Mthuli goes innovative on infrastructure financing

Talk of the country selling its airports and highways have been said since the 2024 National Budget presentation, albeit at a low volume as people concentrated on their incomes and the effect of tax on the said incomes.

As we continue unravelling the budget, this week we talk about how Government wants to fund infrastructure and the innovative way he has thought of.

According to the Minister of Finance, Economic Development and Investment Promotion, Prof Mthuli Ncube, Government will expand and modernise funding models that broaden the investor base in flexible and innovative ways such as asset recycling and Public-Private Partnerships (PPPs).

According to Treasury, “the Government will also keep in contact with the private sector regarding the potential concessioning of certain roads through structured finance, especially those that generate adequate cashflows and whose scope of work can be adequately funded through tolling.”

The budget statement claims that discussions about selling the RGM International Airport, Victoria Falls Airport, and Joshua M. Nkomo International Airport are ongoing.

The newly resurfaced Harare-Beitbridge Road is also on the list. Moreover, the Government is working with Africa 50 to explore project asset recycling as an avenue of financing infrastructure.

This can allow the Government to allocate funds to other important infrastructure projects, which are essential for long-term, steady economic growth.

So this week, we will be talking about asset recycling.

Asset recycling is a financial strategy that involves a government or entity selling existing public assets (wholly or partly), and reinvesting the proceeds into new projects. This approach is designed to leverage the value of current assets to address financial needs or fund new developments.

Like any financial strategy, asset recycling comes with its set of advantages and disadvantages, and its implementation can have far-reaching consequences for a debt-ridden country.

Why enter asset recycling?

One of the primary advantages of asset recycling is its potential to alleviate the burden of debt and by selling off existing assets, a government can generate significant funds that can be used to pay down existing debt obligations.

This debt reduction not only improves the country’s financial health but also enhances its creditworthiness, potentially leading to lower borrowing costs in the future.

Also, the proceeds from asset sales can be strategically reinvested into new infrastructure projects, which allows the government to address critical gaps in public services and promote economic growth.

The infusion of funds into infrastructure development can stimulate employment, attract private investment and enhance overall productivity. It serves as a proactive approach to utilising existing resources for the long-term benefit of the country.

It is believed that private sector involvement in managing and operating assets can bring about efficiency improvements. When assets are privatised or leased to private entities, there is often a stronger focus on optimising performance and minimising costs.

The profit motive of the private sector can drive innovation and better management practices, leading to improved service delivery and overall asset performance.

What might be the downside?

One of the major concerns associated with asset recycling is the potential loss of control over essential services.

As assets are privatised or leased to private entities, the Government may relinquish direct oversight and this can lead to concerns about the quality and accessibility of services, as private entities may prioritise profit over public interest.

Striking the right balance between private sector efficiency and public service standards becomes crucial in mitigating such issues.

Asset sales are often met with public opposition, especially when it involves key public assets and our Government has the reputation of botched deals and poor policy making, giving citizens more reasons to be sceptical.

The perception that the Government is selling off essential resources for short-term financial gain can trigger public backlash.

Managing public sentiment and effectively communicating the long-term benefits of asset recycling is essential to gaining public support for such initiatives. Failure to do so can result in political challenges and resistance that may hinder the successful implementation of the strategy.

While asset recycling provides immediate funds, the long-term cost of leasing or repurchasing assets can outweigh the initial financial benefits. Leasing arrangements, in particular, may involve continuous payments over an extended period, potentially surpassing the revenue generated from the initial asset sale.

Therefore, careful financial planning and analysis are required to ensure that the long-term costs do not outweigh the short-term gains.

Examples of asset recycling

Asset recycling was first introduced to Ontario policy makers through the Mowat Centre report entitled “Recycling Ontario’s Assets: A New Framework for Managing Public Finances” earlier in 2014.

The British Columbia Auditor General’s 2014 report highlights how the BC Liberal Government balanced its books with a record breaking US$601 million sale of government assets.Asset Recycling has been used extensively in Australia, where the national government established a AU$5 billion incentive programme in 2013.

The Australian programme provides state governments with an additional 15 percent in national funding of the capital raised from recycled assets. Between 2013 and 2016, a total of AU$15 billion was raised in Australia from recycling existing transportation power generation assets.

The state of New South Wales also created Infrastructure NSW to act as an independent body in overseeing the asset recycling process.

Infrastructure NSW has funded three new highway projects using revenue generated by its asset recycling program: Newell Highway, a AU$78,8 million 28-kilometer facility in an important freight corridor, a 9,8-kilometer AU$52,5 million extension of Princes’ Highway, and the 12-kilometer AU$30,4 million New England Highway bypass route.

Conclusion

In conclusion, asset recycling is a complex financial strategy that Treasury needs to have careful consideration of its wins and losses because we would not want to leave future generations in a worse off position.

While it offers a promising avenue for debt reduction and infrastructure development, the potential loss of control over essential services and public opposition pose significant challenges.

Successful implementation requires a transparent and well-communicated strategy, ensuring that the public is aware of the long-term benefits and that the government maintains a balance between fiscal responsibility and public interest.

Treasury should engage stakeholders, including the public, in the decision-making process as it is crucial for building trust and support for such initiatives.

Ultimately, asset recycling can be a powerful tool for addressing financial challenges and fostering economic growth, but its success hinges on careful planning, effective communication, and a commitment to balancing fiscal responsibility with the public good.

Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter, Tapiwanashe Willoe Mangwiro on LinkedIn and mangwirowt@gmail.com-businessweekly