Funding infrastructure is difficult. It takes years to get a deal over the line. It’s cumbersome and sometimes there is very little to show for the risk involved.
Infrastructure finance needs a special skill set that goes beyond typical banking. In funding infrastructure projects one needs to consider the commercial business case, the proposed financing structure, technical as well as operational risks and their implications on credit, legal and environmental, social & governance factors.
At a recent decarbonisation workshop hosted by the Development Bank of Southern Africa and Lesedi, I moderated a panel on “Bridging the Gap Between Decarbonisation and Funding”. During the Q&A session a participant remarked that if we used the same principles we used to fund infrastructure in 2025, we would not have built the infrastructure during the Van der Bijl era.
Hendrik van der Bijl played a pivotal role in the creation of numerous SA institutions, including Eskom, the Industrial Development Corporation and Iscor, now known as ArcelorMittal SA.
The concept of bankability as we know it now didn’t exist 100 years ago. Infrastructure was a government prerogative, spearheaded by engineers, industrialists and mavericks, mostly funded by government. Government saw the investment in infrastructure as pivotal for economic growth, job creation and industrialisation.
Some infrastructure will not make sense in commercial terms. Sometimes there is no positive economic rate of return and the return on investment is too low to consider in commercial terms. Infrastructure investment over the past 100 years in Denel (then Armscor), the SABC and even SAA, would have very little commercial rationale as a new investment in 2025, but their importance cannot be overstated.
Government is often criticised for pursuing what some consider outlandish projects such as high-speed rail and new cities. These projects at conception make very little sense and the business case may show negative returns, but as I said to the audience at the workshop, an investment in a new city such as the Oceans Umhlanga precinct has added beachfront property and a mall along Durban’s north coast.
It has created a new central business district and a vibrant hub of restaurants, retail and nightlife. It has also driven tourism in the area, increased property values and the resultant property taxes, and added to the allure of the existing hotels in the area. These returns are invisible in a financial model when considering a new city.
Development, not profit
The aim of building out infrastructure, whether in Dubai, Singapore or China, over the past two decades had very little to do with having a high return on investment or creating value for shareholders. The aim was to develop functional infrastructure, create jobs and industrialise to grow these economies.
In SA, we will not have gas, nuclear and hydrogen projects if investment decisions are based on load factor, least cost (as opposed to total system cost) and quick, easy projects that involve less risk and have predictable cashflows. We will not have high-speed rail between Johannesburg and Durban if we still want to consider economic rationale and passenger numbers reaching a particular threshold.
There are roads and rail built more than 50 years ago that didn’t make economic sense then but now drive the engine of growth and development on the continent and enable regional trade. Historically, Africa’s iron road has always led to the sea; if we are to change our trajectory it will have to start with how we view Africa’s financial, human and natural capital, and how these can be maximised for regional economic development.
Infrastructure decisions cannot be dictated by return on investment. The government needs to take a hard approach to infrastructure investment, especially if it is to turn SA into a construction site. However, it will also need to put its money where its mouth is and back these projects to bankability.
• Mashele, an energy economist, is a member of the board of the National Transmission Company of SA.
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