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Wednesday, 18 January 2012

Debt Watch (India)

Over the holidays, there was an announcement of yet another debt deal without any parliamentary oversight. The Ministry of Foreign Affairs announced that India has given Zambia a credit of US$50 million to finance the reconstruction of pre-fabricated health centres in all the provinces. The credit facility will be repaid over 20 years at an interest rate of 1.75 percent. According Former Minister Kambwili this is part of the PF government intention to "ensure that there is reliable infrastructure as opposed to the former government’s now disused mobile hospitals". 

The Daily Mail observes that "minister could not immediately indicate the number of the pre-fabricated health centres to be procured".  In other words, its appears to be yet another case of accumulating debt without a clear assessment or planning. The idea may be noble, but going into debt without clear facts to hand does not seem like a good way to manage public debt. A larger problem of course is that Parliament continues to be sidelined because no clear debt management strategy exists. There should be a halt to debt procurement until that is resolved - not least because Zambia has not fully capitalised on leveraging domestic sources of revenue. 

1 comment:

  1. I agree that accepting this loan may be premature in the absence of an overarching debt management strategy, especially given that as crucial as health infrastructure is to the nation, it is not the sort of investment which can deliver immediate direct financial returns. While an interest rate of 1.75% is certainly quite reasonable, even concessionary, over 20 years it still amounts to US$17.5 million in total interest payments in addition to the principal, for a grand total of US$67.5 million to be paid. This money is not going to come from the operation of the clinics in question, and while it is plausible that a healthier population is a more productive population and therefore will return a larger amount to government in tax revenues than would be the case without the clinics in question, it is difficult to quantify or compare to the loan amount (not to mention the operating costs of the clinics over the 20 year repayment period).

    The prefabricated nature of the clinics (actual number and location yet to be disclosed), also raises other questions about the project. Should we assume that as the financing is from India that the construction materials likewise originate from India? In that case what percentage of the US$50 million is to be immediately returned to the Indian companies in exchange for the prefab clinic pieces and what percentage to be spent transporting said pieces to the borders of Zambia? How much would remain to compensate the transporters and labour within the country who actually engage in the construction process (and therefore return some portion of the proceeds to local economies and to government as tax revenues)?

    Alternatively, how might this compare to engagement with local materials suppliers, architects and construction companies to construct a comparable number and quality of clinics? Would the same amount of debt produce more or fewer clinics, and would the increased stimulus to local economies offset the costs of borrowing at less concessionary rates? Is there some inherent advantage to prefabricated construction parts with regard to clinics and/or buildings in general, and if so would the debt be better expended on development of domestic facilities capable of generating such construction materials in the future rather than importation of finished goods from overseas?

    I will endeavor to keep an open mind and await further details about the specific means and ends involved in this project before additional questioning of the wisdom of this action, however at the very least it would behoove a government dedicated to transparency and public service to avoid such vague and uninformative press releases on public projects in the future. This is especially true in the case of a clinics project designed to overcome the debacle of the mobile clinics acquisition under the previous government.

    In general I would prefer to see additional debt allocated to infrastructure and para-statal investments which can reasonably be predicted to increase revenue generation by government either directly or through tax collections, such as transport, energy, agricultural support, storage and value addition. A larger direct revenue and tax base can more easily absorb the costs of greater social welfare programmes and infrastructure than the reverse. Increasing government overhead without reliably increasing future revenues can be a recipe for spiraling debt, something I think we can all agree would be best to avoid falling back into.


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