Thursday, June 7, 2018

Role of stock markets in financing infrastructure


By Moremi Marwa

Improving infrastructure is not only critical for our economic growth but an essential tool for ensuring the improved wellbeing of our people.

In whatever form – whether transport infrastructure or energy-related infrastructure, or telecommunication infrastructure, or agriculture infrastructure or health infrastructure or trading infrastructure, or water infrastructure, etc all are important, all the way.

Empirical researches indicate that there is a strong link between infrastructure development and economic growth, that’s how it is, everywhere.

According to the African Development Bank (AfDB) recent report, road access in Africa is less than 35 per cent as compared to 50 per cent in other developing places. In agriculture, just about 5 per cent of agriculture in the Africa have access to irrigation, compare to about 40 per cent in Asia or 15 per cent in Latin America.

Africa’s average national electrification rate of 45 per cent, is poorly compared to 80 per cent in Asia and 98 percent recorded in Latin America.

The total electricity generated for Africa’s one billion population is equivalent to what is being produced and consumed by single nations in Europe i.e Italy, or France, or the Netherland, etc.

The above statistics applies similarly to us, and according to AfDB, the amount of capital required to close the infrastructure gap in Africa is estimated to be in the region of $93 billion annually for the next five years. Where will this money come from? Will China, or the BRICS Development Bank or the Asia Infrastructure Investment Bank or some other foreign financial institutions fill this funding gap? Our experience, when it comes to foreign developing finance and grants indicates that the answer may be largely, no.

We have been through this cycle and experience again and again. What we need is smarter financial innovation and financial engineering approaches, and appreciate the role of domestic finance or capital markets in financing our development, this includes infrastructure.

What we need to hear is our politicians and policy makers talk about infrastructure bonds, we need to hear about investment and savings mobilisation vehicles for financing infrastructure development, we need to hear municipal bonds for financing local governments and municipals infrastructure, we need to hear a government agent responsible for agriculture infrastructure engaging the capital markets in their intent to issue a bond for an water irrigation projects, etc.

Sourcing funds to finance a sizeable infrastructure projects has always been fraught with difficulties, this is the case for us, as it is for other countries in the state like ours. One major challenge is that the multilateral development finance institutions, which are dominated by the western developed countries, often imposing stringent policy conditions to loans.

But it also appears that the funding required to close the infrastructure gaps in a timely fashion can no longer be simply in existence on some of the traditional development financial institutions’ balance sheets.

Another issue is that the major lenders have historically been more active in financing social infrastructure such as health and education.

Their approach to development in Africa has by and large been related to “poverty alleviation” not so much on “economic development”.

As it turns out, financing social infrastructure for poverty alleviation objectives aren’t the same as financing economic infrastructure which plays a critical role in spurring economic growth, which in this moment in time, has not been accorded serious attention that it deserves.

While social infrastructures are equally relevant and important for economic development, however, economic infrastructure is even more urgent. The process of wealth creation and capital accumulation are facilitated more by investments in economic infrastructure.

The fact is, the old approach of countries relying heavily on multilateral and regional development finance institutions to fund infrastructure has been recently challenged by other facts. It is also incapable of closing the financing gap of the size we learn.

In fact, neither the old nor the new institutions have the risk appetite for the kind of investments needed. If we continue to rely on these institutions, then the pace for closing the infrastructure gap might continuously be very slow.

The current move that geo-economic relations are largely based on trade and investment, as it is with encouraging our countries to look inwardly for solutions related to financing our development, instead of the tradition aid and assistance model, looks like the best approach worth embracing – difficult and daunting as it might look.

Furthermore, recent economic challenges in some developed countries have made traditional development finance institutions hesitate to provide resources for the huge but critical infrastructure investment as required.

Given such experience, the game-changing infrastructure projects that can make a dent in the bridging the infrastructure deficit and move economies to a higher growth path need to come from own resources.

And, the place to start would be the domestic financial markets, especially the capital markets, which are so been overlooked or ignored or less appreciated by policy makers, or the corridors of powers.

But, if seriously considered this aspect of finance and its role in our economic development have the possibility to elevating us significantly – it will give us the sense of ownership, it will enable us to achieve our policy/agenda of economic empowerment, it will facilitate and fast track our economic inclusion agenda, it will result into or domestic savings be intermediated to finance our significant our economic infrastructure projects.

And, of course no one is arguing that foreign investors and financiers – i.e. development finance institutions, institutional investors, etc will not have access to these financial instruments, if we decide to let them.