Hooray for ‘blending’, the new model in infrastructure financing?

Public works projects used to be one of the primary tasks of a government. Building roads, bridges and power stations named after them was one of the few tangible legacies that ministers could leave from their time in office.

The demand for infrastructure investment certainly has not gone away.

“An acute infrastructure deficit is evident, especially in energy and roads,” the World Bank noted in its Economic Prospects report on sub-Saharan Africa published in January.

Indeed, inadequate infrastructure saps growth in the region by as much as 2 per cent of gross domestic product (GDP) a year.

Light utilisation

However, the appetite of governments across the world to fund infrastructure projects has waned.

To bridge the gap, countries are now turning to ‘blending’ — the new term in vogue in the world of investment, much like public-private partnerships (PPPs), which became the fashionable way to pay for such projects a decade ago.

The word brings to mind make a mug of instant coffee — and the principles behind it are not dissimilar.

If instant coffee does not use much in the way of actual coffee beans, ‘blending’ is rather light in its utilisation of taxpayers’ money.

The idea is that a government draws up a project for which it puts up a small grant or loan guarantee. This is then used to leverage private sector capital that will fund the rest of the project.

It is becoming increasingly prevalent in East Africa, where massive investment in roads, energy and ICT infrastructure is needed to maintain surging rates of economic growth, but governments are constrained by already high budget deficit levels.

At 6 per cent, Rwanda has the lowest current account deficit in the region. Kenya’s stood at an estimated 7.4 per cent at the end of 2014, while Tanzania’s was projected at 13.5 per cent.

Not much wiggle room to pay for a public spending spree, in other words.

The results are already around us.

Blending paid for the recent reconstruction of the Jomo Kenyatta International Airport.

A $1 billion (Sh91.7 billion) project to overhaul Nairobi’s public transport network backed by the EU and the World Bank uses blending, based on a €20 million euro (Sh2.1 billion) grant from the European Commission and a €100 million euro (Sh10.4 billion) loan from the European Investment Bank (EIB).

The Menengai geothermal energy project in Nakuru was based on a €30 million euro (Sh3.1 billion) grant from the EIB.

Part of the rationale for blending is that it can relieve the burden on cash-strapped governments in East Africa, but also on their counterparts in Europe and North America, who are keen to reduce the amount of aid they offer to developing countries.

At the moment, the EU has eight regional Blending Facilities, including for Africa, Latin America and Asia.

These facilities pool money from bilateral donor agencies and allow them to implement joint programmes, expensive large-scale infrastructure investments with private sector participation.

Stagnant economies

Since its creation in 2007, the EU-Africa Infrastructure Trust Fund has paid out 70 grants to infrastructure projects for a total value of more than €6.5 billion euro (Sh676.2 billion).

It claims that each euro (Sh104) from the ITF has the potential to generate up to €12 euro (Sh1,250) more in total investment.

Blending has also become fashionable in Europe itself.

The flagship €315 billion euro (Sh32.8 trillion) investment programme outlined by new European Commission President Jean-Claude Juncker in December hopes to kickstart Europe’s stagnant economies by persuading pension and insurance funds, and private companies to fund new road, bridge and energy transportation.

Blending is “an important tool to boost economic growth, innovation and job creation,” said EU development ministers in a joint communique issued following their last meeting in December.

“Ministers were quite vocal on enhancing private investments and contributions to development goals,” European Commissioner for Development Co-operation Neven Mimica told reporters at a press conference.

So hooray for blending then?

Well, not everyone is convinced by the argument that a little public money can go such a long way with no strings attached.

In a report published last October, the European Court of Auditors, which monitors EU spending, found that almost half of the 40 projects it assessed would have gone ahead without EU money.

Less convincing

Although it found that the programmes had been “generally effective”, the auditors’ report noted that there were numerous “indications that the investments would have been made without the EU contribution”.

“It is paramount that blending is only used when the Commission can clearly demonstrate its added value,” said Karel Pinxton, the ECA member who drew up the report.

It is logical to assume that the bigger the leverage ratio, the less convincing the case for needing any public money at all. Other critics, meanwhile, say that blending may allow governments to get the new infrastructure they need without paying for it upfront, which can leave them lumbered with expensive and risky public-private projects.

“The EU must recognise that leveraging private finance and promoting public-private partnerships entails many risks,” Eurodad spokesperson Maria Jose Romero, said in an interview in December.

“A better policy would be to ask countries to test the development impacts of these new proposals.”

They also claim that blending tends to blur development objectives. Unlike conventional development aid, blending is more closely oriented to the profit motive as the judge of success.

Institutions offering direct grants tend to focus more on the money actually reaching the intended recipient, whereas institutions offering loans are more preoccupied by the funds being repaid and the projects being commercially viable.

Still, at least for the moment, blending is set to stay. The political reality is that governments need their roads, bridges, power stations and the like, right now, while the economic reality is that they cannot pay for them alone. But everyone should remember the old adage — there is no such thing as a free lunch.

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