The Case for Government involvement in the Capital Markets Development

There are only 14 domestic companies listed in our local stock exchange; this number stands unfavourably when compared to over 30 companies listed in Ghana, over 60 companies in Kenya, over 250 companies in Nigeria, over 360 companies in Egypt and over 450 in South Africa. Our Gross Domestic Product (GDP), as per the recent World Bank and International Monetary Fund reports is US$ 48 billion for Tanzania. Ghana’s GDP is US$ 40 billion; it is US$ 60 billion for Kenya; US$ 285 billion for Egypt; US$ 350 billion for South Africa and US$ 580 billion for Nigeria. So, we are better than Ghana in term of economy size, but we are almost two-third less on companies listed in the Exchange; in the same vein – our GDP is almost 80 percent to that of Kenya, but we are only 25 percent of Kenya when it comes to companies listed in the local stock market.

What are these statistics suppose to mean and why are we comparing ourselves with countries such as Egypt, Nigeria or South Africa? Are these relevant comparators? Yes and No – but, for the sake of this article let us narrow our focus into our neighbour, Kenya – there are 64 listed companies in the Nairobi Securities Exchange; out of these companies, eight (8) represents the agricultural sector; three (3) represents the automobile sector; eleven (11) representing the banking sector; ten (10) companies represents the commercial sector; five (5) from the construction sector; five (5) representing the energy sector; six (6) from the insurance sector; nine (9) companies representing the manufacturing and allied sector; six (6) companies representing financial investment sub-sector; one companies from the telecommunication sector.

And so, most of the sectors contributing to the Kenyan economic growth and size have used (and are using) their local capital market to raise tlong-term money from the public in order to finance either their initiations, or their expansion and growth, which eventually result into job creation, more business prosperity, economic growth, increased economic and financial empowerment, financial literacy, etc, etc. Apart from capital raising through issuance of shares, there are 30 outstanding corporate bonds listed in the Nairobi Securities Exchange – these have been issued by banks, telecommunication companies, housing finance institutions, infrastructure development projects, manufacturing companies as well as energy producing and distribution companies – this means companies are also using the Kenyan capital market to raise long term financing by taping into public money via the issuance of debt instruments.

Back to us, we have 14 domestic listed companies representing nearly four sectors of the economy: four (4) representing the manufacturing and allied sector, six (6) representing the banking and micro-finance; two (2) from the commercial sector; one from the energy sector and one from the agricultural sector. We have only two outstanding corporate bonds listed into our stock market.

If we use another common comparator that measures the depth and liquidity of stock markets, it is also clear to demonstrate the very small scale of our local stock market. While Kenya’s domestic market capitalization to Gross Domestic Product (GDP) is about 35 percent, we are about 12 percent. What does these statistics tell us? Local business enterprises have so far not been using the capital market to drive their enterprises growth, creating jobs and channelling investments and economic growth through the use of our stock market.

Another aspect that is also clear is that Tanzanians are generally not using the stock market for their savings and investment objectives – only 450,000 are currently using the stock exchange for their savings and investment activities. With such a dim picture, it seems that there is a minimal possibility that a highly securitized capital market can be produced in Tanzania, at least in the immediate term. That means, for now, the largely banking based financial market is likely to be the only route ahead of us. That is, unless there are clearly planned transformation drive to encourage and motivate the government and the private sector to understand how the capital market works and how best capital markets can be used to mobilise resources to finance businesses and development projects within the economy, nothing can largely change.

I, in some cases believe, our policy making system has to clearly understand the need to drive policy framework and legal infrastructure that recognises the potential of capital markets in financial resources mobilization and financing long term projects in our economy, with this in place, we can sketch the vision and route map for the long term direction and ambitions of policies that will enable us transform into having a financial market that embraces a mix of various instruments to finance our enterprises, development projects and economic growth.

Why is important that the government has to actively play a role, not only to in the establishment but also in the growth of the capital market industry? why shouldn’t the private sector take that leap? furthermore, one can argue that the Government’s role probably is to initiate the process that enables creation of a capital market system that enable the private sector to raise their long-term finances, how is it that it is the government business to continually development policies that are sensitive to the growth of capital markets?. Apart from the context of our political, economic and social history as a country and as a society, I believe that the government has the moral, political and social motivation to enable and encourage growth of the local capital market. Yes, the private sector may be educated, motivated and encouraged to use the capital market, but it only becomes more conceivable, an idea, to them once the market is deep, it is liquid and can provide good valuations outcomes — that is when private sector, driven mostly by profit and other understandably self-interest motives, can largely consider the use of capital markets. However, for the sake of creating a good society — governments, sometimes opts to do the right thing.
Government’s leading efforts for the capital markets growth has been in use for the history of capital markets development world wide. Let’s take an example of the Latin Americas star performer, Chile. Back in the early 1980s under Jose Pinera Echenique, he decided to breath a life into the then Santiago Stock Exchange when he introduced privately run pension funds. Monies that these funds accumulated enabled the financing of Chillen companies to prosper and expand operations far beyond their country’s borders to the point where they dominated the entire business sectors in Latin America. Currently Chillean Stock Exchange has more than 250 listed companies and a market capitalization in excess of US$ 230 billion.
Chilean Government can exemplify the good use to which capital markets can be put. As dependable engines for sustained economic growth, importance of well functioning capital markets is hard to overstate. I understand that in many parts of developing world, as is in our own country, this importance is not yet fully grasped or, in deed, understood. In whatever case, we need to do something.
Other countries that are good examples to how best can the country (the Government) put the good use of the capital market into play is Hungary and Jordan – different from Chile that used the demand side, i.e. using pension reforms to grow their local capital market, Hungary and Jordan increased the depth of their capital market by increasing supply of securities through privatization of key sectors and companies via listing them into their local stock markets.

For us, we have well documented policies and strategies to either use approaches deployed by Chile (addressing the supply side), or the Hungarian and Jordanian or even Sri-Lankan approach (addressing the demand side) to grow our capital market, grow our business enterprises, create quality and sustainable jobs, increase the wider economic welfare of our people, increase our financial literacy and the growth of our the economy at large. We have in recent years reformed our pension sector — but so far these reforms have failed to clearly and specifically address issues related to financing local business enterprises via the capital markets. We also have well articulated privatisation policy, we have the local economic empowerment policy, we have the local financial inclusion policy, we have good pieces of legislative actions meant to grow our local capital markets (i.e. EPOCA and Mining Act, both of 2010); we have created institutions to specifically implement some of these policies, but, we are just not yet there. What lacks is the coordination and probably a champion with the government to remind and require our operatives to implement these well documented and well intentioned policies and strategies.

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Demutualisation for the Enhanced Exchange

Demutualisation of stock exchanges has captured media headlines in recent years — it seems like most exchanges are doing it (except for Africa, for obvious reasons). A number of exchanges across the globe have demutualised since this idea came into the public attention, especially after the first incident of demutualisation, by the Stockholm Stock Exchange in 1993. According to the World Federation of Exchanges (WFE); as in year 2014, about 85 percent of all stock markets in the World had been demutualised, and about 45 percent of all stock exchanges are publicly listed. How did this come about?

During the past 20 years, globalization and financial integration, the development of innovative technology, regulatory reforms and changes in investment opportunities have all affected the environment for stock exchanges by increasing competition and affecting the functioning of financial markets. In response to the new financial environment, a growing number of stock exchanges have demutualized and opted to go public.
Traditionally, exchanges functioned as markets protected under national auspices because they represented national identities and enjoyed a monopolistic or near monopolistic position. For a long time, exchanges were mutually-owned organizations where members were also owners of the exchange with all the voting rights given by ownership. This monopolistic market view of stock exchanges became progressively obsolete during the last 20 years due to powerful developments in the environment in which exchanges operate.
With these changes in the financial environment, exchanges began to make focused efforts to attract investors and increase their market share. They had to rethink their traditional ownership structure in favour of a structure which accounts for the evolving exchange environment better and reassess their business strategies to face growing market competition.
What is demutualization? In the strictest sense, demutualisation refers to the change in legal status of the stock exchange from a mutual association, into a company limited by shares (with majority-based decision based). Demutualisation makes sense if it is induces a change in the stock exchange’s objectives from managing interests of a closed member-based organisation with the central focus on providing benefit primarily of the member/brokers and keeping costs of investments limited to financing needs of members, into a company set up with the objectives of maximizing the value of investments by focusing on generating profits from servicing the demands of their customers (brokers, listed companies and investors) in a competitive manner.

Since mid-1990s growing number of exchanges are opting to demutualize in the new environment, shifting from mutually-owned not-for-profit organizations into for-profit, investor-owned firms. Among other many benefits, this process offers the advantages of a separation between trading rights and ownership since shareholders provide capital to exchanges and receive profits but do not need to conduct trading on the exchange.
With demutualization, the objectives of exchanges should, in principle, change from focusing primarily on the interests of members/brokers and keeping costs and investments limited to financing approved firms that maximize profits by responding in a competitive manner to customer needs.
Demutualization can take different forms. The exchange can opt for a for-profit private company structure, where only members or members and outside investors are the owners. The second option is to be a listed company with restrictions on the number of shares that can be owned by exchange members and non-members or, alternatively, without restrictions on trading. The added advantage to this second option is that the Exchange is also able to mobilise its financing from a wider source of investment community who then becomes owners of the Exchange.
Does the fundamental roles and the services that they are offered by the exchange changes following the demutualisation process? Largely, NO. A demutualised stock exchange continues to offers a host of services to listed companies, brokers and investors. These includes: (i) Listing of securities (shares, bonds, derivatives, etc) after capital raising or by introduction; (ii) providing liquidity and price discovery for listed securities; (iii) execution of services (trades, settlements, depository); (iv) signalling function for listed companies; (v) monitoring of trading to prevent manipulation and insider trading; (vi) standard rules to reduce transaction costs; (vii) clearing of buy and order transactions.
So, from the tradition way where stock exchanges operated as a “hub of brokers” offering these services as monopoly operators serving largely under the mutual governance to the current trend — to the exchange that have improved governance and can efficiently respond to business competitive environment, roles and functions of Exchange does not change. It just limit value enhancement of the exchange from restrictive access into a broader-based audience and stakeholders value enhancement.

As is, stock exchanges are now increasingly changing their business model and restructuring themselves due to the simultaneous convergence of a number of powerful developments. The most notable of these has been the: (i) rapid development and innovation in technology that has facilitated alternative trading systems, including electronic communication networks; and (ii) growing market competition and integration as well as globalisation induced partly by cross-border listing as well as globalisation induced partly by cross-boarder listings and portfolio flows, etc. Together these developments have eroded the significance of physical national exchanges and their trading floors.

Consequently, across the globe stock exchanges are now re-thinking their business strategy and models in order to find ways of how best to survive. In the process, exchanges have evolved towards new corporate, legal and business models to strengthen governance and face competition. This process of transformation from members’ association into for-profit corporations is referred as demutualisation.

We, at the Dar es Salaam Stock Exchange are in the middle of a demutualisation process, being the third Exchange in Africa to achieve what we have achieved this far, coming after Johannesburg Stock Exchange and Nairobi Stock Exchange. However, other Exchanges in Africa are also seriously considering this option. Out of the current 25 Exchanges in Africa, more than dozen are positively considering to initiate the process of demutualisation.

What will DSE demutualisation mean for us as a Country? (i) enhancement of corporate governance within the Exchange for sustainable protection of all its stakeholders; (ii) an access to the efficiently priced source of funds to finance the Exchange’s growth and capital markets development in the country, including capital investments in trading technologies as well as introduction of new products and services; and (iii) enhance our efficiency is responding to the increased competitiveness within regional financial markets centres in relation to finance and investment choices and allocations.

Capital Market as a Tool of Financing Our Future

There are two major encouraging statements that came to our attention recently, these statements came from the Government: (i) the possibility of repossession of previously privatised state owned entities that were sold to some investors; and (ii) state owned entities, agencies and parastatals are now required to refocus into becoming more efficient and raise their financial needs from the local financial market.

As it related to the potential growth of the local capital markets — these announcements are major and encouraging. If it comes to pass, to my opinion, these actions may be an opportune that will bring us back to the industrialisation glory of the 1970s /1980s, which was somehow disrupted in the process of embracing economic reforms that were (are) part of the new global economic era that requires economies, not only ours, but almost across the globe to liberalise and become part of the globalisation.

Our privatisation approach, as part of these reforms, somehow failed to achieve the intended objectives, namely: privative state owned entities and in the process make them more efficient; investors who buys these entities to introduce and roll out new technology and use the new business models to produce and distribute products and services; introduce our economy into the global markets; use privatised entities to create quality sustainable jobs; increase the quantity of goods, services and capital into our economy; and make the private sector play a key role and become the engine of economic growth and development.

As it were, to be able to achieve objectives set out by the new era, there were (are) requirements to reform the financial sector as well, hence the wave of reforms in the banking sub-sector that we are living with today. Part of these financial reforms was the introduction of the capital markets, and hence the stock market in our economy. The key objectives for the introduction of the stock market were: to facilitate privatisation — by enabling local citizens to buy shares in some of the privatised entities and therefore benefit from the privatised state owned entities; the other objective was to provide a platform for the private sector to raise long term finances for the sustainable growth of their enterprises and projects. And, the other objective was to provide a means where private individuals and institutions can use for their savings and investment purposes, here the stock market was to be used as a mechanism to mobilise part of domestics savings (from individuals, pensions, life insurance activities, etc) and intermediate them for financing long term enterprises and projects within the economy.

Three decades later, as we look back, can ask ourselves if we achieved the overall objectives of these reforms? for example, have we achieved the replacements and adaptions of technologies and business practices that would have brought efficiency and sustainable operability of the privatised entities?; have we used privatisation to create quality and sustainable employment?; have we come closer to achieving full employment of resources and traditional factors of production, i.e. human resources, local capital, local entrepreneurship and better (and efficient) utilisation of our land and its natural resources?; have we used privatisation and other forms of reforms to access the sophisticated global market for our trade, investment, enhanced technology use and capacity building?; have we used these reforms as mechanisms of accumulating surplus savings within our society for usage in the productive economic activities; and lastly have we use these reforms to reduce classes in the distribution of national wealth and resources?.

Let me clearly state that there are some observable benefits that have achieved since the adoption and adaption of these reforms. But also there are some envisaged objectives that have not been achieved and therefore leaves us with a wish and a desire to say, if it was different. And, it now seem, there is a potential for the realisation of the different we wish for.

And so, the response to most of the above questions is probably no — I guess that is why these recent announcements by the government are clearly meant to enable us take a stock of what we have not done, where we are, and how we can bring about the change. I only wish we could it differently this time, having leant some lessons.

Now, as to how we can use the capital market to achieve the intended objectives, especially with the seemingly pivotal change, these are my opinion: I believe that, given the abundance scale of natural and human resources we are endowed as a country, if we can be combine it to a well with an understood and effectively used capital market we have the power to drive our development to such extra ordinary degree that poverty can be a history within a decade or two. A good example to this opinion is Chile and to a larger extent what happened to the mergence of South Korea as global economic power. But also, most of the current frontier and emerging economies especially in Asia and Latin America are pursuing similar route.

Also, developed economies, of course deployed this approach from the early stage of their industrial revolution and development — where capital markets (through issuance of shares or bonds and other instruments) were focal tools to finance heavy industries and the industrial development in general and were (are) highly used by these governments and transformative moments i.e. in financing projects such as railways, canals, roads, bridges, steel mills, technology driven activities, etc.

So, as the government encourages repossessions of some of the privatised entities for future better use, as it encourages re-industrialisation (by promising to create a better business environment), as the government encourages its parastatals and agencies to focus on using the local financial markets to finance their growth and expansion (rather than overly reliance on external bilateral financing arrangements); I am cautiously optimistic that we are heading towards the right direction when it comes to our sustainable socio-economic development, local economic empowerment, efficient usage of our local savings for productive investments within. This will also facilitate the development of our overall financial markets (not only the banking sub-sector) into being more competitive to other financial centres in the region. This government action will also encourage local enterprise and industrialists confidence which will feed into the creation of sustainable quality employment not only in industries but also in the agriculture sector which employs the majority within our population.

Currently, efforts by the stock market to encourage government parastatals and agencies, state owned entities and local governments to consider using the local capital market to finance their projects, to finance their growth and expansions have been met with a skeptic mind and indecision by these entities. Our argument have been, these entities, even if they don’t consider it being of beneficial for them to use the capital market for financing needs, at least they should consider a combination of budget allocations, bilateral local and external financing arrangement but also consider accessing public money by selling a portion of their share capital or by using either general purpose or infrastructure bonds (especially via Special Purpose Vehicles) to finance some of their initiatives, activities and projects. The thing about accessing funds through capital markets is that these funds are efficiently priced, the process is transparent, it eliminates a potential for corruptive behaviours in the process of funding an entity and it brings about efficient in operations and financial performance of these entities.

REITS for Real Estates Development

Alternative Channels of Financing Real Estate Projects

In our environment we have been financing residential and commercial real estates projects via our own funds and bank loans. In most other places in the world real estates are financed by using capital markets instruments such as the Real Estates Investment Trusts (REITS). What are REITS?
REITS are real estate financing vehicle that are modelled after mutual (or unit trust) funds. REITs do own, and in most cases, operate income-producing real estate projects. The REITs structure are created to provide all type of investors (retail and institutions) the opportunity to invest in large scale, diversified portfolios of income producing real estate in the same way they typically invest in other asset classes – through the purchase and sale of liquid securities such as shares and bonds.
REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centres, hotels, etc.
In their form and model, REITs provide a practical way in which all investors who have interest in investing in real estate sector to invest in large scale, income producing, professionally managed companies that owns commercial (and in some cases residential) real estates.
REITs can be publicly or privately held. In our current situation, it is only Watumishi Housing that runs a privately held REITs, National Housing Corporation and Pension Funds are unit holders. We do not have publicly held REITs.
Public REITs are normally listed into stock exchanges to provide its investors an opportunity to enter and exit efficiently in the REITs. Globally, as of end of year 2014, there were about 450 real estate companies from more than 40 stock exchanges representing an equity market capitalization of more than US$ 1 trillion.
As a way of background — the genesis of the REITs can be traced back in 1960 where through a legislative action the U.S Congress gave all Americans (not just the affluent few) the opportunity to invest in income–producing real estates in a manner similar to how individual and institutional investors invests in shares and bonds. Income producing real estates refers to land and the improvements on it, such as, construction of apartments, offices, industrial facilities and hotels. REITs may invest in properties themselves, generating income through collection of rent, or they may invest in mortgages or mortgage backed securities tied to properties, helping to finance the properties and generating interest income from lending.
In most developed economies, REITs own many forms of the shopping malls, apartment building, students hostels, homes, medical facilities, office building, hotels, cell towers, etc. In these markets REITs contribute significantly in jobs creation and investment income to national economies.
REITs have diverse profile that offers many benefits. REITs are often classified in one of two categories: equity REITs or mortgage REITs. Equity REITs derive most of their revenue from rent. Mortgage REITs derive most of their revenue from interest earned on their investment in mortgages or mortgage-backed securities.
REITs have many potential advantages for those who have interest in the real estate sector i.e. real estate developers, investors, and the economy at large. I will mention a few: (i) Diversification: Equity REITs may invest in many different properties in different geographical locations within the country, bringing investment diversification by property and geography to investor portfolios; (ii) Dividends: REITs are usually required to pay a large percentage of their taxable income as dividends to shareholders who in turn pay income taxes on those dividends; (iii) Liquidity: Publicly traded REITs shares can easily bought and sold; (iv) Performance: Over the past 30 years, publicly traded equity REITs outperformed the leading stock market indices, including the S&P 500, Dow Jones Industrials, NASDAQ Composite, etc; (v) Transparency: Publicly traded REITs operate under the same rules as other public companies for securities regulatory and financial reporting purposes; and (vi) Growth: Over long holding periods, equity REIT returns have tended to outpace the rate of inflation in particular economies, helping investors hedge the purchasing power of their portfolios

For our case, in 2011, the Capital Market and Securities Authority (CMSA) put up the regulatory framework (The CMS Collective Investment Scheme – Real Estates Investment Trust Rules of 2011 – these rules are published in the capital market and securities authority (CMSA)) to enable capital raising and financing real estates projects through REITs. This legal framework, among other aspects provides rules relating to eligibility, responsibility, key players, listing procedures, operationalization of REITs, etc. We, at the stock exchange have a trading platform (infrastructure) to facilitate such capital raising approaches.

So, the legal framework and the infrastructure to enable operationalization of the publicly listed REITs are available, therefore property and mortgage developers such as the National Housing Corporation, Pension funds, and other such institutions may consider making use of this platform to facilitate not only in enabling private individuals (retail investors) and professional institutional investors to invest and have ownership in the vibrant real estate industry but also enable real estate developers to access more efficient, effective, better priced and less costly public funding for speedier development of properties and mortgage, being either housing, commercial or industrial properties. In actual fact, less costly funding means lower cost for houses and commercial or industrial properties and hence more affordable houses, office space and industrial properties in our economy.

Once issued in the primary market, units and/or shares issued by a REIT will be listed on the exchange to enable tradability and liquidity creation between and among investors. REITs is a highly liquid method of investing in real estate. Private individuals (retail investors) can invest in REITs either by purchasing their shares/units directly during the IPO or on an exchange after listing or by investing in a mutual fund that specializes in real estate. Investing in a listed REITs is a liquid, dividend-paying means of participating in the real estate market for retail investors (private individuals) and institutions with interest in participating in the real estate industry. For pension funds, this may also be one of the effective mechanisms to enable their members to participate in the ownership of assets created by their contributions.

Recent data issued by the Bank of Tanzania (BOT) indicates that the country’s mortgage size is only about US$ 150 million, just about 1 percent of the total commercial banks lending book and about 0.5% of our GDP. Therefore, several opportunities around there.

I believe that with the increasing level of financial education and inclusion about the financial system coupled with the housing finance and pension sector reforms the REITs structure can appropriately be considered by most of us as a means of economic inclusion and empowerment, wealth creation, welfare enhancement, capital market development and economic development.

Building a good society

Why the Business Community has a Role in Building a Good Society

Two weeks ago in my article titled “In the Creation of a Good Society” In the introductory part of it I summarised some thinking and propositions from various political, economic and moral philosophers and thinkers, from both ends of the spectrum, as they opined what entails a good society, especially as is defined by valued that characterises such a society.

Towards the end of the article I dwelt on what I consider the role of business enterprises and corporate entities operating within a society, such as ours, should consider and behave in order to also play a considerable role in the process of building sustainable businesses that supports various aspects of lives that makes it possible for us to pursue our basic human rights, such as freedom and happiness. I also indicated the need to have systems that values social and economic growth for the majority, in building an economy that is inclusive, the system that values equality, efficiency and a sense of community, a sense of the shared prosperity and destiny — in the working environment, either a meritocracy system or egalitarian and humanisms system it is important that the system we operate should be the one rewards appropriately and accounts for how positive does the corporates relate with their employees.
A system that require employees protection against various forms of risks, a system where employees have job guarantees and security and that they are paid as equally as possible based on their input in the output process, the system where organisational policies and practices are structured in pursuit of enhancement of all employees personal growth; and that employees do participate in decision making and in career-learning and progress as we try to create a society which is also efficient.
Today’s article is the continuation of the same line of thinking – building a good society that will endure and propel the majority of us in the society towards a better, secured and prosperous happy life.
Sometimes, in the midst of the society’s governance process and procedures, it comes a time when it can be all easy to loose focus and point fingers as to who is responsible for what, when it comes to creating ideology, philosophies, policies, laws, and in implementing strategic and operating practices that intends to achieve the objective of building a good society.
For instance, in some cases, I have observed us start questioning who is responsible for building a more peaceful, cohesive, progressive and prosperous society? who is responsible for putting national values, in helping people within our society to becoming more responsible and sensible citizens? To such questions, it is easy for one to consider a one way response — that government should be the one responsible.
Who can make this happen? … it is true that what governments does or decides has a significant influence and impact on other aspects of any societies’ lives. But then, who is the government, who makes the state, who contracts the state… it is the people, under the so called “social contract” as Thomas Hobbes and John Locke puts it. So, yes the people, through creation and decisions of and about the government have the responsibility. Apart from putting government’s in power, through the governance process of choice, it is the people who also run private lives, private businesses and enterprises, through which they enable the government to operate by funding it, largely through payment of taxes. But is does not end up there…
What about the business community, the private sector’s role in the process of getting involved in peace building, in job creation, in an equitable employment practices, in being good corporate citizens, in environmental protection, in caring for the less vulnerable within the society, in a broader economic empowerment for the local citizens, etc.
Each and every one of us, each and every enterprise within our community, every political, civil and religious institution, each and very academic and media institutions can be wholly involved in the process of building a good society among us, otherwise, how is it helpful to any one or how is is anyone’s interest that we should be conducting business within a society that carries a population that is the poorest among other habitants in the universe, a society that carries people whose life span is squeezed as years go by while other people’s life spans keeps expanding, a society that carries the most less educated and most vulnerable humans within itself. A society that is among the less efficient among others in the universe. A society that is far less integrated to its key economic activities and sectors within its economy, a society whose people do not have a key stake in majority of corporates operating in key sectors of its economy?. Is doing business in that society be sustainable and meaningful in the long run? will that society endure in bringing about social, economic, political cohesiveness in a sustainable secure and peaceful manner?.
Existence of national values which forms the nation’s character normally provides the compass for all in the society to move on the same direction and that encourages a sense of responsibility and fostering change to individuals, institutions and the state towards the same true directions. This then helps to form the true national building and cohesion, peace and security as the society steps in a clear vision of social economic development, inclusive growth and sustainable prosperity among its people.
The business community can help create a value-based culture, so everyone takes responsibility in running businesses, and extension the country in an ethical manner.
As a society we have some stipulated visions, although sometimes disintegrated, but given a fact that we have a society’s vision that is the broken down into policies, laws, directives, and rules — this says something about the direction that we all may have to follow, yes sometimes we may lack people who do understand how to steer others towards the intended direction? people who can help the society to actually move towards the aspired destiny — but with some level, form and good sense of patriotism, it is possible for business the community to be largely part of the country’s vision and help us get there.
The business community will at some time be required to be at the fore front, probably maintaining a non-partisan approach in the pursuance of their objectives and encouraging others in the society to lay aside ideology differences for the greater interest of our society (a country). The business community due to their financial and economic influence in the political, economic and social activities and government processes can ensure there is business continuity but also also there is sustainability of peace and prosperity within the society in which these business operate.
Now, if the business community fails or refuses to implement laws that are meant to economically empower local citizens, policies that are meant to improve our financial inclusiveness, practices that are meant to create an inclusive s community refuses to embrace these in their justification of profit maximisation and what makes good business and economic sense; then we have a clear challenge as a society. Failure to implement the Mining Act of 2010 and Electronic & Postal Communications Act of 2010 when it comes to mining and telecoms companies selling a small portion of their shares to the local citizens, through the stock exchange are cases at hand.

Privatisation for economic growth and empowerment

Reconsidering our Privatisation for better economic growth and empowerment

At different phases of our socio-economic development agenda and objective, various policies, strategies and approaches have been chosen, for different purposes, some of the objectives relates to economic inclusiveness and empowerment to local citizens. I want to focus on the privatisation as a tool towards achieving inclusive economic growth.

During the peek of our privatization process in late 1990s and throughout 2000s , we mostly chose private/trade sales over public share offering as opposed to some other countries that were in similar situation and process i.e. Russia, it largely used the voucher system to allocate shares of privatised state owned entities to their local citizens for the objective empowering them economically. These companies were also listed into the local stock market.

The consequences of our choice, preferring private sale, are a relatively economic dispersed and less inclusive economically empowered society, financial exclusivity, a narrow and illiquid stock exchange with a vastly inadequate supply of securities. This was the lost opportunity for financial inclusion, literacy, economic empowerment to citizens and for the development of the local capital market.

Most of the privatised entities, via private sale are longer operating — hence the fundamental promise of using privatisation to create better quality jobs, to increase efficiency, to import technology, to improve export of our increased produce and economic empowerment almost lost through thin air.

We currently observing efforts by the government to recover some of these entities and assets. We will see to outcome.

To avoid repeating similar mistakes, for companies and assets that will be recovered, or for the remaining state owned entities, that may due for privatization; it is advisable that we seriously reconsider our economic policies, options and approaches that aims to ensure sustainability, re-industrialisation, job creation, local content and participation, economic empowerment and inclusiveness.This will mean serious consideration of using the stock market to achieve this purpose.

Currently, the local stock exchange, which should have been the focus for long term source of financing for both the public and private sectors, is almost totally starved of securities other than Government bonds. It is not used as a barometer for economic activities; key sectors such as mining, telecoms, infrastructure, hospitality, health, agriculture are not represented in the local stock market. Meaning, companies from these key sectors of our economy are not using the stock market to raise funds to finance their growth and expansion.

If the focus of privatisation, was, among others, economic empowerment to local citizens, then we would have at least 10 per cent of privatised entities being listed — what would this have meant? It would have meant we would have at least 40 companies listed in our stock market, compared to 23 companies currently listed, we would have at least 1,000,000 Tanzanian individuals and institutions investing in the stock exchange and benefiting economically out of it, compared to our current 400,000 level. We would have the Exchange whose domestic market capitalisation is at least 30 percent of the Gross Domestic Product (GDP) compared to the current level of 15 percent. We would have a private sector that is encouraged to use the stock market to raise their long term capital, because the government have shown the example, compared to the current status where only eight (8) companies from the private sector have issued shared and raised capital from the stock exchange. We would have a stock exchange representing various key sectors of our economy, compared to the current status where banking and manufacturing being almost the only sectors represented. We would have enhanced government revenue charged as taxes from transparently listed companies — which would easy the tax administration efforts. By the way out of the seven (7) listed companies that have been listed via privatisation, six of them are among the top 15 largest tax payers in our economy — one can only imagine, if we had forty companies of such significant impact; i.e. immense benefits from quality job creation, tax payments, and other economic multiplier benefits.

That is why I think, despite the previous lost opportunity, we can learn, re-correct and decide to re-do our privatisation differently — i.e. the Government may now consider facilitating a drive to significantly increase in the supply of securities to the market through privatization and take some legislative and strategic action to bring or encourage companies in key sectors such as mining, telecommunication, agriculture, manufacturing, etc to raise capital and/or list into the local exchange. Without such structured, intended and clearly focused policy choices, the local exchange may not become a significant player and facilitator of long term capital raising for public and private enterprises growth and development and in empowering local citizens economically.

The other smart approach that our country had opted, at least through legislative process and actions, to implement empowerment policies and participation in key sectors was through the two pieces of legislation. The Electronic and Postal Communications Act (EPOCA) and Mining Act, both of 2010. These laws requires that companies operating in these two sectors issue a portion of their shares to local citizens and list into the local stock market. Unfortunately, these provisions of the laws are yet to be implemented, five years down the line.
So, experience shows that despite availability of laws and policies, sometimes regulations that should facilitate implementation of the law or policy take time to come, Privatisation, EPOCA and Mining Acts – are such experiences.
Let me emphasize on this point because its important, if and when the Government decide to take a lead in supporting development of the local exchange through policies such as privatisation, or the local content policy – we envisage to see the local exchange significantly playing the role it was created to play i.e. facilitate raising finance for companies’ growth, encouraging transparency in the way corporates conducts, facilitate monetary policies for the country, enabling the government to finance its budget through the fairly priced bonds, facilitate financial inclusion, give access to pensions and life insurance companies to invest in assets that can efficiently be liquidated, etc.
If our government decides to take this route — we will not be the first to take such smart action. As I mentioned above Russia and most of the East Europe countries did it, China did (and still does) so are some of the middle East countries, Latin America and Asian economies. During Europe’s industrialisation era, most economies used stock markets to finance their industrial expansion and growth.

I was recently moved by the Sri Lankan exemplary courage, after more than 30 years of their civil war, the government decided to develop the local capital market by passing a legislative actions that require all local banks and insurance companies to list into the local Exchange – the argument for their actions was (is): given the nature and business activities of institutions in the banking and insurance sectors (they mobilise deposits (or liabilities) from the public for the purpose of lending (or investing) to the public. With such models of operations, to the Sri Lankan government these institutions qualifies for public ownership and listing into the stock market, for the purpose, among others: of enhancing corporate governance practices, ensure more transparency and accountability, afford investment opportunities to local citizens, empowerment and economic inclusiveness to the local citizens and developing the local capital market and the economy at large. As a result of such policies, Colombo Stock Exchange has about 300 listed companies; while we have only 15 domestic listed companies. Sri Lanka is one of may examples — but I have in my articles, recently indicated how Chile, Jordan, Hungary, Iraq, Nigeria, Russia and other may countries that have executed such policies successfully.