eBusiness Weekly
As the Second Republic drags Zimbabwe out of the inherited economic morass, there is the serious problem of how to raise the huge capital resources to repair three decades of neglect of infrastructure and then expand this to required levels with private investors seen as a required major player in this area.
Fiscal and monetary discipline, coupled with hair-shirted honesty, are part of the new acceptance that the laws of economics cannot be changed by wishful thinking and that fairy tales will not build a single road, dam or power station.
In both his national budgets, the technocratic new Minister of Finance and Economic Development Prof Mthuli Ncube has played a very straight bat, insisting that all day-to-day Government running costs are paid out of tax revenue with a bit left over for capital programmes. He has also budgeted modest borrowing to help finance the capital budget but has recognised that there are limits. And he has kept his budget promises by running that amazing, well amazing by Zimbabwean standards, succession of monthly primary budget surpluses.
But all of this leaves gaps of billions of dollars for urgently required infrastructure that is needed now if Zimbabwean producers are going to be able to produce fast enough to push the country into middle-income status within a decade. Once we are a lot richer as a nation, then we will be able to afford the stuff we need, but we need it now, when we cannot, to get to the stage when we can. This is a classic chicken and egg problem.
There are a set of concepts that are grouped under the slightly vague term “public-private partnerships”, or PPP in jargon land. Using the term at its widest this is how much of the developed world starting developing. The canals, turnpikes, railways, ports, bridges and, later on, more sophisticated infrastructure like power stations and airlines, all were initiated by private investors. Governments provided various degrees of regulation, starting off with the need for Acts of Parliament or Congress before work started, and a raft of incentives. Some worked, some enriched corrupt businesspeople and politicians but no one else and some destroyed national savings. We can learn.
We can also learn from our own history, our own successes and our mistakes, and then apply common sense and legal changes along with tight contracts to harness private investment positively, locking in the successes but avoiding failures. But there are a lot of things we have to get right, from assigning risk, working out fair returns on investment without bankrupting investors or exploiting Zimbabweans, and ensuring that investors are ultra-efficient and users are not subsidising inefficiency.
None of this is simple.
Two historical examples might illuminate what can happen.
The basic railway system of Botswana, Zimbabwe, Zambia, the Beira Corridor and its branch line to Malawi was put together in little over a decade in what would now be called a set of PPPs, but even by the corrupt and creative financing standards set by Cecil Rhodes it was somewhat breathtaking.
Three companies, one very small, were eventually created put in the Botswana-Zimbabwe-Zambia trunk network. Another two put in the Beira Corridor line and yet two more the branch line to Malawi from the corridor. Each company had different shareholders, although the BSA Company was an important common investor directly and through fronts. But every metre of track was under first and second mortgages to fund debentures and the list of financial instruments eventually covered several pages. A small Swiss private bank was a major arranger, taking large commissions off the top and, along with Rhodes’s buddies who actually built the lines, was probably the only outfit that made any money.
Eventually the bank consolidated the ownership and debt into two companies, one Portuguese to handle the Mozambican bits, and one to handle the Botswana-Zimbabwe-Zambia network with the consolidated shares and debt instruments placed just two weeks before the global equity and money markets collapsed in the Great Depression. The bankers smugly noted later that investors got nothing back until the whole lot was nationalised after the Second World War and the investors sold out cheaply, glad to get their money back without any dividends or profits.
This is perhaps not the most wonderful example to follow, although the five countries were opened up for business.
The second example is public bus transport, done far better in a pair of PPPs that lasted half a century. By the 1930s Bulawayo (the bigger town then) and Harare had grown large enough to need buses. The councils tried and failed. An experienced British transport investor was brought in. Best practice contracts were signed. The basic model saw the councils giving the bus investor a monopoly, so that no one else skimmed the good routes leaving the less-popular but needed bad routes for the investor.
Complex formulas were used to set fares which ensured running costs were met, there was adequate provision for buying new buses to expand and replace the fleet, and that, critically, the investor had to run exceptionally efficient business operations to make a modest profit. Any inefficiency would see that profit vanish.
It worked. It even coped with Harare’s weird town planning. While Bulawayo, Gweru and Mutare split their cities and built their high-density working-class suburbs as close as possible to city centres and industrial areas, Harare in a moronic attempt to create racial exclusivity, put it well over its borders. Even Mbare started off away from the settler town on the other side of the Mukuvisi River. In the end, commercial and industrial ratepayers agreed to a special levy used to subsidise services from these suburbs as a cheaper option to paying a living wage that would cope with actual costs. But that is why HUOC, the Harare company, was far larger than ZOC, the one that served the other cities.
After independence the British investor indicated it would like to pull out. The Government was keen; a price was agreed and the two PPPs were amalgamated (which is where the United in Zupco’s name comes from). Zupco tried to follow the same sort of formula but short term politics saw fares fall below required levels for capital replacement and as buses wore out they were not replaced. That emphasises the need for costing formulas, enforceable under the PPPs but not later.
Interestingly Zupco is now rebuilding a quite different sort of PPPs, franchising large bus owners in one system and brining in kombis under another. Subsidies are again in place, but carefully controlled and funded. A lot of what is now being built is a collection of ad hoc arrangements, but with an underlying concept and by the look of things capable of growing formality, risk sharing and efficiency requirements. Few would expect Zupco to be a pioneer in a new breed of working PPPs but it shows an interesting approach.
One PPP problem has been highlighted by the creative financing of the renovation of the Plumtree-Harare highway. That assigned toll revenues to the private investor who did the work. Unfortunately everything was done in what we now understand was a fake currency and there were other problems. This all needs to be addressed, both to ameliorate the growing mess and also to avoid the same mess in the next PPP.
There has been a lot of talk about independent power producers. Clearly these are needed, considering the cost of a power station. Equally clearly, we need to think through how a private station will cost its power, how consumers, or which consumers, will pay and the terms and conditions of the contracts with Zesa. We need to move fast on this since we need the stations, but we also need to avoid dodgy contracts, hidden subsidies, raw deals for investors and raw deals for consumers.
The National Railways of Zimbabwe rehabilitation contract, that appears to have failed, highlights the sort of mess that arises if neither party has done its homework. Railways can be profitable and can be well run, moving goods and passengers at significantly lower cost than road services. But someone has to know the business intimately. A double dose of enthusiasm is useful but is not enough. Again we have a lesson learned.
One advantage we have is that we do not have to reinvent the wheel. There are successful PPPs in the areas we need to use them. We need to find out those using the best practices and then build ours from that starting point. Clarity of objectives, clarity of financing, clarity of assessing success. This is all needed but then it should be possible to use other people’s money to help us achieve our own visions without unfairness to either party and without failure.
