World Bank Vice-President for Infrastructure Makhtar Diop visited the country at the end of November to assess the progress made in executing a number of projects funded by the bank. During this visit, Mr Diop held meetings with Cabinet Secretaries James Macharia (Trasnport), Ukur Yattani (Treasury), and Joseph Mucheru (ICT) as well as the African Union High Representative for Infrastructure, Raila Odinga. He spoke to the Business Daily on a wide range of issues.
HUGE EXPENDITURE OUTLAYS ASSOCIATED WITH CAPITAL-INTENSIVE INFRASTRUCTURE PROJECTS HAVE NOW BECOME THE OBJECT OF CRITIQUE BY MANY AS CONCERNS ABOUT DEBT AND EMERGING PRESSURES IN ECONOMIES LIKE KENYA RISE. DOES THIS BOTHER YOU GIVEN THE WORLD BANK’S ROLE IN FINANCING SOME OF THESE PROJECTS?
It’s always a question of a delicate balance as countries pursue productive investment and keep an eye on their level of debt. It is undeniable that a country’s long-term growth is linked to its level of infrastructural development and on this front, Africa faces a huge investment gap. Unfortunately, in addressing this, there are instances where projects have been undertaken without ensuring there is a viable rate of return. A key intervention to ease the rising pressure on the public purse should be to bring in private capital through a strong framework of public-private partnerships.
SPEAKING ABOUT CROWDING IN PRIVATE CAPITAL TO MEET INFRASTRUCTURE SPENDING, THERE IS A PERVASIVE CONCERN AMONGST INSTITUTIONAL INVESTORS THAT THERE ARE NO SUFFICIENT WELL-STRUCTURED PRODUCTS TO ALLOW PRIVATE CAPITAL TO BE DEPLOYED IN INFRASTRUCTURE PROJECTS. WHAT CAN BE DONE TO REMEDY THIS AND WHAT IS THE WORLD BANK DOING TO DE-RISK THIS SORT OF PROJECTS?
Bringing in private capital is really critical for sustainable investment in Africa’s infrastructure projects. Often, we have had a double mismatch in infrastructure financing. First, we had a currency mismatch where borrowing has been in hard currency yet revenue from the projects is in local currency. Second, there was a maturity mismatch where borrowing was done through short tenured instruments for investments that are amortized over very long periods. One solution lies in tapping into institutional capital, especially at a time when there is a lot of liquidity in the global market whilst ensuring there are strong provisions for de-risking investment. That’s why the World Bank is engaging in partial risk guarantee as well as other guarantees made available through the Multilateral Investment Guarantee Agency. The International Finance Corporation is also working on development of vehicles to allow co-financing with institutional investors.
IN VIEW OF YOUR CONCERNS AROUND THE TWIN MISMATCH OF FOREIGN EXCHANGE AND MATURITY PROFILES OF DEBT SECURED TO FINANCE INFRASTRUCTURE PROJECTS, WHAT IS YOUR ASSESSMENT OF KENYA’S POSITION?
I think things are moving in the right direction but with need for acceleration. Kenya is one of those economies which could actually lead as far as demonstrating what sustainable financing of infrastructure spending should look like. Kenya enjoys a strong private sector, it has an economy which is both vibrant and diverse, the economy enjoys openness to the global economy and it has very strong human capital. All these are very important elements for investors who are looking at the long-term horizon when making a decision. Attracting pension funds and other institutional investors always requires visibility on long-term prospects and I think Kenya is well positioned to offer that.
THE INTERVENTIONS BEING MADE BY THE WORLD BANK NOTWITHSTANDING, DON’T YOU THINK THERE ARE COUNTRIES WHICH STILL HAVE A LOT TO DO AS FAR AS PLACING THEMSELVES ON THE RISK PROFILE MAP IS CONCERNED? HOW WOULD THEY BE EXPECTING TO ATTRACT LONG-TERM INVESTMENT?
What the World Bank has been doing in this regard is to encourage countries to secure sovereign credit ratings as well as encourage countries within those economies to secure ratings. So, companies can secure credit ratings and then be able to borrow directly from the global capital markets and meet its investment needs. The second critical thing is for existence of a clear legal framework on a number of issues. For example, if a country is considering toll roads, it is very important to have a clear legal framework around the same.
Also, regions such as East Africa should consider harmonisation of something like their public-private partnership legal frameworks such that an investor doesn’t have to worry starting from scratch when moving within the region.
DATA AND DIGITAL INFRASTRUCTURE ALSO FALLS UNDER YOUR PURVIEW AT THE WORLD BANK. IN AFRICA AND ACROSS THE GLOBE REALLY THERE IS THIS GROWING PUSH FOR TAXATION OF THE DIGITAL ECONOMY HOW DO YOU FEEL THIS WILL IMPACT SOME OF THE OPTIMISM YOU HAVE AROUND AFRICA’S ABILITY TO PIVOT INFRASTRUCTURE GIVEN THE DEEPENING PENETRATION OF THE DIGITAL ECONOMY?
I think this is an area where we all need to be extremely careful. We need to appreciate the point at which Africa is. The digital economy in this continent is vibrant, demands much less physical investment to scale and it is driving a lot of creativity and growth of the continent’s economy. So, we need to be very careful about how we are going about the taxation of this segment of the economy.
Already we have a challenge where because of the capital constraints, as soon as home-grown data driven start-ups reach the $ 1.0 million financing need, they get stuck and they sell off their product and then we have companies come and buy and take away the intellectual property.