Conference Paper – Public Infrastructure Financing Using EPC-Turnkey Contracts

The demand of public infrastructure in developing countries like Malawi is currently on the rise due to urbanization and population growth. Malawi’s infrastructure contributes a total of 1.2 percent to the annual per capita growth of its gross domestic product (GDP) (Shkaratan, 2010). The major public infrastructural constituents of the country include the power, water and housing sector, the transportation networks, the information communication and technology (ICT) sector and waste water systems. The demand-supply ratio of public infrastructure since 1964 has drastically increased and reached a state of equilibrium in 1994 when Malawi attained its democracy with a population of 9,725,612 against an infrastructure supply value of $14.18 Million (NSO, 2008). The demand-supply curve started to decrease with a high demand of public infrastructure with respect to the current population pegged at 17,215,000 as recorded in 2015 against a current infrastructure supply value of $78.78 Million (NSO, 2015). The foregoing illustrates a population growth of 56.5 percent with respect to an infrastructure growth of 18 percent within a period of 21 years which is low as compared to other developing countries in the world (NSO, 2014). Further to the same, the latter has also been justified further by the World Bank with Malawi being ranked as the 64th fastest population growing country yet it still ranks low on the gross domestic product log currently listed at position number 148 out of 194 countries (WorldBank, 2016).

The traditional trend of financing public infrastructure in Malawi has involved the use of local revenue collected from taxes, donor aid, financial grants and international bank loans. The foregoing trends have been in existence ever since with an extremism on donor aid, grants, and loans in the democratic era for financing mega public infrastructures in all sectors as a means of meeting the growing demand. In 2009, a turn around to the public infrastructure financing began when alternatives such as the Build – Operate – Transfer (BOT) contracts and the Public Private Partnership (PPP) were introduced (Mwanakatwe, 2014). These current substitutes have proved effective but with risks in project management of public infrastructural projects specifically in areas of feasibility studies, planning, contractual agreements, liabilities, and cost benefit returns. The efficiency of the same in terms of the development of the country has been questioned that has led to the need for identifying a sustainable substitute for financing public infrastructures in an effective and efficient manner to eradicate the bottlenecks generated by the BOT and PPP.

The Engineer-Procure-Construct (EPC)/Turnkey contract also referred to as the Turnkey contract are general contracts that involve the use of the contractor’s in-house resources to plan, design, implement and deliver works to a fully functional/operational state upon agreement with the client and its related contractor’s financier (FIDIC, 1999; Huse, 2013). Unlike the BOT financing agreement that involves the client agreeing to the operational period with the investing contractor, the EPC/Turnkey financing agreement allows the client to fully own the public infrastructure upon final completion and commissioning. In addition, the same agreement allows the investing company (contractor and its financier) to adopt all the liabilities until handover unlike in the PPP financing agreements where risks are shared and all dealings are advantageous to the private partner.

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