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Regional policy for accelerated infrastructure development

By Russell Duke & Michael Tichareva   |   29 September 2015   |   11:53 pm
Russell Duke Chairman of National Standard Finance, LLC Global Sovereign & Infrastructure Investors

Russell Duke<br />Chairman of National Standard Finance, LLC<br />Global Sovereign & Infrastructure Investors

Michael

Michael

In recent articles we have been talking about many issues ranging from the need to create enabling environments for investment, the infrastructure challenge for Africa, the financing gap and government policy formulation process among other issues.

All the issues we have been discussing require solid policy frameworks.We discussed in the most recent article the government policy formulation process proposed by John Kingdon, Emeritus Professor at the University of Michigan, who reasoned that decision making in government follows three main streams: the problem stream, the policy stream and the political stream.

We often prefer to illustrate things with real life examples, and the most recent SADC Industrialization Strategy and Roadmap, 2015-2063 is a good example. This was crafted in the context of existing national and regional policies and specifically the decision taken at August 2014 Summit at Victoria Falls which was held under the theme: “SADC Strategy for Economic Transformation: Leveraging the Region’s Diverse Resources for Sustainable Economic and Social Development through Beneficiation and Value Addition”.

Decision making streams in action
In developing the SADC strategy, first was identification of the problems hindering sustainable economic development and poverty reduction in the SADC region (the problem stream). This was then followed by the Victoria Falls summit decision and the strategy development process (the policy stream), and there was overwhelming political support (the political stream). The outcome was a resounding strategy document for SADC industrialization and regional integration to be implemented in 3 phases up to 2063. The first phase lasts until 2020 focusing on laying down the foundations for long term development. The second phase, covering 30 years to 2050, constitutes a period of heavy lifting development and establishing strong momentum for competitiveness. The final third phase, covering 13 years to 2063, builds up for the convergence with the African Union long term Agenda 2063 and crossing into a fully developed country stage.

Interesting in this SADC strategy is that it identifies that accelerated industrialization is being hampered by three binding constraints – inadequate and poor quality infrastructure, a severe deficit of the skills needed for industrial development and insufficient finance. So the issue of inadequate infrastructure and lack of finance always takes centre stage. We have always argued that skills can always be imported from global partners and local people up-skilled as long as the funding is there, with an enabling policy environment and with adequate political will.

Strategy on infrastructure development policy
On infrastructure, the SADC strategy notes that increased investment in new infrastructure, soft as well as hard, allied with improved management and additional spending on maintenance, are prerequisites for industrial take-off. We have been discussing these issues in this column over the past few months. The SADC strategy hits the nail on the head in identifying these issues, the challenge remains accelerating the implementation of the strategy. To quote the strategy, it notes that Efficient and affordable infrastructural services (consisting of transport, communications, ICT, energy and water supply) are critical inputs for reducing transaction costs for industry and trade, as well as for enhancing the economic and social wellbeing of society at large. Effective implementation of the strategy would indeed require the building and/or close coordination of these services in a timely and optimal manner. To this effect, the strategy calls for (i) enhanced access to quality infrastructure; (ii) timely and locational availability of services to reduce input and transaction costs; (iii) addressing the infrastructural deficits at the national and regional levels; (iv) provision of quality infrastructure for the implementation of the Industrial Upgrading and Modernization Programme; and (v) upgrading the transport, energy, ICT and water supply infrastructure.

The strategy notes that in tackling the infrastructure deficit through increased investment in new facilities, extra attention should be paid to maintenance and quality, as it is not just the supply of infrastructure that is constraining economic development, but the failure to provide adequate resources for the upkeep and maintenance of existing infrastructure, while ensuring that due attention is paid to the quality of infrastructure provision. The strategy then advocates that (i) the current Regional Infrastructure Development Master Plan (RIDMP) should be fast-tracked and aligned to meet the varied needs of the industrialization strategy; (ii) a strategy for leveraging the RIDMP should be developed to catalyze industrial development and reduce current high costs of doing business; and (iii) the infrastructure support programme for industrialization should be planned and implemented as a continuum, extending beyond the medium term.

Strategy on financing policy
To overcome the severe constraints imposed by the infrastructure and skills deficits, the strategy notes that governments will need to re-order their public expenditure programmes to give greater priority to public and private investment in physical infrastructure and human capital development. In part this will depend on the willingness of governments and electorates to embrace the paradigm of change in the form of a switch from consumption-led economic growth to investment-driven expansion. This is a very important paradigm shift that requires careful planning and re-orientation of both the electorate and the civil service.On domestic sources of capital, the strategy notes that existing savings and investment levels in the SADC region fall well short of what will be needed to drive structural transformation, economic diversification and poverty reduction.

Given the present and likely future state of the global economy, SADC countries cannot afford to rely on foreign savings to make good shortfalls in domestic savings, hence the need to develop the domestic sources that includes the internal fiscus, the financial sector, the capital markets, the private equity funds, the public-private partnerships, SADC Development Fund, Sovereign Wealth Funds, remittances and institutional savings including Pension Funds. The strategy recognises that exploiting the potential of these sources will require deepened financial sector reforms, innovative mechanisms and effective frameworks to maximize and sustain the high level of resources necessary for industrialization.

Alongside this, we believe that foreign direct investment plays a critical role early in the process. We noted in the most recent article on government policy formulation process that Finance Ministers will need to work very closely with the global financial network to tap into both existing and new and innovative ways of financing for projects. It will be practically impossible for the SADC industrialsation strategy to succeed in its objectives within the envisaged timeframe without taping into the global financial resources. Initially, external funding will be needed to address the bottlenecks. Key to attracting this external capital is creating an enabling environment, a theme that we have always repeated.

The SADC strategy notes that Governments’ central roles is the creation of enabling policies and regulatory environments for accelerated industrialization with a particular focus on tackling the binding constraints of infrastructure, skills development and financing. Once again, the SADC strategy hits the nail on the head and political will should lead to accelerated infrastructure development to support industrialization.

Nigeria seems well placed to lead regional integration in West Africa starting with sorting out key policy issues at home.

Russell Duke is Chairman & Managing Principal at National Standard Finance, LLC. Mr. Duke can be reached at RDuke@NatStandard.com.

Michael Tichareva is Principal & Managing Director of Africa operations at National Standard Finance, LLC. Mr. Tichareva can be reached at MTichareva@NatStandard.com.

The website can be accessed here: www.NatStandard.com




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