by the IMF and the World Bank is a sensible place to start.
For cities, sub-national borrowing rules add a further layer. In many countries a municipality or region cannot enter multi-year commitments without central government approval, and some cannot contract in foreign currency at all. We have seen promising municipal projects stall late in the process because nobody had confirmed that the city had the legal capacity to sign.
An availability PPP moves the hard question from whether users will pay to whether the city will.
Making the payment secure
The core risk is appropriation. The payment falls due, but the budget line was cut or the transfer from central government arrived late. Lenders will want several layers, and the right mix depends on the payer’s track record.
The first layer is contractual: a dedicated budget line, a legal obligation to appropriate the payment, and default interest on late amounts. The second is liquidity: an escrow account holding a few months of payments, ideally fed by an identified revenue stream such as a share of a fuel levy or local property tax, or a standby letter of credit from a bank acceptable to lenders. The third is credit enhancement: a central government guarantee of the municipal obligation, or a partial risk guarantee from a development finance institution such as the World Bank Group or the African Development Bank, which protects lenders if the public party fails to meet defined payment obligations.
DFI guarantees of this kind generally require a counter-indemnity from the national government. For a city, that means bringing the finance ministry in from the start.
Performance regimes and currency
The performance regime is where availability PPPs succeed or sour. Deductions should be proportionate, measurable and tied to what the private partner controls: lanes open, lights working, wards available to the agreed standard. A regime with dozens of indicators and severe deductions looks tough on paper and ends in disputes. A light one leaves the authority paying for poor service. We usually recommend a small number of availability measures with clear rectification periods, a few service quality indicators with modest weighting, and a cap on deductions that lenders can model.
Currency is the other structural issue. A city’s revenues are in local currency. If the debt is in dollars or euros, someone carries the mismatch. In the CFA franc zones the peg to the euro reduces that risk for euro debt, though it does not remove it. Elsewhere, local currency finance from domestic banks and pension funds, sometimes with DFI support or hedging, is increasingly available for municipal-sized tickets. Indexing the payment to a foreign currency is a fallback, but it hands the risk back to the city and should be counted as a contingent liability.
Lenders’ questions are predictable. Who pays, and from which budget? What happens if a payment is late? Can the deduction regime wipe out debt service? Who carries the currency risk? A city that can answer all four clearly will find financing. For an authority considering its first availability PPP, we would suggest these steps.
- Confirm the legal capacity to sign multi-year commitments, and any central approvals needed, before spending on feasibility.
- Put the payments into the medium-term budget and quantify the contingent liabilities alongside them.
- Agree a payment security package with the finance ministry early, including whether a DFI guarantee is realistic.
- Keep the performance regime short, measurable and capped.
- Test local currency financing before accepting foreign currency indexation.
Availability payments are a good tool for the infrastructure cities cannot charge for. They only work when the public commitment is planned as carefully as the asset itself.