President Trump’s infrastructure plan and a counterproposal by Senate Democrats are rising toward the top of the national agenda. All agree that there is a pressing need to fix the collapsing bridges, potholed roads, crashing trains, and embarrassing international arrivals terminals at airports in the great cities of America. But there will likely be massive arguments about how to raise the money and how to invest it.
The solution may lie in finance models that have proven successful in several nations across the Atlantic Ocean—not in Europe, but rather in Africa.
American policymakers, investors, and builders can learn from the African experience, where public-private partnerships and deployments of new technologies are illuminating new ways to approach the task of funding infrastructure despite a scarcity of government funds.
"Public-private partnerships and deployments of new technologies are illuminating new ways to approach the task of funding infrastructure despite a scarcity of government funds"
At first glance, it seems counterintuitive that a massive continent with more than 50 independent nations, dozens of currencies, no interconnectivity, and endemic poverty could teach the richest nation on earth about how to finance infrastructure. But, there are important lessons in multiple examples of roads, power, ports, and water projects that actually get built, thanks to successful funding models.
Their success is founded on their adaptability to three new conditions in the world today: the declining capabilities of government, the massive size and increasing sophistication of the global financial markets, and the impacts of new technologies that leapfrog large centralized projects and put usable knowledge directly in the hands of citizens.
In many African nations, as in the United States, a key role of government is the funding, construction, and maintenance of the public infrastructure that benefits everyone. This obviously is not being accomplished to an adequate degree by government alone in either place.
Why don’t governments just build roads, bridges, water, power and more? It’s not because they don’t aspire to. It’s because they lack the money and the expertise (in African cities) or because they can’t get to political consensus (in the United States)—or because there are other priorities for limited resources (like education, health care, security, and more). These are valid reasons. But there are workarounds that work.
At Harvard Business School, my research looks at ways that the private sector can finance and deliver public infrastructure. For the last three years, I have led an Immersive Field Course in the Harvard Business School MBA Elective Curriculum. Teams of HBS students have traveled to several developing countries to research prospects for private finance and delivery of solutions in traditional energy, renewable energy, urban transit, inter-city transit, water and sanitation, municipal solid waste, infotech and telecoms, commercial real estate, and more.
We have conducted several hundred in-person interviews with business, government, academic, and investing leaders in countries including Ethiopia and Tanzania as well as field research in Ghana, Kenya, and Rwanda. (Several students have shared insights from their field studies here: IFC Africa: Building Cities.)
I believe the lessons learned there can be applied at home in the United States, where the ability to fund infrastructure is less obvious than it may seem at first glance.
The infrastructure paradox
There is plenty of capital in the global financial system: upward of US $20 trillion invested in fixed income securities alone between pension funds, insurance companies, endowments, sovereign funds, and wealthy families. Most of these securities are yielding from zero to 2% annually. There is a giant search for yield in the financial markets. There is also massive need for infrastructure investment. Why can’t the funds and the projects get matched up? This is often called the “Infrastructure Paradox.”
Investors have an easy explanation for the paradox: a lack of bankable projects. For bankers (admittedly a broad characterization), a “bankable” project has several characteristics: a clear source of repayment from revenues, no market risk, no currency or interest rate risk, no competitors, and no political uncertainty around election outcomes, regime change, or expropriation. Historically, all of these factors have been favorable in the United States and that’s why the municipal bond market is so robust. But as we can see from the intense discussion in Congress, infrastructure is not obviously conducive to bankability.
Infrastructure projects are even more difficult to make bankable than are other possible investments, since the capital expenditure is so focused (usually concrete, steel, and asphalt in a specific location) and the benefits are so diffuse and hard to quantify (the whole society might get cleaner air, faster transit, more dependable electricity, a more robust economy, but these aren’t all cash flow to the promoter).
Why, then, can Africa teach the United States about making projects more bankable? Precisely because almost none of the bankers’ preferred conditions exist there. Revenues are sketchy, exchange rate risk is real, political uncertainties abound, and expertise is thin. Yet projects get funded and built.
What can be learned?
First, direct tariffs are not the only way to repay investments. Most water projects, for example, don’t generate enough water bill revenue to pay for themselves. But, rather than go without water for lack of current funds or skills, municipalities like Algiers, Algeria, have contracted for water with GE on an availability-plus-subsidy basis so the city builds on top of the water revenue alone. This public-private partnership helped the city finance and deliver water to millions of people when it did not have the cash or the capability to do it with city resources alone.
Second, the public can help the private investors with initial capital. The Diamniadio toll road in Dakar, Senegal, is a public-private partnership where the private sector supplied most of the capital and is compensated mostly by toll revenue, but the low “policy price” tolls would not have paid back the full cost. The government of Senegal contributed to first cost of the road—a much smaller amount than building the whole route with public funds—rather than pencil in a prohibitively high toll. This successful project reduces congestion in the capital, facilitates business investment in the region, and helps to move the center of gravity of the city to a newer, less congested district.
Third, procurement can be streamlined to avoid inadequate specification of the project’s scope and/or a bad selection process. For example, Senegal’s Infrastructure Council vets projects, the World Bank and other development finance institutions help to fund a proper set of competitive documents, and a panel oversees a transparent award.
Fourth, projects can be planned and sequenced to optimize cumulative benefit. While it’s tempting to spread infrastructure spending around for political reasons, that can lead to disconnected and unrelated projects that don’t provide sufficient bang for the buck. African municipalities can’t afford to waste money this way.
Highly aspirational cities like Kigali, Rwanda, follow an explicit investment plan where roads, water, power, real estate, and mass transit are all coordinated to reinforce each other. The city is growing quickly and efficiently. This comprehensive plan is consistent with Rwanda’s strategy to attract international capital by offering transparency and responsiveness in government. Contrast that with many US municipalities where the road person does not talk to the power person who does not coordinate with the zoning authority. Or, where a “bridge to nowhere” gets funded, absent market demand for the crossing.
Much of the above sounds like decades of “best practices” admonition. Why should anything be different now in Africa, and how can that apply to the United States? One reason is the sophistication of finance. The other is the growth of three specific technologies.
Sophisticated financial tracking and smart mobile phone technology
The sophistication of financial tracking means that rather than investing in, say, a bond issued by the African Development Bank or by a nation, an investor can put his or her money behind a specific asset or piece of an asset.
Think of mutual fund pricing and tracking: if Fidelity and Vanguard can tell you every ten minutes where every penny of your 401(k) is working, then they can also inform infrastructure investors—or even abutters of projects—who want to see their funds go directly to X bus or Y power plant or Z interchange.
Consider the Massachusetts Bay Transportation Authority’s Commuter Rail stop, which is being built directly in front of the New Balance company headquarters in Boston. Rather than hope that train fares and property tax payments eventually make their way into a public good, New Balance built the station themselves so they could watch the use of every penny—even as the general public benefits from the final product.
Similar examples in Africa abound in the power space, where corporates like Heineken or the Garden City Mall in Nairobi will pay the fully loaded cost of electricity to firms like Symbion Power or CrossBoundary Energy. These power producers provide direct services to entities not properly accommodated by state-run power generation and unreliable power grids in nations like Liberia and Tanzania. They don’t wait for government to connect the dots.
The second and likely more powerful new capability arises from the combined arrival of three technologies all enabled by feature phones and smart phones: cashless payments, sensors everywhere, and distributed computing.
Think how these are starting to apply, for instance, in mass transit. The old model is a centralized bus and light rail system, serving fixed routes at high cost, with little adaptation to schedule and a lot of cash leakage as informal payments are made. Imagine instead a scenario where the traveler can summon a pooled vehicle that takes her and several other riders from where they live to where they work, saving them hours and saving the city money. No cash changes hands, reducing both petty corruption and crime. And the system is coordinated by third party entrepreneurs (like Waze or Uber) from open data sources—rather than being controlled by a central utility.
Pricing can vary by demand or by user’s ability to pay. This provides an astonishing ability to improve how the existing infrastructure of water, electricity, roads, rail and more are used—and to capture fares and tariffs more completely. Firms like MasterCard and M-Pesa are starting to make this happen today in Africa, from Nigeria to Kenya and from Cairo to Capetown. These tools can apply to stretch the throughput of existing concrete, asphalt, steel, and cast iron in the United States as well.
President Trump is a famous builder and real estate developer and an astute observer of trends in the built environment. His business experience informs how he can be expected to govern. Congress is interested in constituent services that don’t require more government spending. These American players can learn a lot from how innovation in Africa has helped to stretch limited cash and capability while attracting private capital and bringing viability to seemingly unbankable projects.
The Right Way to Fund America’s Infrastructure