Opinion: National Infrastructure Plan 2045 must encourage hybridity to attain financing

21st September 2020

Opinion: National Infrastructure Plan 2045 must encourage hybridity to attain financing

Bongani Mankewu

In this opinion piece, Nelson Mandela University Infrastructure Development & Engagement Unit associate Bongani Mankewu writes that a move from government to governance is needed for infrastructure to be catalytic to economic growth.

The South African government adopted a National Infrastructure Plan in 2012 with the intent to transform our economic landscape while simultaneously creating a significant number of new jobs and strengthening the delivery of basic services. The plan also supports the integration of African economies. The New Growth Path, meanwhile, was also developed, identifying structural problems in the economy and pointing to opportunities in specific sectors and markets. The government planned to invest R827-billion in building new, and upgrading existing, infrastructure over the three years from 2013/14, then Minister of Finance Pravin Gordhan announced in his 2013 Budget Speech. The Cabinet-established Presidential Infrastructure Coordinating Committee (PICC) would devise “a balanced approach . . . fostered through the greening of the economy, boosting energy security, promoting integrated municipal infrastructure investment, facilitating integrated urban development, accelerating skills development, investing in rural development and enabling regional integration”.

Not much is reported on the government planned investment of R827-billion from 2013/14,  instead what now appears to be front of mind is the recently announced intention to position Infrastructure South Africa (ISA) as a single point of entry for infrastructure projects. However, interestingly, the intent is to finance ISA through three different financing methods: debt capital markets/commercial funding; blended financing; and the fiscus. National Treasury in 2000 established a public-private partnership (PPP) unit and subsequent legislation and a PPP manual helped solidify the policy framework for PPPs in the country.  The experiment with PPPs in South Africa demonstrated flaws in social service delivery at the municipal level due to a lack of performance guarantees and an absence of a pro-poor approach. The Gauteng Freeway Improvement Project (GFIP) presents a perfect example of the inadequacy of deploying PPPs. The GFIP gained momentum as revenue sources based on fuel taxes dried up, and road financing debates increasingly focused on the viability and impacts of alternative funding mechanisms.

Notwithstanding, the ISA, although its functioning is unclear as yet and it shows some signs of duplication, has laudable intentions, with its approach to the task being best described as increasing the use of institutional hybridity and a move from government to governance. There were rational reasons for the establishment of the PICC as there were for the creation of a dedicated PPP unit, including departments not appreciating fully the budgetary implications of PPPs due to the off-budget nature of such projects. A dedicated PPP unit was viewed as the ideal instrument to monitor and judge the affordability of a project, in particular since it acts as a regulatory body within government, but at an arm’s length from the department that wants to implement the PPP. However, critical investment instruments such as sovereign bonds essential for structuring project finance under PPP financing are still peculiar to the government of South Africa. The ISA, therefore seems not to be that different in approach, with the exception of mention of ‘aggregate demand’. Notwithstanding, the creation of positive economic aggregate output through the expansionary fiscal approach is as elusive as the ‘holy grail”, undermined by the obsession with the austerity budgetary mechanism in South Africa.

As for integration at the sub-regional level, PPPs have been encouraged by the two relevant regional economic communities, the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA). The SADC PPP Regional Framework provides guidelines that member States should follow to successfully benefit from PPPs. COMESA has released PPP Guidelines, which promote the establishment of an institutional framework that includes a PPP policy, a legal and regulatory framework, and recommended responsibilities for the various line ministries.

Experience both at the regional and country level demonstrates that there are three most salient weaknesses in the existing institutional field of PPP program development: building capacity, increasing legitimacy, and the balancing of interests. The proposed funding model of ISA cannot avoid the inclusion of the private sector, therefore, PPP will play a pivotal role.  But reflecting the continued role of the State in infrastructure funding, financing and governance, the public sector has been an integral actor in initiatives such as PPPs, given its role as an initiator, guarantor, and regulator of contracts and agreements.

Theoretically PPPs attempt to balance the strengths and weaknesses of both the public and private sectors for the benefit of both. Concerning the structure of a project, three areas are of importance: (1) organizational structure that entails project ownership and source of financing, (2) governance structure that entails capital structure, and (3) contractual structure including packaging of work, delivery models, and pricing scheme.

For the success of infrastructure as an antecedent of industrialization in South Africa and Africa at large, governance is central, and holds currency in infrastructure development, not least because corruption is a symptom of failed governance and/or institutions and always has a significantly negative impact on returns to infrastructure investment.  A closer look at South African infrastructure projects reveals that almost all projects overrun significantly by between 5% and 58%, and furthermore, the reasons for overruns are attributed mainly to contractual issues resulting in corruption.

With that appreciation, the government should regard PPP as a governance scheme, rather than a pragmatic economic tool, with ISA focusing its attention on governance.

While governments ought to operate more often with a philosophy of caveat emptor and take absolute responsibility for the significant governance shortfalls identified, with fragmented and failed institutions that is not attainable. The sustainability literature holds that sustainable development and radical transformation benefit from a governance approach. “Better governance is a prerequisite for steps towards sustainability.” The relevant question for PPPs then becomes which governance instruments, under which model, can be used to induce sustainability, and thus economic stability on the African continent.

Institutions like the Nelson Mandela University Infrastructure Development and Engagement Unit are very keen to critically evaluate PPP financing of infrastructure from the perspective of the domestic endogenous effectiveness of fiscal policies, governance and contractual compliance, which is aimed at achieving the suggested hybridity in approach.