Sustained and effective investment needed
THERE is consensus that emerging economies have to grow and prosper over the coming decades. But to realise this potential, they must undertake sustained and effective investment in education, infrastructure and technology.
There is also a general agreement on the main barriers to investment that include: lack of “bankable” projects; difficulty of managing political and macroeconomic risk; and mismatch between the instruments being offered and the needs of institutional investors.
Therefore, there is a rationale to the call that, institutions like BRICS Bank must enhance and be normative in propelling vanilla lending and stepping up technical assistance while seeking to mobilise private finance through innovative policies that advance project-preparation facilities, the co-financing of funds and de-risking for private investors.
It is critical to note that infrastructure assets are an evolving asset class that is still peculiar to investors at large and thus sectors vital to development have seen insufficient funding.
Adding to that Basel III and Solvency II regulatory changes impacted the global private-finance flows to developing countries.
It is argued by PwC Report that, high levels of debt can make governments vulnerable to financial and currency crises, particularly if these involve heavy borrowing from overseas, and so tend to be associated with greater macroeconomic instability, higher inflation and slower long-term growth on average.
Therefore, the BRICS Bank is positioned to be more innovative, to depoliticise the choice of infrastructure projects, improve their implementation, monitoring and evaluation, reduce financing costs through the issuance of safe long-term infrastructure bonds and better leverage private capital.
This can assist the attainment of raising debt capital to finance private and public activities that can be executed through project puttable bonds designed to mobilise pension and life insurance funds as well as sovereign funds for public-private partnerships in emerging economies. This will perfect the rationale by the South African government to establish an Infrastructure Fund.
As the African Development Bank suggests, major investments in infrastructure, financed principally by external borrowing, have raised concerns about a currency and maturity mismatch in debt service, as revenue streams accrue predominantly in local currencies and debt obligations mature before these streams begin.
Therefore, BRICS Bank can aid the build-up of debt that is consistent with country development needs and capacities to service the loans without compromising fundamentals for future growth.