Innovative financing mechanisms for government to leverage private sector investment in infrastructure for sustainable development in South Africa: case study in the water sector

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The research article presents catalytic and innovative mechanisms for the use of fiscal grant funding to crowd in private sector investment for water infrastructure projects in the Republic of South Africa. Chapter Two of the South African Constitution (1996) includes a series of socio-economic rights, of which the right of access to water is one of those afforded its people, but this access is not currently provided to the entire population. The study uses a mixed methods approach, utilizing both quantitative and qualitative data sequentially. The data gathered involved a non-random purposive sample of best practice from European Union-funded projects internationally, South Africa-based projects, and qualitative interviews with officials from international development finance institutions and the National Treasury. It was found that the strategic targeting of grant funding to mitigate project risks, better enabled investor confidence. Through the use of three innovative financing tools, specifically investment grants, interest rate subsidies and technical assistance, government was able to leverage further investment into projects. The research concluded that blended grants for debt financing should be a consideration in South Africa. Specifically, as the current challenges in the water sector relate to constrained financial gaps, as well as capacity and skills deficits, these could be addressed strategically and deliberately through the use of blended fiscal grants targeting innovative financing tools. To allow for blending as recommended, budget reforms in South Africa are necessary.

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    • Figure 1. Behavioral portfolio theory
    • Figure 2. Innovative mechanisms of development finance
    • Figure 3. Proportion of grant cost per total project cost of the EU-supported project sample
    • Figure 4. The leverage rate and total project cost for the EU projects
    • Figure 5. Average leverage rate per financing tool: EU project sample
    • Figure 6. Proportion of grant cost as per total cost of the South African project sample where financing had been finalized
    • Table 1. Interview schedule
    • Table 2. Leverage rate of financing tools used within the EU-supported project sample
    • Table 3. Breakdown of financing tools as per economic country classification within the EU-supported project sample
    • Table 4. Overview of the financing of the South African sample