Investment Considerations for Nations & Businesses

From rural electrification to food security, the Government of Rwanda regularly considers various investment opportunities. Allow me to suggest the Government of Rwanda may be wise to approach such deliberations from the perspective of a private business.

For a business to be successful over the long-run, it must continuously invest. By definition, an investment seeks a rate of return that is competitive vis-à-vis other investments that entail a similar level of risk. Sources of capital for investment are categorized as either equity or debt. The amount of debt verses the amount of equity required for a business to be successful depends on a number of factors. Ultimately, the business has to generate enough capital to repay its debt holders and it has to generate enough profits to satisfy the return requirements of its equity holders. When a company begins to generate negative profits (i.e. lose money) and continues on that path to the point where it has insufficient funds to pay the interest on its debts, the business goes into default, which is tantamount to bankruptcy.

Reversing this course means a return to profitability which inevitably requires some form of new investment. That may take the form of equipment retrofitting to produce a different line of more profitable products. It may require factory relocation or hiring a more qualified team that will successfully manage expenses. Even reducing employee ranks requires an initial investment in some form of severance benefits to those former employees. The two criteria required to justify any investment are: 1) it generates the required return, and 2) it affords sufficient capital to fulfill ongoing commitments.

These same investment criteria apply to public sector investments. Friedrich August Hayek, renowned 20th Century economist and philosopher, advocated for nations to grow by using internally generated profits to make investments that create appropriate returns. In contrast, John Maynard Keynes, Hayek’s contemporary, argued for nations to grow by using borrowed funds to make investments that generate appropriate returns. There is a great debate continuing today in the developing world about which approach is best. The reality for any nation (or business) is that these are not mutually exclusive; both debt and equity strategies need to be pursued simultaneously to maximize growth.

Nations seeking growth implicitly or explicitly evaluate two criteria: 1) what capital structure will be simultaneously the lowest cost and still afford sufficient capital to fulfill ongoing obligations to creditors; 2) what investments will generate the highest short, medium and long-term returns.

As businesses readily attest, a nation’s best investment is in its people. This includes appropriate levels of health care, education and entitlements; more importantly it involves investing in the creation of an environment where people have the opportunity to exercise their gifts and talents to the maximum extent for the benefit of themselves, their families and their communities. Rwanda is leading the way in the East African Region by striving to maintain a competitive capital structure, while making investments that will generate good socio-economic returns for its citizens.

Other developing countries could learn from the example set by the Government of Rwanda, while simultaneously taking a page from the logic used by business investors: prioritize investments in people, find the right balance of debt and equity, and commit to continuous investment for growth.

-Dano