Infrastructure development key to growth

via Infrastructure development key to growth – The Zimbabwe Independent November 17, 2014

THERE is no argument that infrastructure development, both economic and social, is one of the major determinants of economic growth, especially in developing countries.

Direct investment on infrastructure creates:
Production facilities which stimulate economic activities;
Reduces trade costs and improves competitiveness;
Provides employment opportunities;
Alleviates poverty;

Improves quality of life.

Lack of infrastructure causes production bottlenecks for sustainable growth and poverty alleviation.

However, there are still numerous arguments on exactly which infrastructure causes what and how national conditions can have an impact in the effectiveness of infrastructure development directly causing identifiable economic growth.

If we take the case of China, its growth has been driven mainly by domestic capital formation due to cheap labour, high savings rates (50%) and high investments as a percentage of GDP (43%). What puts China apart is their investment in human capital as the country has focused on export led growth of manufactured products.

The key here has been ensuring that infrastructure development is matched by investment in human capital and it is a combination of these that has resulted in increased economic output and increasing per capita incomes.

In addition to that, good planning and making sure that the country is attractive to foreign direct investments has resulted in explosive growth.

It is evident therefore that although investment in infrastructure does lead to economic growth,other conditions must be in place. This is the paradigm shift that we must go through in Zimbabwe.

Infrastructure investments alone will not necessarily maximise our potential as a country unless we address a myriad of issues that continue to arrest our development especially human capital development and savings.

Challenges
According to the African Development Bank the challenges faced by Zimbabwe are:

The sustained deterioration in the quality of infrastructure assets which stemmed from very inadequate levels of public expenditures for routine and periodic maintenance ofthe infrastructure networks, especially in power, water and sanitation, and transport;

Infrastructure services in road transport and communications that are provided by the private sector are now more expensive than in neighbouring countries, reflecting in part the economic costs of the deterioration;

In state enterprise dominated sectors such as power, rail transport, and fixed line communications, services prices have been kept low, and as a result, the economic costs of the deterioration have emerged in the form of large and, in some cases, unsustainable operating losses;

The deterioration in the physical infrastructure has been accompanied by lack of progress in building institutional capacities for management and regulation of the basic services associated with these networks. Problems in this area stem from a disjointed approach to regulation and oversight among the ministries responsible for these sectors, compounded by a substantial loss of skills in the public workforce;

Institutional and regulatory inadequacies also resulted in minimal amounts of investment by the private sector in basic infrastructure, despite periodic efforts to attract such investment, for example, in the transport and communications sectors;

Zimbabwe is also faced with challenges of urban sprawl, urban poverty, inadequate housing especially for the urban poor, provision of inadequate infrastructure and services including clean potable water, sewerage reticulation, power supply, garbage collection and disposal, and adequate transportation, at affordable levels.

We can then add the issue of country political risk that has seen a severe reduction in foreign direct investment.

The dwindling tax base has seen also seen a severe reduction in government expenditure on gross capital formation in the last ten years or so. This has meant that as a country, we do not have our own resources to fund our infrastructure development which must be funded through loans. This of course makes it expensive and delays the net return to the country.

Zimbabwe is currently only spending a mere 6,2% of its gross expenditure on capital expenditure most of it (42%) being in agriculture while critical sectors such as energy, transport and communications receive very little attention from the fiscus.
A country that spends 82% of its revenues on employment costs cannot expect a better future simply because it is not investing in that future.

Clearly the Zanu (PF) model of politics and predator rule is not conducive to the emergence of a developmental state in Zimbabwe. That remains our fundamental challenge.

Comprehensive studies have been done by organisations such as the World Bank and the African Development Bank on the revival of Zimbabwe’s infrastructure.

Solutions
We have problems and these can only be resolved through addressing the following issues:

Better planning and coordination of government policy and projects on infrastructure development.

Institutional renewal both at national and local government levels to improve governance, financial management, accountability. This must also involve dealing with corruption and red tape.

An increase in government expenditure on capital formation and investment in infrastructure projects with high output elasticity.
Investment in human capital as a driver of economic growth.

Attracting engineering skills back to the country particularly Zimbabweans in the Diaspora.

lMaking Zimbabwe an attractive investment destination and attracting foreign investments in infrastructure development.

lRevive agriculture and stem the urban drift that has put pressure on urban infrastructure.

A reduction in country risk through political settlement.
Sector specific needs

The African Development Bank performed a comprehensive Zimbabwe infrastructure development study for the period 2011-20. It was estimated then using 2009 prices that Zimbabwe would need to spend about US$14 billion on infrastructure (see table above) development projects.

Of this amount, the private sector was expected to contribute US$5 billion and the Government through own expenditure and donor funding for the remaining US$9 billion.

The projects envisaged are
Power: Full rehabilitation of the national power grid and by 2020 addition of new generation capacity required to sustain strong economic growth;

Roads: Rehabilitation of a large part of the national road network;
Railways: Rehabilitation of the railways network and restructuring of the industry through the creation of a new public entitythat would own, maintain, and manage the basic track infrastructure, the restructuring of the National Railways of Zimbabwe (NRZ) into a privatised railways services company and the award of concessions for freight and passenger services on the entire rail network;

Civil aviation: Early action to upgrade the status of air traffic communications and safety in Zimbabwe to a standard consistent with the requirements of the ICAO, theaward of concessions for the upgrade and operation of the Victoria Falls and Buffalo Range airports to promote the growth of tourism, and the rehabilitation and upgradeof the remaining nine airports that would continue to be managed by the Civil Aviation Authority of Zimbabwe (Caaz);

Water storage and transport: Substantial investment in storage and transport of water to meet increased demand from agriculture,industry and households.

Water supply and sanitation: Rehabilitation of the existing water supply and sanitation infrastructure andimprovement of services in urban and rural areas to ensure that the MDG goals for the sector are met no later than 2020;

ICT: Development of a national communications grid for ICT based on a fibre optic network linked to the submarine cables now in place along the eastern seaboard of Africa.

The grid would lay the foundations for a major expansion in access to reliable communications at reasonable cost for a majority of Zimbabweans, the business community, government and civil society;

Institutional and regulatory reforms: A substantial programme of institutional reform and strengthening that includes measures to streamline the regulation of basic infrastructure services, promote private investment in infrastructure assets and services, as well as training and other capacity building measures to expand the skills required within the public sector for continued effective oversight andmanagement of the basic infrastructure of the country.

Conclusion
This will not happen in the short-term when the country moves away from extractive political and economic institutions, to inclusive political and economic systems.

No sustainable economic development and infrastructure development will happen in our country until we can manage our economy better and we have a government that is not only accountable but spends less on consumption and more on capital formation.

Vince Musewe is an economist. These articles are coordinated by Lovemore Kadenge, President of the Zimbabwe Economics Society (ZES) email; kadenge.zes@gmail.com and cell +263 772 382 852.