A lesson from De Soto

”Developing and former communist countries’ principal problem is clearly not the lack of entrepreneurship: the poor have accumulated trillions of dollars of real estate during the past forty years. What the poor lack is easy access to the property mechanisms that could legally fix the economic potential of their assets so that they could be used to produce, secure, or guarantee greater value in the expanded market…” (Hernando de Soto)

Not AlwaysThe Best PPPs

While taking cognizance of the need to pursue policies that can protect or expand critical infrastructure through the many benefits of private participation in infrastructure it should be noted that in the context of relatively underdeveloped financial markets, this has meant reliance on foreign capital to finance growing needs, with the concomitant risk for the economies of unexpected devaluations and/or sudden reversals of those flows, as noted during the Asian financial crisis (Vives, 99). Closer to home, in Zimbabwe, the paucity of foreign private inflows in the infrastructure sector is a reflection of the ‘finnickiness’ and relative sensitivity of foreign capital within the ambits of the current global economic crisis.

Chen and Kubik, 2007, have been critical of the touted PPP approach to infrastructure development, following an assessment of the approach in India, Indonesia, and Philippines, noting that it has detrimental flaws and results in substantial resource wastage. More specifically, they postulate that the PPP approach leads to the ‘plum’ and ‘lemons’ problem first introduced by Akerlof (1970). According to the authors, the ‘plum’ problem arises when the bidder or firm providing capital (buyer) knows more about the quality and economic value of the project than the government agency (seller); while in the case of the ‘lemons’ buyers are disadvantaged because they have less information than the sellers about a projects value, risks, and costs. This will lead to severe agency costs and failures for large scale projects. Other challenges would include an inefficient bidding process, timeous negotiation process and political/policy risk. While acknowledging such weaknesses, the fundamental aspect in Zimbabwe’s case is the anticipated policy reforms and the attendant benefits for the financial sector, assuming that such reforms will level the playing field, deter political and policy risk and develop more efficient, transparent market mechanisms. The public sector should play the role of grantor, regulator and facilitator because it controls most of the rules of the game and its actions in either sector can make or break the relationship.

If properly structured, investments in infrastructure financial instruments should be attractive to local banks and pension funds. Nevertheless, infrastructure investment is an inherently risky activity which is, both because of its strategic inflexibility (it cannot be moved or used for other purposes) and the fact that it provides basic public services subject to political interference. In this regard, it is important to distinguish between investments in established firms that provide infrastructure services (treated as regular investments) and investments in new projects, which require special consideration in terms of the regulatory environment and financial instrument design.

And Zim opts for the PPP route??

Zimbabwean politicians have rightfully noted that one of the main challenges affecting Zimbabwe’s industries, public institutions and citizens include unavailable and unaffordable infrastructure (water, power, roads/railways, telecoms), which in a sense drives low capacity utilisation and low production. Fundamental to this is how to adequately meet the substantially massive costs of providing and maintaining infrastructure networks, given the limited fiscal capacity.

Developmental state theory is based on the idea of a state’s commitment to a technically sound, long-term national development agenda (Fritz, Verena & Menocal, 2007). Through its capacity to both design and implement policies that support such an agenda, developmental states are able to trigger and sustain growth as well as poverty reduction over extended periods leading to a positive transformation of the economy and society within a condensed period of time.

Robust, well maintained national infrastructures is critical to stimulating the economic growth of the country and significantly improve the quality of life of the Zimbabwean citizens. Kessides (2004) points out that formal research on linkages between infrastructure and economic growth has looked at macro-economic or industry wide variables (aggregate public capital investment). Such studies, most often carried out in developing economies have concluded that infrastructure capital has a significant positive effect on economic output and growth.

The inclusive government of Zimbabwe has intimated that the starting point in dealing with the aforementioned challenges should be reducing country risk while embarking on a comprehensible infrastructural development and rehabilitation plan given that the availability and cost of water, power, telecoms, and logistics affect both private and public institutions.

While acknowledging that the private sector has a pivotal role in this process, it is encouraging to note that government is rethinking the tautology on sovereignty, away from the traditional emphasis on ownership of non-performing assets to the ability to effectively and efficiently deliver high quality and affordable services to both citizens and institutions.

Naturally, the main reference point has been the advocating for and recommendations for the adoption and implementation of Private Public Partnerships (PPPS) as an antidote to refurbish and develop Zimbabwe’s infrastructure and for long term economic development. This is in tandem with regional and global trends in infrastructure provisioning towards fiscal rules, budgetary reforms, tax policies, public private partnerships to address infrastructure financing constraints.

Are we going to get there?

I wonder?? A lot of thinking is being developed around the idea of an Africa that is rising, and the immense opportunities available on the continent. Given the link between infrastructure and economic growth, are we, as a continent, in a position to take advantage of such opportunities, have we put in place the requisite infrastructure to spur growth??

Zimbabwe's Infrastructure Roadmap

A few days ago troubled Zimbabwe released its Short Term Economic Recovery Program, aimed at stimulating economic after years of moribund decay. While laudable, the framework fell short of specifics especially with respect to infrastructure development in the country. while its a given that humanitarian concerns are pressing at the moment, social infrastructure, i.. hospitals, prisons, reticulation, water delivery, are in such a derelict state, that ignoring the need to upgrade is tantamount to shooting oneself in the foot. As a nation, there is need to come up with a clear roadmap to revamp the infrastructure framework in the country. I find it totally absurd that neighbouring SA can invest in Nigeria for coal reserves, while the same can be provided in closer vicinity by recapacitating Hwange for example, and the rail. Over the next few weeks, I will start developing a tentative policy framework for infrastructure development in Zimbabwe as my Thesis for my Masters in Development Finance.....