Twenty-one years after its genocide, Rwanda ranks 46th in the world for ease of doing business according to the World Bank, four spots below its former coloniser Belgium. This is flattering. The rush with which international lenders financed its energy utility’s first solar public private partnership (PPP) demonstrates that this ranking is not empty academic musing. Yet, in the same manner in which Rwandans drew on their own internal reserves of strength and resilience to rebuild their nation, so too should they draw on their own reserves of capital to build the nation’s infrastructure.

Within just 12 months of an agreement being reached between the state energy utility and private developer GigaWatt Global, an approximately $24m, 8.5 MW solar plant was financed, constructed and connected to the grid. Lenders came from Europe and the US. The project demonstrates that PPPs in Rwanda can be successful mechanisms in transferring upfront costs and construction, delay and operations and maintenance risks from state-owned institutions to private developers for the delivery of infrastructure on time, on budget and to specification. The project demonstrates that Rwanda is an attractive destination for foreign direct investment.

The benefit to the investors is in the steady cash-flows guaranteed by the energy utility’s commitment to purchase produced energy, and underwritten by the Treasury through a sovereign guarantee.

The benefit to the utility is that the project will alleviate short-term dependence on expensive diesel-generated energy. By allowing end-consumers through the energy utility’s distribution arm to repay the private developer by matching payments against use of the resulting infrastructure asset, the PPP has overcome the initial barrier to investment: a lack of sufficient capital to cover the upfront cost of construction. In this way, the PPP has created infrastructure where none would have otherwise existed. Rwanda’s energy utility is entering several other such PPPs for the delivery of power to its grid, and its water utility entered the region’s first similarly-structured PPP on Tuesday for the delivery of 40,000 cubic metres a day of potable water to the cities of Kigali and Bugesera.

The vision behind expanding the country’s affordable supply of electricity holds unknown promise. With a cheaper cost of energy, the Treasury will be able to reallocate subsidies away from the energy utility to other sectors of the economy that are in need of support.

But the greater hope is that the expansion of energy delivered in Rwanda at more affordable tariffs than currently offered, together with Rwanda’s growing reputation for ease of doing business and its stability, will attract capital investment focused on consumers in Rwanda, Burundi and the Kivus of the Democratic Republic of Congo – altogether a market three times the size of Rwanda’s 11m consumers. With capital investment will come a demand for labour in the formal sector, increased earnings for those living in Rwanda, and a self-perpetuating cycle of economic growth as the better disposed, newly-employed labour is better able to afford the goods it produces.

But such hopes do not come without risks and opportunity costs.

Even though PPPs do deliver power infrastructure to the public off the government’s balance sheet, the sovereign guarantees underwriting those PPPs are limited; there are constraints on the guarantees the government can give even for contingent liabilities without affecting its credit rating.

When PPPs for independent power projects are entered into no longer for the purpose of urbanising the Rwandan economy but for rural electrification, would the guarantees have been better directed towards PPPs delivering access to potable water or transportation to rural areas instead, particularly when private micro-solutions could have provided cheap lighting and cleaner gas stoves? The foregone net economic benefits are difficult to simulate.

There are also the costs of accommodating foreign lenders. Their risk appetite is difficult to satiate, uncomfortable as they are with risks that local investors would worry about to a lesser extent – such as political risk and currency convertibility risk. These in turn are factored into risk-adjusted returns required, and translate into higher tariffs required of Rwanda’s utilities and ultimately end-consumers.

Paradoxically, it is their sophisticated aversion to risk that allows them to demand a structure of PPPs attractive to investors per se, in a way that an acquiescent state-run pension fund may not, and that therefore enable the construction of the infrastructure. But because they also have the added intention of removing hard currency from the economy to the economies in which they reside, their entry into a small economy poses a threat to local currency stability.

Rwanda’s pension fund would do well to learn from the demands of foreign lenders to provide the country with its own in-house financing-potential for PPPs; 25 year-term PPPs offering steady cash-flows that attract foreign investment should, after all, prove to be an attractive venue for local long-term investment.

This article was first published on Financial Times’ beyondbrics blog

Imaduddin Ahmed is a PPP transactions and policy advisor to the Government of Rwanda. The views expressed here are his own.