Govt sets up new body to finance infrastructure projects
The government has announced the setting up of a new body, the Ghana Infrastructure Fund (GIF), to help finance critical infrastructure projects needed to accelerate economic growth and development.
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The Minister of Finance is expected to chair the quasi-fiscal body which will be charged with raising its own funds from domestic and international sources to match private sector funds for infrastructure development.
The Minister of Finance, Mr Seth Terkper, who announced this in the 2014 Budget and Economic Policy of the government presented to Parliament yesterday, said the GIF would “focus on strategic infrastructure that will lead to job creation and the growth of the economy.”
Sources of GIF funds
The primary source of funds for the GIF would be the 2.5 per cent increase in the Value Added Tax (VAT) rate, the Annual Budget Funding Amount (ABFA), a portion from the petroleum revenue, meant for amortisation and infrastructure development and other such funds as Parliament may decide.
“Other sources include: escrowed and on-lent funds from prior investments; private or public domestic and foreign funds from multilateral institutions and development banks,” Mr Terkper said.
The 2014 Budget is on the theme: “Rising to the Challenge: Re-aligning the Budget to meet Key National Priorities”.
Mr Terkper said the GIF would also look to the capital markets, including the Ghana Stock Exchange, pensions and mutual funds, social security and insurance funds for additional sources.
The Finance Minister said the Ghana Infrastructure Fund would in due course pursue its own ratings on the domestic and international financial and capital markets in order to attract the trust and confidence of the market.
Although he did not explain, it appears the GIF would partner departments, agencies and state-owned enterprises to undertake projects with matching funds from the private sector.
The independent rating would, therefore, enable the SoEs and agencies to borrow funds on their own balance sheets or records to finance their capital projects.
This is in line with the government’s initiative to wean some State-Owned Enterprises (SoEs) and agencies off government subvention.
Role of private sector
According to the minister, the GIF would focus on strategic infrastructure in partnership with the private sector.
The country’s financial and capital markets are currently constrained with limited long term financing flows, a phenomenon which does not support infrastructure projects. Hence, the GIF will partner the private sector through linkages that include financing public-private partnerships (PPPs), mortgage finance and finance leases.
By this arrangement, the GIF will become an investment avenue for institutional investors, including pension funds.
GIF Debt Service Account
The Finance Minister further proposed that the GIF, with the assistance of the Bank of Ghana, would set up and manage a Debt Service Account (DSA) for designated domestic and foreign sovereign debt that would be procured in pursuit of its mandate.
“The purpose of the latter is to utilise the flows of foreign exchange such as Annual Budget Funding Amount (ABFA) of the petroleum revenue to spur confidence in the markets and minimise foreign exchange exposures,” Mr Terkper said.
In that fashion, the Ministry of Finance proposes to subordinate all existing escrow and debt service accounts – such as for EXIM and China Development Bank (CDB) – to the GIF-DSA, with a proviso that existing agreements permit.
Project financing
The GIF will have a Board of Directors to, among other things, advise the Finance Minister on viable projects to be financed by GIF. In addition, the infrastructure financier will issue special bonds to finance specific commercial projects.
“The GIF will be empowered to set up on-lending, escrow and other mechanisms for the purposes of pursuing and ensuring the success of its investments,” Mr Terkper said.
This means that with funds at its disposal, the GIF can on-lend funds which would not be readily used to other bodies and make returns on them to secure their value and increase the base.
Guarantees and risk management
The GIF, the Finance Minister explained, was in response to the need to manage the country‘s limited but potentially expanding fiscal space and management of public debt, which brought about difficulties in mobilising funds, in particular, for infrastructure projects of a commercial nature.
“The linkages to the private sector are crucial since, to leverage private sector investment in infrastructure projects, it is necessary to vigorously pursue long-term quasi-fiscal institutions as well as banking and/or capital market solutions,” he said.
Therefore, the government would make use of such commercial financing facilities to finance projects that could repay commercial loans that the government contracts directly or guarantees.