Last month, President Robert Mugabe officially launched the $984 million dualisation of the 580km Beitbridge-Harare highway under a build, operate and transfer (BOT) concession agreement structure with an Austrian company Geiger International. This BOT is a form on a public-private partnership (PPP). It is expected that the project will be completed in three years’ time. In line with local content and indigenisation initiatives, 40% of the project value will be earmarked and sub-contracted to local companies.
in the money with NESBERT RUWO & JOTHAM MAKARUDZE
The project is part of the long overdue construction and dualisation of the 897km Beitbridge-Harare-Chirundu highway estimated to cost a $2,7 billion. Once this project is completed, it will bring significant economic benefits to the country as part of the North-South corridor by facilitating and enhancing the efficient flow of business to/from South Africa to central Africa. It is also expected to reduce the current carnage on that road. This project is one of the many infrastructure investment initiatives needed to support an ailing economy and make it competitive to do business in the region as many years of neglect in infrastructure build and maintenance has made Zimbabwe move decades backwards in development.
Infrastructure investment (investment in transport, utilities, social and service infrastructure) has a huge multiplier effect on the economy. For an example, China and India are on extreme ends when it comes to infrastructure spending. While China’s infrastructure spend grew significantly since late 1990s (from 15% to at least 20% of GDP), India’s stagnated at around 4%. Unsurprisingly, this increased infrastructure spending turbocharged the Chinese economy which grew from $359 million (1990) to $11 trillion (2015) while India trailed from $326 million to $2 trillion respectively. There is no doubt about the impact of infrastructure investment.
International Finance Corporation (2009) notes that sub-Saharan Africa requires an estimated infrastructure spending of $93 billion a year or 15% of the region’s GDP, about 10% in new infrastructure and 5% in operation and maintenance to unlock growth and achieve millennium development goals, including poverty alleviation. Worth noting is that spending needs in the poorest countries should be as high as 25% of their GDP, even more for fragile states.
With an annual budget of $4 billion, the project over three years represents a significant investment for the country hence the need for a concession agreement funding structure. Zimbabwe cannot afford to invest directly in infrastructure as at least 96% of its total revenue is spent on recurrent expenditure (the bulk of which is the civil service wage bill), while a paltry 4% remains for capital projects. With so much funding required to achieve the investment critical mass, the question that arises is what are the funding options for Zimbabwe’s much-needed infrastructure.
Traditionally, many governments were by far the largest source of funding for infrastructure projects through direct cash injection and/or government guarantees given that infrastructure projects by their nature are difficult to commercialise and require patient capital. The government may choose to fund some or all of the capital required in a project and look to the private sector to bring in expertise and efficiency as in the case in a so-called design-build-operate (DBO) project where the operator is paid a lump sum for completed stages of construction and will then receive an operating or concession fee to cover operation and maintenance of the project.
Another example would be where the government chooses to outsource the implementation of the project through a public procurement process (tenders) and then bring in a private operator to operate and maintain the facilities or provide the service. But this government direct investment and/or guarantees are no longer sustainable due to the significant government deficits and high sovereign debt levels.
Infrastructure funding is now being availed by the World Bank/IFC, export credit agencies and other multilaterals, state-owned infrastructure banks (development finance institutions — DFI), and private capital. Many specialist infrastructure funds have arisen, while pension funds and sovereign wealth funds are increasingly looking to take direct stakes in infrastructure projects and companies to match their portfolios’ liability profiles.
There has been notable growth in PPPs as a way of delivering and funding public infrastructure projects where project risks are shared between the public and private sector. The success of this funding model is dependent on the government exhibiting to the private investors both stability and a professional transactional capacity. And in this regard showing that there is alignment between the government and the private partner’s objectives. The effectiveness of the alignment depends on a sufficient and appropriate transfer of risk to the private partner while the government benefits from the efficiencies, quality and quantity delivered by the private partner.
Many DFIs can provide support for transactional capacity if the counterparty government can show and provide policy stability.
The Basel 3 capital regulatory requirements are likely to increase the cost and reduce the supply of long-term debt, particularly from commercial banks. The impact of the Basel 3 regulations has seen commercial banks sweet spotting at between seven and 10 years’ debt. As such, the ideal funding recipe for infrastructure projects would need to include some mixture of debt from commercial banks, and DFIs given their ability to invest their debt funding over longer periods, while the governments act as a strategic partner.
The key to successfully raising enough investment for the country’s essential infrastructure will be underpinned on finding the optimum balance between public and private capital and participation, through PPPs. We note that there are no substitutes for infrastructure development and there are no shortcuts for faster economic growth. It is only when a country is serious about infrastructure investment that it can see real economic development being achieved.
Nesbert Ruwo (CFA) and Jotham Makarudze (CFA) are investment professionals based in South Africa. They can be contacted on [email protected]