Funding models essential to infrastructure rollout
By Bongani Mankewu
CRITICAL to Africa’s development is the paucity of financing models to achieve industrialisation through sustainable infrastructure development.
The incentive of infrastructure, as an asset class is, to catch attractive monetary qualities – appealing returns, low correlation with other asset classes, long-term inflation hedging and low-default rates to name a few.
The dearth of infrastructure investments acts as a preventive force in naturalising infrastructure investments as a financial asset class of its own. Adding to that, infrastructure is dependable on financing itself through painstakingly calculated ex-ante cash flows.
What is confirmed to be a challenge is governance that includes agency problems with moral hazard, project design, and contractual efficiency with financing models. Perfected by stable governance, infrastructure is progressively seen as an optional asset class close to bonds, currencies, equities, and others, on the financial investment landscape.
The proposed review of Regulation 28 is progressive as it aims to increase investment in infrastructure, given the low economic growth climate. For optimum mobilisation of financing, the Regulation 28 review must dovetail with the limpid development finance institutions’s (DFI) mandate to proffer the flywheel effect to the Economic Reconstruction and Recovery Plan through Infrastructure delivery.
Therefore, infrastructure assets added with its ex-ant cash flow, long term, and inflation hedging can be painstakingly considered an asset class. Governance stability is essential to capture economic value, in contrast to procurement processes that are embedded in market thinking, utilising government-endorsed structures (PPP and the like) that are market-based and market-shaping instruments.
The devices of contemporary infrastructure finance, design, commission and deployment are constructed by markets and market actors, delivered by markets, procured through markets, and ultimately traded on markets.
This par for the course can be ameliorated by regulations that discipline markets while capital mobilisation is defining “infrastructure” as an asset class like equity, bonds, loans and private equity. Intriguingly is the extent to which pension savings induce behaviour on capital markets determined by the structure of pension systems and, in many instances, are further enhanced by pension fund reforms.
Despite the reforms, the Public Investment Corporation and most DFIs behave no differently to private asset management firms – they seek returns and profits, rather than industry development that creates aggregate demand to stimulate the economy which alleviates poverty.
There are various means to structure infrastructure ventures. Development banks, commercial banks and Special Purpose Vehicles can issue listed or private mezzanine financing, representing quasi-equity instruments, namely fixed-income financial products with equity rights, particularly appealing for investors like pension funds. Therefore, regulation of the monetary and fiscal policies influences the possibility of moral hazard that theoretically surfaced through the Capital Structure of the public-private partnership (PPP) financing as an instrument.
Fiscal affordability assessment acts to identify and measure the PPP expenditures of the sovereign state, evaluate the impact of implementing the PPP projects on the aggregated economic output with a focus on linkages for the value added to the industry.
Scaling up infrastructure investment is a global challenge in the developing world, delivering infrastructure is a key component of the 2030 Development Agenda and a prerequisite for achieving the Sustainable Development Goals (SDGs).
South Africa's efforts are in alignment with Goal 9 of the UN SDGs and Aspiration 1 of Agenda 2063 of the AU which both prioritise infrastructure development.
To address the infrastructure deficit in African states and accomplish Goal 9 of the SDGs and Aspiration 1 of Agenda 2063 of the AU, governments should quicken and escalate endeavours to activate home-grown and outer-financing assets for infrastructure.
Infrastructure classified as an asset class with no ambiguity on policy supervision of the pension funds and DFIs can avail the desirable Flywheel Effect to the Economic Reconstruction and Recovery Plan for South Africa to lead the successful execution of the African Continental Free Trade Area , which must nurture real value chains, thus industrialisation.
Therefore, pension funds, DFIs, and state-owned enterprises in South Africa must be provided with clear instruction on the balance between commercial and developmental objectives, and clarify the process on the costing and funding of each.
Bongani Mankewu is an associate of the Infrastructure Development and Engagement Unit at Nelson Mandela University
*The views expressed here are not necessarily those of IOL or of title sites