Africa’s recent economic profile is synonymous with infrastructural bottlenecks; be it energy, water, transport logistics(roads, rail, port facilities and airports), human skills, or local government utilities as well as a general and substantial gap in the quality of public services- a critical transversal (soft) infrastructure that influences the overall productivity of all other infrastructures. The monetary value of the required infrastructure runs into hundreds of billions of US dollars. In South Africa alone this is estimated to be US$450 billion! It is worth noting that this estimate is more than double the current SA government’s Total Gross Loans of US$200 billion as of April 2012.
In this milieu, it is understandable that much pressure is placed on the political leadership to act. And, act they must do. Yet, in so doing it is vital that we are alert to the socio-political significance of the task ahead, and the fatal risks that we need to manage carefully and methodically. The current economic and financial malaise prevailing in Europe and USA provides valuable and relevant lessons for the approach that we need to adopt in meeting the national and continental infrastructural needs. The key lesson is this: not all infrastructure finance should be put on the public sector balance sheet- be it directly on the national fiscus balance sheet or indirectly via public enterprises investments. In brief, when the national government takes on the debt (and the risk) which belongs to the private sector, it ends up crippling the nation.
Different types of infrastructure need different forms and mix of finance. Much of the continent’s current infrastructure backlog is in the form of “near pure economic” infrastructure, such as dedicated rail lines for exporting coal, iron ore, manganese or other commodities. All such pure or near-pure economic infrastructure should be financed via leveraging the private sector assets and/or expected future revenue streams. Almost no public sector exposure should be built into this component of the portfolio of infrastructure backlog. At the other end of the spectrum is social infrastructure such as public schools, public health facilities and basic urban infrastructure. These should be financed solely via public finance and/or user charges in the case of urban amenities.
Within this framework care should be taken that neither haste nor ideological misconceptions distort the critical judgments needed for a sound structuring of the finance mix appropriate for each infrastructure project. Hard lessons from the prevailing European and American fiscal errors of judgment could help avoid financially expensive and socially consequential outcomes. Lumping all the projects into one category called “infrastructure” and seeking suitable finance based on a ‘one-size-fit-all” approach is bound to prove fatal- financially and fiscally speaking. The challenge is not just about how much ‘tax’ and how much ‘debt’. The equity-debt mix is secondary to the question of who should be financing the project in the first place.
In addition to appropriate financial structuring and funding, a productive and sustainable national/regional infrastructural programme needs other key requirement too. There are five key alignments that should be put in place if Africa’s infrastructure investment is to turn out productive and sustainable.
Based on the lessons of the past century of economic development in the West and the East, the following components of the macro-financial framework need alignment for a productive and sustainable infrastructure programme of the order of magnitude facing Africa today:
- Macroeconomic Policy and Financial Prudential Framework need to be reconfigured to ensure appropriate foreign exchange regime and macro-prudential measures over the medium-term corresponding with the expected average return profile of the infrastructure investments.
- Definition and Categorization of the projects so as to identify appropriate funding sources as well as the financing mix.
- Prioritization and Sequencing of the portfolio of infrastructural projects are key technical requirements for both cost-minimization and the optimization of expected socio-economic benefits.
- Project Preparation and Implementation Plan are indispensible primary requirements for successful as well as for an efficient completion of the project.
- Operational Management and Maintenance are the last, but not the least, requirements for success.
It is laudable that Africa, at long last, is focusing on its national and regional infrastructure needs, their planning and finance. However, as argued above, it is of critical importance for the continent’s medium to long term developmental interest that extra care is taken not to “pave the way to hell with good intentions”. The palpable sense of urgency prevailing across the continent should head the cautionary lessons emerging from the US and European experience.