Rwanda: Why Rwanda Has to Turn to Private Sector for Infrastructure Investment

Rwanda needs to significantly mobilise private sector investments in infrastructure to meet development goals in the mid- and long-term, a World Bank report has noted.

The report, Rwanda Economic Update: The Role of the Private Sector in Closing the Infrastructure Gap, observed that the domination of the public resources was unsustainable going forward a risks leading to a surge in debt and cost of living

In previous years, infrastructure investment has been dependent on public investments at over 70 per cent.

A view of the cooling tower and water clarifier at the Peat power plant in Gisagara District in May 2020. Photo: File.

Rolande Pryce, the World Bank Country Manager for Rwanda, noted that the country's public investment spending is third highest in the world as a share of GDP (after Timor-Leste and Afghanistan) and highest as a share of total public spending.

Highlighting the unsustainability of the trend, the World Bank noted that if the entire amounts of infrastructure investment was to be financed by borrowing, public debt would increase to about 101 per cent of Gross Domestic Product by 2024 (compared to 78.1 per cent projected in baseline) and 132 per cent by 2030.

On the other hand, if the current infrastructure demands were to be funded through grants, the amount of grants would have to more than double, a scenario deemed highly unlikely.

If the infrastructure was to be availed purely through domestic revenue mobilization, the report noted that tax revenue would need to increase from about 16 per cent of GDP to 24 per cent which would see taxes raised unsustainably driving up the cost of living.

"Increasing infrastructure investment through domestic revenue mobilisation yields lower outcomes for households and the economy as a whole compared to external financing sources," the report read in part.

The need for private sector investment is further emphasized by the fact that if official sources of finance were increased to their maximum level based on likely grants, borrowing and taxes, they would provide only about 45 percent of the resources required to fill the infrastructure investment gap.

"Thus, private infrastructure financing would have to increase sharply from its current share of about one-third of total infrastructure commitments," the report read further.

Calvin Djiofack, the Senior Country Economist for Rwanda, said that the private sector has potential to step up infrastructure investment and currently has investment in about 30 per cent of infrastructure needs.

Among avenues of private sector funding include Foreign Direct Investment which have been going up steadily from $119 million (2.2 per cent of GDP) in 2009 to $420 million (4.1 per cent of GDP) in 2019.

Public Private Partnerships were also listed as a key contributor as they can significantly reduce project risk.

Going forward, the World Bank called on the government to ensure a sound regulatory framework to attract, maintain, and secure Public-private partnerships, while ensuring the optimal contribution to the country's development.

Noting that the country has made impressive progress in strengthening the institutional and regulatory framework for further recommended efforts include improving competition in PPP contracting and improving the design of PPP contracts.

The bank also called for the strengthening of the regulatory framework to enable pure private investments which is possible when there is competition among providers or effective regulation of any monopolies.

"Private investors would often take more risk than under a PPP, and this can lessen the need for government fiscal commitments," the report noted.

Further ways the government could increase private sector investment in the sector include mobilization of domestic private sector financing to deepen access to long-term finance in the currently small project finance market.

"The country will need to rebalance its investment strategy from prioritizing large strategic capital-intensive projects toward projects critical for broad-based social returns," Djiofack added.

Minister of Infrastructure Claver Gatete said that Rwanda has made multiple reforms to improve the investment ecosystem to de-risk investment over the years.

However, he noted a challenge that there is a challenge of access to affordable capital for private sector investors which holds back their potential. Citing the case of investors in the energy sector, he said that investors such as Hakan and KivuWatt were facing challenges of capital affordability despite the fact the projects were viable.

Clare Akamanzi, the Chief Executive of Rwanda Development Board, noted that the country in 2016 put in place a Public Private Partnership law and guidelines to channel private capital into the country.

"Today we have about 58 projects in PPP, 21 per cent of them are already operational and 71 of them in various stages of implementation," she said.

Going forward, she noted that they are working on interventions to reduce cost of capital and further de-risking which could reduce cost of capital.

Among the top investments by the private sector in infrastructure includes Rwanda's first inland dry port specialized by DP World as well as Ongoing construction of an airport in Bugesera worth $400 million.

Others include 80MW peat power plant in southern province set to commission later this year and 55MW power plant, which will extract methane in Lake Kivu, set to commission in 2022.

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