The Stock Markets and the Financing our Industrialisation and Economic Transformation

In my last week’s article, I tried to indicate, picking from other country’s industrial revolutions and transformations perspectives, how they financed their transformation and how necessity it is for a country to transform its domestic financial resources mobilisation as it aims to transform its economy through industrialisation — like we intend to do. Today, I will focus on the need for a vibrancy stock market, as part of the tools economies normally utilise in financing their economic transformation.

History tells us, most successful industrialisation and economic transformation policies were preceded and/or accompanied by important development in the country’s savings and capital formation. The lesson in front of us is somehow clear in the sense that the process of capital formation go hand in hand with efforts to industrialise and transform. In my reading of the National Five Year Development Plan (FYDP-II) 2016/17 – 2020/21, which carries the theme: “Nurturing Industrialisation for Economic Transformation and Human Development”, the almost 400 pages document, the word Dar es Salaam Stock Exchange has been mentioned only once — the DSE mentioning came under the context of trying to explain why FYDP-I didn’t achieve some of its intended objectives. One of the reasons given being the lack of capital and funds to implement some of the key priorities, and DSE underdeveloped being one of the reasons. Other than that, DSE (or the capital market in that matter) has not been mentioned in the FYDP-II and its proposed financing strategies. And I think this is a mistake, similar to the one we made in FYDP-I.

FYDP-II is right — our local stock market is relatively underdevelopment. After almost 20 years of existence, the DSE is still narrow and thin, domestic market capitalisation (Tshs. 8.5 trillion) ratio to GDP is only about 10 percent, liquidity/turnover ratio (averaging about Tshs. 800 billion p.a) to market capitalisation is also about 10 percent. Only 17 domestic listed companies (23 inclusive of cross listings) are listed, and three currently outstanding corporate bonds. Government’s listed bonds worth about Tsh. 4.8 trillion are also listed, less than 5 percent of our current GDP; and the total number of investors at the Exchange is only about 450,000 — closer to only one percent of total investable population.

In my opinion, the upside potential is high, but only if we consciously decide to create and pursue the right policies under this context. Previously (& currently), the stock market has not been part of the country’s development plans (the same seems to apply under FYDP-II). DSE has not been treated as the primary national engine of capital formation and economic development by the Government or the donors. For instance, instead of driving most privatisations through the DSE and creating a tax efficient structure for companies listed on the exchange and investors in listed securities, different policies are normally chosen. The consequences of these policies are an economically weak stock market (as rightly stated in the FYDP-II), without a vastly adequate supply of securities in the market place. This is a big lost opportunity for financial inclusion, domestic capital formation and broad-based economic empowerment.

To avoid repeating similar mistakes, FYDP-II should specifically aim to revolutionise the growth and vibrancy of the stock market in the process of sustainable domestic capital formation as we strategies to finance our future. FYDP-II should have made DSE as one of the tenets of financing the envisaged industrial programs and its related infrastructure programs. How can the government facilitate growth and development of the stock markets? — there are several tools that can be deployed to achieve this objective. I will mention a few:

Out of hundreds of privatised state-owned entities, only seven (7) were privatised via listing into the exchange. These are TOL Gases, TBL, TCC, Swissport, Tanga Cement, Twiga Cement, and NMB. Hundreds of others were privatised via private sales, large part of these didn’t bring the financing, skills, technology or job creation, as was envisaged and most of these entities are no longer in operations. Comparably, entities that were privatised through the stock market on an efficient combination of ownership, by: the government, strategic/industrial investors and the public (by way of IPOs); have been more impactful, both socially and economically compared to entities that were privatised through private sales. The 7 mentioned companies are some of the largest tax payers, they provide some of most quality jobs — propelling their employees to middle income earners, being listed entities, they are relatively more effective for tax administration purpose. I therefore, urge the government to learn from this experience; the remaining SOEs should be conducted across the DSE. With the vibrant stock market (brought by, among others, privatisation of SOEs through the DSE), entrepreneurs, industrialist and business owners from the private sector will be attracted to use the capital market for their enterprises growth and development as well as an exit mechanism. This is how consideration to use the stock market for funding industrialisation would be meaningful.

Apart from privatisation, the government should also implement policies and legislative actions whose spirit was to facilitate growth of the local stock market, a wider economic empowerment and an inclusive growth i.e. policies such the economic empowerment; financial inclusion; local content; privatisation, etc. Furthermore, the Mining Act of 2010 as well as the Electronic and Postal Communications Act (EPOCA) of 2010 (amended in 2011) are some of the legislative actions meant to economically empower local citizens by way of ownership in such key sectors of our economy, however, provisions of these laws in the context of ownership distribution hasn’t been implemented, or for the case of EPOCA, the 2015 regulation provided an option. Were these laws implemented, we would have increased the depth, liquidity and the number of local investors in our stock market; that’s how we will encourage more savings and domestic capital formation.

Additionally, we should proactively and aggressively encourage domestic savings by pursuing programs that will introducing other financial instruments that can then be used as investment platforms for many. Financial instruments such as, common stock (for common ownership), micro savings bonds, infrastructure bonds, municipals revenue bonds, real estate investment schemes, collective investment schemes, etc must be championed by both the government and private sector using existing and potential financial institutions. These financial instruments should be linked to the practical industrialisation projects and enterprises that requires such funding.

As we pursue this approach, we need to be mindful of the fact that our current savings rate as a proportion of our GDP is about 20 percent while the country’s investment rate per annum is about 30 percent of the GDP, the gap is financed using foreign funds and capital. We need to gradually reduce this gap by way of developing our domestic capability to raise the rate of domestic savings and capital formation.

Blending private domestic and foreign investment through shareholding on the state-owned enterprises is vital for creating a vibrant local capital market. In relation to FYDP-II financing, a combination of government’s substantial ownership in existing (and new industries) via financial interests/commitments, combined with large number of shares trading publicly in the stock market, plus joint ventures between strategic/industrial investors on one hand and small investors (via IPOs) on the other hand, plus debt instruments i.e. syndicated trade credits, project finance will encourage the financing of the envisaged industrial program, enterprises and projects.

The FYDP-II has mentioned many strategies of financing identified priority sectors and projects; i.e. increase tax revenue by broadening our base; establishment or enhancement of specialist banks; foreign direct investments (FDIs); domestic borrowing; issuance of sovereign bonds, etc. What is clearly missing is the intent to grow the stock market so it can facilitate capital raising, encourage savings and capital formation — which is vital for the envisaged industrialisation program and for economic transformation. We shouldn’t continuously avoid this opportunity.

Our Industrial Development and its Financing

I recently have read our National Five Year Development Plan (FYDP II) 2016/17 – 2020/21 whose theme is “Nurturing Industrialisation for Economic Transformation and Human Development”. In trying to understand more about it I have also read the following books: “How Rich Countries Got Rich and Why Poor Countries Stay Poor” by Erik Reinert; “Globalization and its Discontents” by the Nobel Laureate, Joseph Stiglitz; “Bad Samaritans” by the Cambridge University Professor of Development Economics, Ha-Joon Chang; “How Can Tanzania Move from Poverty to Prosperity? “ by L.A. Msambichaka, J.K. Mduma and O.J. Mashindano; as well as the report by United Nations Economic Commission for Africa, the report called “Transformative Industrial Policy for Africa”.
I will therefore have to admit from the onset that these books and report have informed a portion of my thoughts here.
I would want us to briefly consider the whole question of industrialisation. Why does industrial development continue to be sluggish in our country and the Continent in that matter? As we might be aware, the African continent has about 25 stock markets (some of them dates back prior to independence) — so can partly be source of capital to finance our industrialisation. We also have a long tradition of trading and entrepreneurship – somehow also fuelled by parts of citizens who are of Asian origin who are integrated within the native African communities; we have a wide network of global and regional commercial links; we are witnessing an increased level of democracy and political stability in large part of the continent; a somewhat risk-taking culture (though admittedly limited to some ethnic groups among us); and a somehow developed banking system, although tilted towards commercial banking. So, what is it — why are we not making the required progress in industrial development?
Following independence, in the 1960s, most African countries (including ours) have had several extensive plans and elaborate policies that formed the critical framework for the nations’ industrial development and this somehow came much into fruition in most part of 1970’s/80’s. Then came neo-liberal social and economic development ideology: i.e. economic liberalization, the need for a “small government”, free market and private enterprise as well as the need for privatization of state-owned enterprises – a significant portion of these enterprises were mid-sized -value addition industries in textile and garments, leather, agro-processing, foot wear, etc. These industries were also resource-dependence, labor-intensive light processing industries.
As we were doing privatisation via private sales, countries that had similar levels of development at the time of independence, especially those in Asia marched far ahead of us mainly as a result of their focus on targeted industrial development programs. It is this context that we may need to ask ourselves, what can we do to restore the industrial development glory — which forms, not only the fundamental bases for inclusive and wider participatory economic growth and prosperity, but also a significant support as an uptake of the local agricultural sector, leading to non-seasonal job creation — hence facilitating job creation for young graduates from technical colleges and universities, more skills development in our society as well increasing our exports which translates to more foreign currency reserve. Industrial development can significantly be used as one of the tools for balance of trade and foreign exchange stability. In the after all, most economists, agrees that it is difficult to achieve significant and sustainable levels of economic growth and development without a developed industrial sector. The question is – how can we do it?
A recent report of the UN Industrial Development says: “Global manufacturing has been shifting from developed to developing economies even faster, with economies such as China, India and Taiwan building strong manufacturing sectors”. So, it is true that Africa is not that much reflected in the global industrial development. So, what can we do to change this? — probably we need strong leadership and political willingness; what about policy constraints?; what about the sources of funds for industrialisation financing?; who should take a lead — private or state or both – at what proportion? does it end by having a well document industrial development plan or policy?; what kind of shape do we want our industrial development agenda to take? should it be export-focused or should we focus on import-substitution-industries, or can we pursue both? what about trade in tasks?
Africa, have almost failed to derive benefits from the so called ‘Trade in Tasks’, one of the outcome of the globalisation is that of disaggregating production of individual components and spreading various tasks of the global manufacturing process to different countries in accordance with climate, costs and competitiveness. Asian and Latin American countries have managed to leverage on this ‘Trade in Tasks’ paradigm. Take an example of India, which has registered remarkable gains in sectors such as information technology, telecom and pharmaceuticals; the same applies to countries such as: China, Taiwan, South Korea, Malaysia, Turkey, Mexico, Brazil, etc.
Statistics are also not on our side either — manufacturing value-added in Africa is still one of the lowest in the globe i.e. averaging less than 2 per cent per annum in the past two decades, compared to India for a example which has rose from a yearly rate of 7 per cent during 1992-2002 to 8 per cent during 2002-2012 and probably more than that as of now. Per capita Manufacturing Value Added in India also rose from $116 in 2006 to $158 in 2011 and per capita manufactured exports from $90 to $202. Same statistics in Africa indicates decimal growth, even regression in some parts of the continent.
How can we sustainably finance our industrialisation?
The successful and sustainable industrialisation policy and plan should be preceded and/or accompanied by important development in the financial institutions. There is therefore the need to enhance our national capacity to mobilise financial resources, from both domestic and external sources, as well as the ability to utilise those resources effectively and efficiently.

We rightly have been focusing on attracting foreign direct investments (FDIs) as a key tenet to our industrial development. True, through FDIs we import the much needed capital, skills, technology, markets, etc. However, evidence shows that for sustainable industrialisation and its financing, the real benefits could more effectively be harnessed on the basis of local enterprises, local capital, skills and entrepreneurs working hand in hand with foreigners within the framework of policy pragmatism, prevalence of productive firms, effective forward and backward linkages, fair competition and tax laws, investor protection, and an infrastructure and legal framework that will work at the required speed. Factors such as: (a) top-down decision-making in regard to industrial policy, (b) unwillingness to relax direct control of strategic industries, (c) interference in investment decisions, (d) neglect of entrepreneurship and competition, and (e) lack of proper coordination between different development agencies as affecting the pace of growth notwithstanding the FDI flows. Therefore, developing our local capacity, in finance, skills, innovation, technology and markets is key for us to achieve the objectives as set in FYDP II.

Our country is currently short of development financial resources to propel the country into achieving the intended industrial development program; therefore, in the short to medium term, we should still focus on inducing more foreign capital flow — mobilising foreign capital (foreign financial resources could be obtained via aid, external borrowing via soft commercial loans and grants, foreign direct investment, private equity funds, portfolio investors, etc).

However, as we attract and encourage foreign capital we should understand from the onset that, we need to be more inclined into implementing a financing strategy that will propel us to make better use of the little own resources instead of the prolonged depending on foreign funds. This will allow freedom of implementation of our industrial policy and flexibility. Additionally, as we focus on foreign mobilised resources — these has to be well monitored, managed and prudently used to bring about the intended result — there is a need to prudently use of both grants and loans, linking these to FYDP II and the budget process. That is to say, having managed to get these funds, we should aim to use the same for financing importation of capital goods, raw materials and foreign technology that are to be used in manufacturing of goods under the industrialisation program.

In aiming for the long term — we should start to proactively and aggressively encourage domestic savings by pursuing programs that will ensure increased financial literacy, we could also introduce financial institutions and instruments that will provide investment platform for many. Products such as micro savings bonds, collective investment schemes must be continuously championed by both the government and private sector using both existing and potential institutions. These financial instruments should be linked to the practical industrialisation projects and entities that requires such funding. For this to be achieved there is a need for proper macroeconomic policies, a series of focused programs, priority setting and a pragmatic and flexible approach to develop our local financial market. We will need industrial development bank(s), we will need to encourage commercial banks to get more involved and align themselves in the country’s industrialisation goals. We will need a combination of ownership (between the state, strategic/industrial investors and the public (via IPOs) and management of entities and projects that execute the industrialisation programs. We will need to to engage the Diaspora in our industrialisation not only in financing (through remittances) but also leveraging from their knowledge, skills and experience. Definitely, the envisaged over TZS. 190 trillion financing plan for the FYDP II, over a period of 5-years, whose major theme is industrialisation, requires non-traditional financial resources mobilisation and spending.

Demutualisation, IPO and Self-Listing for the Stock Exchange — what it means

The Dar es Salaam Stock Exchange has been demutualised and in the next few days it intends to conduct its Initial Public Offering (IPO) and eventually self list into the stock exchange. This may not sound familiar to many — but I will explain.

What is demutualization? In the strictest sense, demutualisation refers to the change in legal status of the stock exchange from a mutual entity/association, into a company limited by shares (with majority-based decision based). Normally, 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 investment by focusing on generating profits from servicing the demands of their customers (brokers, listed companies and investors) in a competitive manner.

The idea of stock exchange’s demutualisation has captured media headlines in recent years. 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 2015, more than 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? why this phenomenon?

Globalization and financial integration, the need for enhanced corporate governance, the development of innovative technology, regulatory reforms and changes in investment opportunities are some affected the environment for stock exchanges. There has also been an increasing competition that is affecting the functioning of financial markets. In response to this 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. Governments have been keen to ensure stock exchanges get into their feet — mainly because it is of national interest to have a vibrant stock market in a country, however, there comes a point where private sector and its enterprising and profit-seeking spirit have to come into play, i.e. by capitalising the stock market, ensure there is good governance and protection of all its stakeholders instead of focusing on serving interest of members only.

For a long time, exchanges were mutually-owned organizations where members (brokers, dealers, custodians, listed companies, etc) 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.

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 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) ensure there are standard rules that governs market activities; (vii) ensure clearing of buy and sell transactions.

We, at the Dar es Salaam Stock Exchange have been demutualised, will shortly conduct an IPO and then self list; being the third Exchange in Africa to demutualise coming after Johannesburg Stock Exchange and Nairobi Securities Exchange.

What will DSE demutualisation mean for us as a Country? (i) enhancement of the DSE’s financial and operational capacity; (ii) enhancement of good corporate governance for sustainable protection of all DSE’s stakeholders; (ii) increased 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.