Developing the Project Pipleine and Rent Seeking

Africa’s working population is expected in the coming decade to be the largest in the world and hold the majority of the worlds uncultivated agricultural land in addition to the significant untapped natural resources it enjoys today. In order for the African economies to respond to this explosion in the productive human capital, it is essential that economic growth must occur to satisfy the needs of the growing population. A core enabler for this economic growth is the provision of improved and new physical infrastructure such as roads, ports, power, gas, utility services and the current deficit in infrastructure is holding back economic development on the continent, in particular power sector.

The infrastructure deficit has been recognised not only by African Government but also multilateral development organisations and the annual infrastructure gap is estimated to around $48 billon. So has the issue of financing capacity been the issue? When you consider that in addition to respective Government budget availability the global investment capital available was estimated in 2012 to be in the region of $2.6 trillion[1] Clearly, the problem is not one of capacity of funding.

The source of this market failure must lie therefore in organisational and institutional capacities. But at what stage of the lifecycle in the development of an infrastructure project do these market failures lie?

Within any project there are three distinct phases, namely: design, construction and operational. Using the analogy of the strength of a building always lies in its foundation, and so it follows that the design phase of a project if ill-conceived, poorly managed and structured incorrectly will weaken the foundations of the project. This weakness could have an enduring and negative impact on all the other phases of the project if it is successful in passing onto the second stage.

With the evolution of private financed initiatives in the OECD countries in the 1990’s, there was an expectation in the donor community that a larger percentage of the infrastructure financing would be taken up by the private sector. These expectations were sorely disappointed to the extent that the donors, having originally reduced their support, subsequently had to increase their support for infrastructure again in the 2000’s

This lack of engagement and support from private sector participation, it has been argued, is a function of the lack of well prepared and structured projects that can stand up to the close scrutiny of investors due diligence process.

A number of reasons for this have been offered from politics, policy, regulation, planning, preparation and execution challenges to misalignment between the social returns and the commercial returns in projects, risk adjusted return and cost of capital are not aligned, cost of transactions due to the lack of standardization, lack of political entrepreneurship, and financial regulation by OECD countries impacting the ability to mobilize long term patient capital to infrastructure assets.

Another reason offered is the impact of rent seeking during the design phase of infrastructure projects. In spite of the introduction of a variety of reforms that have been designed and implemented to tackle rent seeking, corruption is still prevalent due to bad governance and perhaps, due to the way democracy is funded in Africa.

The vulnerability of the infrastructure sector to rent seeking is understandable, with large sums of public resources deployed to support and fund big and complex projects. With the deep-seated culture of secrecy and weaknesses in accountability, fragmentation within and between government sectors, and at times technical capacity gaps all create the enabling environment for avenues of abuse to be created by officials.

There are many points where corruption can come into play for which infrastructure developers and capital providers have to be mindful of and mitigate against, starting with the initial project conceptualization period where projects may be promoted even through there is no commercial need or social demand for the same. This can then translate into the project scoping with biased specifications and confusing tender documentation.

Unsolicited proposals have been left out of this category as governments do not hold the monopoly of innovation and one should not discourage the private sector to bring forward projects that can address an unidentified and unsatisfied needs. There are a number of approaches governments can adopt in handling unsolicited proposals; from banning them outright, purchasing the intellectual property from the original project proponent, adopting a bonus bidding system or the Swiss Challenge System. It is worth noting that approximately 50% of South Korea’s infrastructure projects that have reached financial closure originated from unsolicited proposals.

The challenge in many emerging markets that is governments, multi-lateral development agencies and the donor community have not yet arrived at a collective position on creating the optimum environment that encourages private sector to come forward with original and transformational proposals whilst not compromising the need for good governance to be demonstrated.

The final stage within the design phase of infrastructure is the procurement process and bid evaluation. With the culture of secrecy decision makers can operate in an environment that allows biased decisions to be put forward with no objectivity and the selection process to be completed in a non-transparent manner, with award decisions either remaining secretive or in the event of a public announcement, the decision not being offered to stand up to public justification.

As indicated earlier in this article, infrastructure is an enabler for economic growth. If governments fail to effectively address rent seeking in the delivery of infrastructure projects the legacy they leave behind includes, the misallocation of resources to projects that are not only unnecessary but also uneconomical, the increased likelihood of infrastructure assets not being delivered on time and to the quality levels specified and the increased public spending on operation and maintenance of the infrastructure assets and reduced competitiveness of their country.

[1] Lippera, D., Lyonnet du Moutier, M., Rebondy, N. and Taillandier, L. (2012) Guide to infrastructure investing

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