The goals of the Monterrey Accords, approved in Doha, were to “eradicate poverty, achieve sustained economic growth, and promote sustainable development as the world moves towards a fully inclusive and fair global economic system.”
According to the Intergovernmental Committee of Experts on Financing for Sustainable Development, the global cost of eradicating extreme poverty is approximately US$66 billion per year. The impact of illicit financial flows and erosion of the profit base has undermined African countries’ laudable efforts in tax reform. Foreign direct investment (FDI) flows are increasing, but these flows are often tilted towards resource-rich countries and the overall socio-economic benefits of these investments to affected communities are questionable.
International organizations such as the African Development Bank (AfDB) and the Organization for Economic Co-operation and Development (OECD) recommend structural transformation and economic diversification, particularly in low-income countries, to ensure positive domestic spillovers from foreign investment in the resource sector.
Tackling Africa’s poverty problem means that existing resources, including aid flows, remittances, development finance, private equity, bonds and FDI, should be appropriately applied to all economic sectors, especially the infrastructure sector. These include both physical assets (transportation, energy, water and sanitation, ICT, etc.) and social services (hospitals and clinics, education, low-income housing).
Governments are ultimately responsible for ensuring access to infrastructure for their citizens. However, governments, particularly in the least developed countries, are unable to address infrastructure backlogs, let alone develop new assets.
The private sector plays a key role in the ability to provide infrastructure financing and innovation in technological solutions. Urban developments such as toll roads and urban railways have relatively high user fees and can be profitable for private operators in the long run. However, the business case for rural development targeting poor communities and difficult sectors, such as good feeder lines that enable the provision of fresh food, is difficult to prove because initial costs are so high.
Engaging the private sector requires more deliberate government intervention and focused policy measures. Private actors need to be encouraged to develop these projects and welcomed as ‘real’ development partners, alongside governments, development finance institutions and civil society experts.
A new form of ‘blending’, which combines private finance with that of the public sector, development finance institutions (DFIs) and/or development partners, combines concessional financing with debt financing from international financial institutions. A “subsidized loan” element keeps service fees affordable. It is also used for interest rate subsidies, investment subsidies, technical assistance, loan guarantees, insurance premiums, etc. The blend is used by many DFIs including Proparco (France). Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden (Netherlands). AfDB, the EU’s African Infrastructure Trust Fund (ITF), and the Neighborhood Investment Facility.
Infrastructure has emerged as a separate asset class over the past five years, but was previously a niche area within the private equity category. Additionally, infrastructure companies can tap into private equity raised by various infrastructure funds and sovereign wealth funds (SWFs). Foreign portfolio inflows to Africa are also increasing, but their volatility represents a financial risk to the continent. However, there is also an encouraging move towards long-term financing options. By the end of 2014, governments in sub-Saharan Africa had issued over US$7 billion in foreign currency sovereign debt. Demand for African government bonds is indicative of the continent’s relative resilience to the global financial and economic crisis, as well as its improving political and economic governance fundamentals.
According to the World Bank, between 1990 and 2013, 499 infrastructure projects with private participation in 47 African countries reached financial closure in sub-Saharan Africa. Telecommunications accounted for around 205 of these projects, accounting for 76% of the total infrastructure investment portfolio (US$108.7 billion), followed by energy (US$22.4 billion). transport (US$18.2 billion) and water and sanitation (US$392 million). Since the global financial crisis, the total number of energy-specific projects has increased significantly to 46, while the total energy investment was approximately $11.3 billion. Meanwhile, only 14 projects were in the communications sector, totaling $22.5 billion.
Private sector involvement in such projects is not always a natural fit. The infrastructure sector has traditionally been viewed as a government business domain embedded in monopolistic utilities. Private sector involvement in infrastructure has deepened and matured since the various waves of privatization (20 years starting in the 1980s). Governments, private contractors, and advisors in this field have benefited not only from modern valuation techniques but also from hindsight. Approaches to private participation in infrastructure (PPI) and public-private partnerships are becoming more tailored to the requirements of individual projects and the economic and political climate of the time.
When considering “next stage” models beyond PPPs, analysts point to the 5Ps (pro-poor public-private partnerships), alliances involving governments, private companies, microfinance institutions, multilateral development banks, and nonprofit organizations, including community-based organizations and research and academic institutions. The 5Ps aim to address the poorest communities, who have limited access to infrastructure services, especially in rural areas and least developed countries. The idea is not to provide services for free, but rather to structure service provision and prices in a way that is affordable to poor communities.
Because the private sector is profit-motivated, there is no strong incentive to expand deliveries to poor or remote customers. Therefore, the role of government policies and regulations to protect disadvantaged groups is very important.
Undistorted, transparent and targeted subsidies can be applied to ensure that the poorest people are served. In least developed countries, the need for private sector efforts to achieve sustainable development is even more pressing. Where possible, governments should provide carefully regulated incentives to help businesses participate in long-term, sound economic projects. These projects should aim to replace short-term, often philanthropic efforts to be seen as “doing the right thing” and are likely to include community engagement programs, including the provision of basic infrastructure, carried out in the context of building infrastructure assets.
Due to the inherent complexities of the infrastructure subsector, development progress requires clear political will and favorable legislation, especially for regional or cross-border projects where national priorities may conflict with local solutions. Faced with pressure to deliver successful infrastructure projects in the modern global context, many developing country governments have enacted new PPP, concession and sectoral laws affecting private participation in infrastructure.
Maintaining infrastructure and developing new assets in Africa is critical to economic development. International aid agencies and development banks have contributed to narrowing the infrastructure gap through funding to governments, capacity building, and leveraging private sector participation in various areas of infrastructure development. But the backlog grows each time the continent fails to meet the $93 billion in infrastructure investment it needs. If the private sector is sufficiently motivated to participate in projects, it can offer a variety of solutions, including innovative design and construction, financing and security, and commercial and political risk insurance.
There is a significant shift among investors to recognize that not all infrastructure projects will deliver the expected returns along the exact timeline envisaged. This is especially true when projects target the poorest communities in least developed countries. Governments need to negotiate with the private sector in building projects to ensure the right outcomes for all parties (public and private sector partners). DFIs and development banks. microfinance organization. Civil society and research organizations. These partners come together in dedicated projects that aim to ensure that the benefits of infrastructure assets are shared across the population.
This is an excerpt from an article to be published in the next issue of the South African Journal of International Affairs.
