Boosting infrastructure investment by addressing governance gaps
Government, private sector, multilaterals, and development partners gather in Cape Town as this topic takes center stage globally
Infrastructure is hard to get right – across the world. Up until now, policy makers focused on improving access to finance. Marking a significant shift, this week representatives from African governments, the global private sector, multilateral institutions, and other development partners meet in Cape Town to participate in the region’s first roundtable on the governance of infrastructure, hosted by the Development Bank of Southern Africa (DBSA). The topic takes center stage as consensus develops globally that a major factor hindering infrastructure implementation is a lack of good governance.
Strong governance structures are critical to governments’ ability to deliver the infrastructure their communities need. When governments are better able to identify, develop, and coordinate their infrastructure pipeline, project financing – both domestic and foreign – will flow. It is indisputably within the power of governments, the business community, and civil society to make this happen. There are many success stories in developing countries to prove it.
With participation from over 120 delegates (including 11 cabinet ministers) and 27 Anglophone and Lusophone Sub-Saharan African countries, the event brings together senior decision-makers including Patrick Dlamini, CEO of DBSA; His Excellency Malusi Gigaba, South Africa Minister of Finance; Dr. Stergomena Lawrence Tax, Executive Secretary, Southern African Development Community (SADC); and Hartwig Schafer, Vice President of the World Bank.
The roundtable, Building the Right Infrastructure for Tomorrow, will offer insights, new ideas, and solution-focused tools such as “InfraCompass” and the online preparation facility “Source” that help improve the governance of public investment in order to deliver essential services and goods – with direct and indirect benefits for the economy and society as a whole. This is the first of a series of roundtables about infrastructure governance that will be organized around the world in the months to come. The next roundtable in Sub-Saharan Africa is planned for May 2018.
In Sub-Saharan Africa only 35 percent of the population has access to electricity. Access to modern transport has declined in the region over the past 20 years, and 23 percent of the population still lacks access to safe water.
The magnitude of these figures masks a more fundamental need. Good governance is essential to avoid white elephants, fraud, waste, and inefficiencies; it is critical to deliver sustainable, inclusive services that promote economic growth, innovation, and increase the quality of life for citizens. It is also paramount to attain the Sustainable Development Goals (SDGs).
The roundtable follows directly from the 2015 Addis Ababa Action Agenda on financing for development. It also comes in response to the recommendations of the 2017 Global Infrastructure Forum, which called on the multilateral development banks and partners to help strengthen the investment capacity, policy, and governance frameworks of governments and enhance private sector participation.
Discussion at the roundtable will be guided by this key question: Why is infrastructure hard to get right? Participants will focus on how to formulate a holistic vision for their infrastructure programs that anticipates the infrastructure needs of the present and the future – and provides inclusive, sustainable services.
At the opening ceremony, DBSA President Patrick Dlamini said: “I am delighted that DBSA has been able to bring together such an esteemed audience of senior decision makers from across the continent. I hope that this inaugural event will pave the way for a greater understanding of the importance of good governance for infrastructure.”
The event is sponsored by the African Development Bank Group, African Legal Support Facility, DBSA, European Investment Bank, Global Infrastructure Hub, Konrad Adenauer Stiftung, NEPAD-IPPF, OECD, PPIAF, and the World Bank Group.
Note: The opening ceremony and second session will be livestreamed.
Why good infrastructure governance is the key to unlocking Africa’s potential
Op-ed by Chris Heathcote, CEO of Global Infrastructure Hub (GI Hub)
Infrastructure is crucial to Africa’s growth prospects. It’s also hard to get right. Until now, policy makers have focused on improving access to finance. But a consensus is developing globally that a major factor hindering infrastructure implementation is a lack of good governance and well-planned projects.
This is a topic that deservedly takes centre stage this week as representatives from 27 African governments, the global private sector, multilateral institutions, and other development partners gather in Cape Town to participate in the region’s first roundtable on the governance of infrastructure hosted by the Development Bank of Southern Africa (DBSA). This is the first in a series of roundtables being delivered by the World Bank, OECD, GI Hub and other partners, which aim to help countries move towards infrastructure planning and governance frameworks that facilitate inclusive and sustainable investment decisions.
There’s certainly no denying the need for infrastructure development on the continent, as has been emphasised during the course of Germany’s G20 Compact with Africa initiative. In Sub-Saharan Africa, only 35 percent of the population has access to electricity. Access to modern transport has declined in the region over the past 20 years, and 23 percent of the population still lacks access to safe water.
Against this background, it’s understandable that the investment focus over the past 10 years has been on utilities and trying to improve access to electricity and water. For some countries this is a significant challenge. Ethiopia, for example, needs to spend 20 percent of its GDP to meet its electricity Sustainable Development Goals (SDGs) and another nearly seven percent to meet its water SDGs.
That’s a major chunk of its GDP, particularly when you compare that the average investment in all infrastructure in Latin America stands at about 5.5 percent. Ethiopia is not unique and such cases point to a significant underinvestment in economic infrastructure such as ports, airports and roads across Africa. And that’s before you factor in investment in ‘softer’ forms of infrastructure like the rollout of telecoms and broadband internet access which are also crucial for economic growth.
So, how do African countries attract and retain the kind of investment in infrastructure projects needed to help stimulate that growth? The InfraCompass tool created by GI Hub recently studied infrastructure markets across 49 countries to pinpoint the best conditions for infrastructure delivery and found the strongest driver of investment was the rule of law.
This is why governance, rather than development finance, is the primary focus of this roundtable. Of course, finance is vital. Without it, infrastructure development would not be possible. But there’s a growing realisation globally and in Africa that if you get the governance aspects right, the finance will follow. Get it wrong and the investment will dry up.
Getting the governance right also allows for efficient and disciplined planning, which is crucial if a proposed infrastructure project is to be sustainable and contribute to growth and lift people out of poverty.
A 2014 study by the International Monetary Fund (IMF) found that increased public infrastructure investment raises output in the short term by boosting demand and in the long term by raising the economy’s productive capacity.
More specifically, the study found that an increase of one percentage point of GDP in investment spending raises the level of output by about 0.4 percent in the same year and by 1.5 percent four years after the increase. In addition, the boost to GDP a country gets from increasing public infrastructure investment offsets the rise in debt, so that the public debt-to-GDP ratio does not rise.
In other words, investment in public infrastructure can pay for itself and more, but only if it’s done correctly. That’s a big if. We’re all familiar with projects that have turned into white elephants, beset with fraud, waste, and inefficiencies.
Infrastructure is a very powerful engine of economic growth, but only if it’s an economically crucial piece of infrastructure created as part of carefully thought out development plan. If not, a country risks falling into the trap of building infrastructure that does not create growth and which it can’t afford to maintain, which then falls into disrepair. This is known as the ‘build, neglect, rebuild cycle’.
It’s why when canny investors, whether they be multi-lateral institutions or private sector players, look at markets they want to understand why a particular piece of infrastructure is necessary, what revenue it will it drive and whether it is affordable. They know it can only be affordable if it’s driving growth by one means or another.
This is also why corruption is such a hinderance to economic growth. Consider those IMF multiplier figures again. If you assume that corruption adds a 40 percent ‘inefficiency premium’ to a project, then any multiplier effect evaporates. Instead, the project becomes a drag on the economy.
We at GI Hub have found that public-private partnerships (PPPs) can play a valuable role in combatting corruption by encouraging transparency regarding bidding and payments. Where we see countries improving in terms of their corruption indexes, we quite often see PPPs being used to overcome that corruption and to improve levels of transparency.
Which brings us back to the crucial importance of the rule of law. Investors want to know what legal frameworks exist and whether they are being fairy applied and in a timely manner. Kenya is one of the examples in our InfraCompass study of a country which used PPP laws to increase transparency and to show its willingness to run clean bidding processes.
It’s thanks to this and other success stories that the perception of Africa as a hotbed of corruption is changing. You’re seeing investors like Meridiam Infrastructure increasingly targeting Africa as an investment destination. The question is no longer whether to invest in Africa, but which countries in Africa will be most likely to stand behind the sort of long-term contracts investors are interested in and have the economic plan to create and maintain the stability they require.
There’s investment going into countries like Morocco, Gambia, Nigeria, Kenya and South Africa – the latter of which has been an investment destination for some time. As this level of investment grows, it will create the precedents that will encourage other countries to clean up their acts and become stable, positive partners to investors and, hopefully, move more countries into that elite group of investment countries. By showcasing these positive examples, and providing practical support at the political and bureaucratic levels, this roundtable is intended to help speed up the transition for more African countries to better infrastructure governance models.