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Five principles for living beyond your means in infrastructure

The business of building physical infrastructure is capital intensive. To be successful, any ambitious program for the consistent, sustainable development and maintenance of new and existing roads, bridges, electricity assets, seaports, airports, waterways, pipelines, railways, wagons and locomotives (among others) will inevitably require significant resources beyond the capacity of any single source of capital.

Even at the best of times (when infrastructure assets are to be put up in wealthy, well-organised countries), the resources of the various governments or agencies in the country will be insufficient by themselves to maintain a successful development and maintenance program.

Therefore, from the earliest times in modern human development, the proven means by which successful infrastructure financing programs are established has always been the creation of self-sustaining and credible frameworks for continuously raising capital from as broad a variety of sources as possible: both public and private.

Whether it be historically important landmark transportation arteries like the Erie Canal (Eastern United States, 1821) and the Suez Canal (Egypt, 1869) or (closer to home) revolutionary developments like the ambitious colonial Nigerian railway system (from 1895), the history of successful infrastructure development everywhere in modern times is tied closely to the evolution of sophisticated frameworks for raising diversified capital. In all three cases above, access to local and international capital flows significantly beyond the immediate means of the governing administration or implementing agency was essential to delivering the transformational infrastructure.

So, how does a governing administration seeking to repeat such successes go about setting up its affairs? This is a particularly important question in the case of a government with development challenges entirely above its present means (as is currently the clear case in Nigeria), and desperately in need of an ambitious infrastructure roll-out and maintenance program. For ambitious governments aiming to live beyond their means in infrastructure development, five principles are worthwhile to observe from recent and distant history.

Firstly, because resources are always finite, project prioritisation is critical. In practice, the most efficient means of achieving this is to apply discipline to resist political and parochial considerations in selecting the most important infrastructure works to focus on. This requires commencing every assessment of a proposed capital project with a clear-eyed focus on either the potential revenue impact (via taxes accruing to the public purse) from having a project completed and operational, or conversely, the reduced or avoided costs (to businesses and citizens) from having a project in place. As an example, a railroad connection between a seaport and an established inland trading location might rank higher on the implementation list than a new airline or office building.

Secondly, just like in military warfare, capital intensive infrastructure is all about planning. Thorough advance preparation for every contingency, prior to heavy deployment is an indispensable condition for success. In the case of economic infrastructure desired by a governing administration, this will include technical studies (into everything from site conditions and accessibility to economic viability), detailed evaluation of the legal and regulatory framework, and an Environmental and Social Impact Assessment.

As an example of the interface between the two principles already listed above, a high priority project might also prove terribly daunting in the cold light of a proper plan; which might be a reason to shelve it, or to evaluate alternative strategies for achieving it.

Which brings us to the third principle for living beyond your means, and one of the cleverest devices yet evolved for attaining ambitious yet critical infrastructure works: contracting for capacity using guarantees. In direct contrast to sourcing upfront all of the funding required for a project, a procuring government or agency might look only to provide operational performance-based guarantees to a private contractor that undertakes to raise capital and deliver the works. This is the concept behind power purchase agreements, shadow tolls, minimum revenue guarantees and multiple other such schemes.

Every successful program for large scale infrastructure deployment in recent history has employed one or more of these methods for attracting risk capital and construction expertise from multiple diverse sources. It is a system that boasts the added benefit of encouraging a more market-based and efficient method of allocating risks between procuring agencies (governments) and implementing contractors.

How does a governing administration seeking to repeat such successes go about setting up its affairs? This is a particularly important question in the case of a government with development challenges entirely above its present means and desperately in need of an ambitious infrastructure roll-out and maintenance program

That being said, there is no system clever enough to succeed in the absence of procurement transparency, which might be aptly referred to as the bedrock of civilisation in implementing public works, large and small. Thankfully, modern information and communication technology has now made absolute transparency possible in determining the winners and losers of all public sector expenditure contracting, and at an insignificant cost. The only question remains the political will to obviate the discretion of human officers, by using appropriate technology at every stage of the public procurement process. This is a question for a separate article.

Finally, having followed all the principles above, the means by which infrastructure is paid for remains a critical matter to consider. Even where projects have been scientifically selected, properly planned and regulated, contracted using clever guarantees, and procured transparently; prompt payment still needs to be delivered as and when due for all obligations. This is where Africa Finance Corporation (AFC) is perhaps most useful to the project developer or procuring agency, as an infrastructure-focused financier that provides a broad range of solutions to meet payment obligations.

From the project development expenses (essentially the costs of following all the principles laid out above), through provision of payment guarantees, debt, equity and other forms of liquidity, AFC is available (with its own funds as well as third-party partners) to assist ambitious African governments meet the important challenge of living well beyond their means in the business of infrastructure development.

Fagbule is the senior vice president and head of financial advisory at Africa Finance corporation

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