Change in infrastructure financing model needed
Zimbabwe is currently undertaking critical infrastructure projects such as the Harare-Beitbridge highway, Mbudzi interchange, Gwayi-Shangani dam, Kunzvi-Musami dam and a number of other projects. A 2019 report by the African Development Bank (AfDB) highlighted that Zimbabwe needs more than $34 billion over the next 10 years to upgrade its infrastructure to achieve sustainable levels of economic growth.
This means the country would need to invest $3.4 billion every year until 2030 to keep pace with developments on the continent, especially with rapidly developing peers in the SADC region such as Mozambique and Zambia. . The government of Zimbabwe stresses that it needs at least US$40 billion to fund critical infrastructure over the next five years. The 2022 national budget earmarked Z$334.7 billion for capital expenditures such as infrastructure financing. As of June 2022, Z$141.4 billion had been disbursed for the construction of roads and dams, among other projects. The government spent an additional ZW$172.6 billion on projects, bringing total capital expenditure to ZW$507.3 billion for 2022.
Source of infrastructure financing
Most of the above projects are financed by tax revenues and disbursements made partly in national currency. The government plans to issue a US$100 million bond on the Victoria Falls Stock Exchange (VFEX) to help accelerate some of the projects that have been delayed by funding such as the Gwayi-Shangani Dam. However, the short-term funding model used by the government for ongoing development projects has come under heavy criticism due to the impact of large payment volumes in the unstable foreign exchange market and subsequent depreciation. of the local currency which remains very volatile. .
Due to this depreciation and lack of trust in the local unit, infrastructure contractors are rushing to the parallel market to exchange their Zimbabwean dollar payments for foreign currency at the time they receive their payments in order to preserve value. To ensure local currency stability while meeting short-term infrastructure needs, long-term financing models are needed for infrastructure development, especially those that are self-financing in nature.
Need for private partnerships
Zimbabwe does not have a dedicated public-private partnership (PPP) law. In 2004, the government developed the PPP policy and guidelines, but this did not translate into a binding legal and regulatory framework. Without such regulations, investors and financial institutions cannot take risks to finance PPP projects locally given inconsistencies in monetary policy, institutional breakdown (property rights loopholes and tainted rule of law), bureaucracy and high levels of corruption in government. Over the past five years, monetary authorities have announced a plethora of conflicting regulations, policies and regulatory instruments that are eroding confidence in potential financiers.
The AfDB report (2018) explicitly points out that an inadequate regulatory framework limits private sector participation in infrastructure financing in Zimbabwe. In PPP projects, the financial, technical and operational risk is borne by the project sponsor, so PPPs do not contribute to public debt or raise tax revenue.
History of PPPs in Zimbabwe
Notable PPP projects in Zimbabwe since independence include the current $300 million Beitbridge border post upgrade by Zimborders under an 18-year build, operate and transfer agreement, the bridge 1994 Alfred Beit road built by the new Limpopo Bridge under a 20-year construction agreement. Operating and Transfer Arrangement (BOT) for a total cost of $18 million. Other PPP projects that have been successfully undertaken include the 800 km section of the Plumtree Highway in Mutare completed at a cost of US$206 million in 2014 (implemented by Group Five of South Africa with funding from the Development Bank of South Africa (DBSA), the $600 million Chisumbanje ethanol plant project by Green Fuels and Arda implemented in 2013 and the Beitbridge railway line $65 million Bulawayo (BBR) which was implemented on a BOT basis by Beitbridge Bulawayo Railway (Private) Limited in 1999 on the 317 km railway For example, PPPs have eluded Zimbabwe in a trend worrying because of institutional flaws that need to be easily corrected to ensure sustainability.
All of the above PPP projects were successful because the financiers were happy with the repayment model (self-financed by users) and the exchange regulations that tied the contract together. In the domestic market, pension funds have more than $650 million in foreign currency that can be used for infrastructure projects provided policies and law can ensure an uninterrupted return on investment. The same goes for financial institutions which can easily obtain offshore financing and synergies from external financiers provided there is a favorable environment. It was noted that local financial institutions lack sufficient capital to fund infrastructure, but capital flows where the environment is conducive and there are repayment guarantees.
Coordination of complex projects
Zimbabwe does not have a dedicated PPP unit, which means that implementation is carried out by the Ministry of Finance with the collaboration of various relevant agencies and government departments. It is therefore difficult to get traction on projects that fall under various ministries or departments such as dams and water projects in cities where the funding model falls under the Ministry of Finance and Economic Development, users fall under opposition-controlled city councils that are administered by the Ministry of Local Government and Works, water resources fall under the Ministry of Lands, Agriculture, Water, Climate and Rural Resettlement through through the National Water Authority of Zimbabwe (Zinwa), repayment guarantees from the Reserve Bank of Zimbabwe (RBZ) among other bodies that will be involved. This makes running PPPs in Zimbabwe complex, prone to corruption, political interference and bureaucracy.
Corruption has plagued PPP deals to a level where some projects had to be scrapped as project costs soared to cater to the many pockets involved. In addition, the use of public infrastructure through payment in an unstable national currency and the absence of a market-oriented foreign exchange market reduce any hope of private sector financing in infrastructure projects.
Need for political commitment
Long-term infrastructure financing requires high-level government commitment before and after implementation, as private actors incur operational and financial risks in these long-term contracts. PPPs require clarity on the policy and legal framework before the private sector can commit millions of dollars to public projects. Zimbabwe has gone to great lengths to separate economic policy and politics over the past four decades at the expense of infrastructure development.
The government points out that unlike other African economies such as Zambia, Mozambique, Ghana and Kenya which obtain huge amounts of loans for infrastructure development from international partners, Zimbabwe does not have this privilege. as the country was shut out of the debt markets due to non-payment of debt and arrears running into the billions. As of June 2022, public and publicly guaranteed debt stood at ZWL$1.3 trillion and US$13.2 billion, consisting of domestic and external debt, respectively.
Harare has external arrears with multilateral and bilateral institutions such as the World Bank, Paris Club, African Development Bank and European Investment Bank. As a general rule, institutions such as the International Monetary Fund (IMF) are not allowed to lend to a country that is in arrears with other international financial institutions. Similarly, other potential lenders are reluctant to lend to Zimbabwe without a means-tested guarantee.
Any potential infrastructure financing for Zimbabwe would require a clear path to full external debt restructuring, including clearing arrears and securing financing assurances from creditors. PPPs are ideal for self-financed projects such as sports facilities, water distribution, electricity generation, modernization of the railway network and the rehabilitation of all border posts in the country.
The consequences of infrastructure degradation are evident in the high cost of importing electricity from neighboring countries year after year, the high cost of doing business and low investment flows into the country, with investors preferring markets with better infrastructure in the Southern Africa region. Government does not need to fund (or even own) all public infrastructure. A favorable obligation for the government would be to ensure that the citizens derive the maximum benefit from the use of these public infrastructures solely, to the credit of the government.
The fact that PPPs tend to finance long-term projects calls for policy coherence and stability as prerequisites for building investor confidence. There is no national security benefit to funding all public infrastructure by printing money or spending scarce public resources at the expense of other urgent short-term needs. Government should only provide opportunities for the private sector to partner with government at the local or national level through an enabling regulatory and policy environment for PPPs. Infrastructure built and maintained by public resources cannot match that provided and maintained by PPPs.
- Bhoroma is an economic analyst. He holds an MBA from the International Monetary Fund (IMF) (UZ). – [email protected] or Twitter @VictorBhoroma1.