South Africa

Details

  • Industry: Public Sector
  • Type: Business and industry issue
  • Date: 2011/10/26

Unravelling the complexity of urbanisation in Africa 

Since the 1980s, several Asian economies have enjoyed unprecedented growth, with China’s output now ranked second only to that of the United States. This remarkable expansion had to happen concurrently with mass urbanisation. Yet without infrastructure, Asian cities never would have coped with the influx of millions from the countryside.

It may well now be Africa’s turn to convert potential into economic growth. As in China and India, this could lift hundreds of millions out of poverty. First, however, Africa must overcome the drawback of infrastructure bottlenecks.

 

Challenges in developing urban infrastructure

 

The causes of infrastructure bottlenecks include:

 

  • high fiscal deficits and poverty
  • limited capacity for domestic finance
  • unrealistic project structuring
  • financial weakness of projects
  • weak institutional frameworks
  • lack of capacity and inefficiencies at city government level.

 

Traditionally, national governments financed local infrastructure projects. With decentralisation, however, many city governments are increasingly responsible for providing infrastructure without any commensurate increase in their funding. It is therefore critical to enhance the financial viability of local governments before they can source any external funding.

 

The role of city governments

 

City governments, the private sector and national/provincial/state governments all have a role to play in boosting local financial viability. City governments can take initiative in the following ways:

 

  • Undertake pre-feasibility studies. Specialist advisors should help with the technical, financial and regulatory aspects of proposed projects.
  • Develop capacity. A training calendar for all levels and across departments should be prepared on an ongoing basis.
  • Consult with stakeholders. Private developers, financial institutions, end-users and related government agencies must be consulted.
  • Standardise the decision-making process. This approach allows for the transparent selection of procurement options, thanks to standard evaluation parameters.
  • Actively pursue the private sector. The private sector can help bridge the gap between infrastructure requirements and scarce public-sector means.
  • Endorse sustainable development. The city government must strike a balance between economic, environmental and social development.
  • Obtain a credit rating. A bond credit rating can be up-rated through, for example, escrowing dedicated revenue streams and pool financing.

 

Finance alternatives

 

City governments can tap into both public and private sources of project finance. These include:

 

  • capital markets
  • private institutional investors
  • domestic financial institutions
  • multilateral, bilateral and export credit agencies
  • asset leverage (land)
  • Public-Private Partnerships (PPPs) and Joint Ventures (JVs).

 

About PPPs

 

Private investors should be aware that their revenue from user charges for infrastructure depends on the ability and willingness of the public to pay. Using foreign currency loans for infrastructure projects which generate revenue in local currency, poses a foreign exchange risk. Weak governance and political instability present the risk of contract cancellation or renegotiation.

 

On the other hand, PPPs, which are mostly structured as Special Purpose Vehicles (SPVs), generally deliver better value than the alternatives. The public sector performs certain tasks better than the private sector, and vice versa. From this effective sharing of risks comes value for money. Through an SPV, government retains some oversight while allowing the private sector its share of the profits.


Conclusion

 

Urban infrastructure will be the cornerstone of sustainable African economic growth. Together, governments, municipal corporations, multilateral funding agencies, financial institutions and private developers can help optimise this growth.

 

Contact

Contact
Tshidi Mokgabudi
Executive Director
Clients and Sectors
Tel: +27 (0)11 647 6735
tshidi.mokgabudi@kpmg.co.za
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