State projects good for business

Amid the pressures on many businesses, with recovery from the two-month Level Four national lockdown leading the pack, there is a surprising amount of stimulus in the offing as the Government pushes its infrastructure programmes up the priority ladder and starts converting plans into action.

For those used to a few decades of talk, the Second Republic’s attitude of budgeting for plans and then starting the hard physical work is welcome. And, even more importantly, the Government is now keen on using Zimbabwean companies and contractors as the main implementers, and even when a foreign engineering expert company is called in, to ensure that the raw materials and sub-contracting is bought and done locally.

We saw this with the Harare-Masvingo-Beitbridge Highway. There was a fancy and expensive plan to use a foreign firm to basically take over the road and the tollgates along it for 20 years or more. Fortunately that particular foreign entity was not some well-capitalised concern offering a rational and reasonable contract, but rather one of these get-rich-quick outfits. So the contract tanked and was voided.

Instead, the Government started doing the planning itself and hiring Zimbabwean contractors to do the heavy lifting. What interested the new Government planners as they monitored progress and checked costs, was that the Zimbabwean firms were perfectly capable of doing the work well, and the costs are significantly lower than using the scheme offered by the foreigners.

Now the Government is thinking about taking up the concept of the credit scheme offered by the chancers, but running it itself. This would involve floating a bond issue tied to the highway, but using the toll fees generated along that highway to service and eventually repay the bonds.

While there has been a determination in the Government to balance the budget, using tax dollars to pay all recurrent expenditure and to pay many of the capital costs, on the basis that quite a lot of this capital spending is necessary, but does not provide fixed income to service the loans. While there are economic theories that even general capital expenditure can upgrade the economy to make it possible for more business and so more taxes, and those extra taxes can then fund repayments, this does not really work out in practice.

For a start, there is what can best be described as social capital spending, new hospitals, universities and schools for example. There is no way a Government can set fees to recover that spending, and at best the fees that can realistically be charged will do nothing more than cover the maintenance. And while that spending does improve the lives of Zimbabweans it is a long and complex trail that might generate more taxes at some stage.

But a busy national highway is somewhat different. Thousands of vehicles a day cross the Limpopo at Beitbridge on their way north, with the bulk then driving north on the Masvingo leg of the highway network, and with Harare as the largest single destination. In addition there is the internal traffic along sections of that highway.

This has already triggered plans to rebuild and expand toll plazas to cope with the traffic, showing that there is a lot of cash flow. The cracking down on corruption means that a higher percentage of that money is now available for what was intended, highway construction and maintenance. And that income is now protected in real terms with the switch to tolls being set in US dollars, although Zimbabwean residents can pay in local currency at the auction rate.

So dedicating the net revenue from every tollgate along that highway to servicing the loans and keeping up the maintenance does make economic sense, so long as the sums are done very carefully not to create sovereign debts that then needs the taxpayers’ children to take over.

What is interesting though, is that the bond now being considered will cover just half the costs. Someone is being very careful to ensure that what is borrowed can be repaid without problems from revenue generated. And the loan money is not for the full route, only the exceptionally busy Beitbridge-Harare section, while the lower traffic Harare-Chirundu section is funded more traditionally.

This is important when we come to the two other major projects announced over the last week or so, the Gwayi-Bulawayo pipeline and the start of a major Government housing scheme. Funding has yet to be publicised, but both could have a borrowing component depending on how exactly these two major projects will be used.

In theory the pipeline could have a significant borrowed component since the water being pumped down it will be sold by Zinwa. The biggest customer will be Bulawayo City Council, which will purify its purchases, distribute this purified water to its commercial, industrial and residential customers and collect water tariffs to pay for everything, on the normal no-profit-no-loss system. As the bulk of costs of getting water from a tap arise from this final stage, there is some flexibility in setting the raw water charges, with everyone in Bulawayo ready to pay a fair price that will be lower than borehole water or going without.

But Bulawayo, and other urban areas, principally growing Lupane, will not be using all the pipeline water at first, so there are plans for irrigation and here the costing options are tighter. Experts from the 1980s were suggesting that cheaper irrigation water could come from Bulawayo’s existing supply dams, now all paid for, with the city switching to the pipeline.

But for businesses there will be an huge bonus. The Government is planning on using local contractors to lay the pipeline and install the pumps, and there we have a direct benefit from the infrastructure spending.

The housing scheme, some houses but eventually a lot more multi-storey blocks of flats will provide a continuous and near eternal market for bricks, cement, roofing, windows and other materials. Since these structures need to be built, there will obviously be years of work for building contractors.

Under new policies, the Government, when it comes to housing for State employees wants to return to the old system that these remain in State ownership. The police, uniformed forces, boarding schools and Health Ministry have always followed that policy, and one of the perks working for these is having accommodation, usually at a modest rent that covers rates and maintenance but not the capital costs.

Where that policy is followed then obviously the capital has to come from the cash raised by taxes. In effect it is a staff cost, but can be thought as capitalising some of the staff costs. If you throw in a low-rent flat as part of a package, then the pressure on pay rises is reduced. This is why boarding schools, for example, always find it easier to recruit and retain staff than day schools.

There was another set of schemes in the 1990s, a vast number of flats were built and handed over to civil servants on a rent-to-buy scheme. Most were sublet and as they were paid off, especially during the hyperinflation, were sold to others. And now the Government has to start from scratch with a bunch of former civil servants getting an asset.

But the Government is also keen on seeing these housing schemes extended to the general public, and here we are looking at the old public housing programmes that built many of the high density suburbs where people received what amounted to mortgages, although controls ensured that a family could only buy one house.

That would allow outside financing. Bulawayo took this to a whole new level in the late 1970s and early 1980s when it doubled the size of its high density housing by floating bonds to finance the building and then sold the resulting homes to families on the no-profit-no-loss concept.

The city had almost reached the stage where it needed to slow down, since the council reckoned it needed at least a waiting list of around one year to ensure that every house built was immediately occupied by a mortgage-paying family since the costing did not work with empty houses.

Those 30 000 houses built in just over six years were affordable, mind you, because of innovative assembly line production and careful design. The scheme was then messed up by the idea of using building brigades without controls. But a return to that sort of thinking, home ownership using the cost savings in industrial building, seems a possible solution.-ebusinesweekly.co.zw