Bonds Market for Financing Infrastructure Development in Africa

Last week I had an opportunity to attend the U.S.-Africa Business Forum in New York. The U.S-Africa Business Forum is an initiative by President Obama aiming at bringing together African political and business leaders to actively engage with the U.S. political and business leaders with the common objective of forging joint business enterprises and development projects that can tap the resources, experience and skills from both ends of the Atlantic. Along with this forum, were other sideline meetings betweens U.S strategic as well as portfolio investors, (such as pension funds, private equities, development financial institutions) and African business leaders and entrepreneurs. What was somehow clear to me in all these series of meetings and forums was the existing financing gap on the African side and the significant need for such financing from other parts of the world, major financing gap are particularly in infrastructure [from power/energy, to transport to social infrastructure such as schools, health centres, water and sanitation to irrigation) where the World Bank and the African Development Bank estimates a financing gap of US$ 93 billion per annum, this is despite the relative significant observed efforts by our Chinese friend in this aspect of our development. And therefore, if Africa will be able to finance this investment gap of US$ 93 billion at the current value for the next two decades, then that is when we will be able to fill in our infrastructure development gap. It was also clear to me, out of those deliberations, that there is a knowledge/awareness gap in part of the U.S investors and financiers on the potential opportunities available in Africa (which says we need to do more engagements), but also there are limitations that some of the U.S investment and financing institutions have, especially at these times and age, when it comes to investments accruing outside the U.S. And so what was also clear to me is probably the need for us in Africa to seriously consider looking inside Africa as we try to source the financing needs for our development. And, like in many cases, one thing came clear to my mind — the need to develop our bonds markets, especially for us in the sub-saharan Africa (with the exceptional of South Africa). where only three countries have specific infrastructure development bonds issuance within their financial market platforms. Why do we need to develop our bond markets?

First, sub-Saharan Africa has been heavily dependent on external grants and concessional loans for funding capital spending and government deficits. Only a small number of countries have developed their local currency bonds markets and also accessed global capital markets via issuance of sovereign bonds or eurobonds. Gross official developmental assistance to sub-Saharan Africa amounted to over US$ 55 billion in 2015, accounting for about 30 percent of total government consumption expenditure, with almost 85 percent grants and 15 percent concessional loans, according to the recent reports and data by the World Bank and Organization for Economic Cooperation and Development (EOCD). Additionally, the fact that western donors are currently facing substantial fiscal challenges in their home fronts, that says that consequently donor flows to sub-Saharan Africa may continue to be scaled back significantly, as has been in recent cases. Without access to alternative sources of finance, including bond markets, many African countries could find it difficult to finance critical needs such as the highly needed infrastructure.

Second, well-functioning bond markets help sustain economic stability. The Asian experience supports this point. According to the 2010 International Monetary Fund (IMF) report, since the 1997 Asian financial crisis, many Asian economies have made significant progress in strengthening bond market development. This has in turn helped these Asian economies weather the recent (2008) global financial crisis because deeper financial markets generated valuable funding sources for these countries to finance fiscal stimulus packages.

Third, the development of bond markets in sub-Saharan Africa can improve the intermediation of savings. Although Africa needs money, Africa is a net capital exporter to the rest of the world (IMF, 2015). This is mainly because there is a lack of effective intermediate channels to absorb this capital. As a result, some of us claims that there is a general lack of liquidity in many African capital markets. As it turns out, this is rather a structural and ethical problem, where funds from the continent are exported as savings or investments to developed economies, instead of being effectively used at home. Bond markets are an effective way to intermediate these capital savers with capital users, who needs these funds to finance our own development.

Fourth, promoting bond market development in sub-Saharan Africa can improve the structure of the African financial system. Since the period of liberalisation of our financial markets as part of the Structural Adjustment Programs, the African financial sector has been dominated by banks. The non-banking sector, capital markets and bond markets, both public and private, are still in their infancy. Bond markets and bank finance are complementary rather than incompatible. While banks tend to be more adept at providing short-term (working) capital, bond markets enjoy a comparative advantage in financing government deficits and infrastructure investment, and providing longer-term capital to companies for growth.

Fifth, deeper bond markets will enable central banks in sub-Saharan Africa to conduct monetary policy more effectively. At present, many markets have few domestic fixed-income.

Local currency bond markets in sub-Saharan African countries are still at a nascent stage of development with market capitalization of both government securities and corporate bonds typically much lower than those of other developing, emerging, and advanced economies as a percentage of Gross Domestic Product (GDP). The government securities market capitalization as a percent of GDP was 15 percent in 2014 in sub-Saharan Africa. In contrast, Asian and Central European countries surpass this measure, and generally speaking most Latin American countries do as well.

This disparity is even greater for corporate bonds. On average, the capitalization of corporate bonds was 2 percent of GDP in 2014 for sub-Saharan countries, whereas this figure was generally much larger for other developing and emerging economies. Moreover, the low level of development of the bond market is particularly apparent upon comparison with the capitalization of more advanced economies, and, in the case of the corporate bond market, the capitalization ranges from 30 percent of GDP for Canada to over 90 percent for the United States.

Also evident is a notable disparity for sub-Saharan Africa in terms of the relative importance of government securities and corporate bonds in local currency. In this region, the local currency bond market is dominated by government securities, with a share of 90 percent of the total market capitalization, compared to the share of corporate bonds which stands at just 12 percent, in 2014. This contrasts with the situation in other areas of the world. Aside from Poland, the share of corporate bonds in total bonds in sub-Saharan Africa is smaller than in other developing and emerging economies.

Here at home, our total bonds market (at Tsh. 5.2 trillion) is just 5 percent of GDP, outstanding corporate bonds, at Tsh. 60 billion is 0.06 percent of the GDP and 1 percent of the total bonds market. We have general purpose bonds issued by the central government via the Bank of Tanzania as a fiscal agent. We do not have infrastructure bonds issued specifically for particular infrastructure projects which can be transparently accounted for. We neither have municipal bonds. However, our infrastructure investment deficit is currently at about Tsh. 10 trillion per annum, according to the Five Year Development Program. Therefore development of the local bonds markets is a no brainer, that it can be used as one of the tools for financing our development, especially in the infrastructure space for both public and private sector

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Stock Markets and banks complimentary roles, for our development

On some of my recent columns I have been encouraging enterprises, real estates developers, local governments, the central government (mainly through privatization and implementing legislative actions) to use the local capital market to raise long term capital through equity and debt instruments for the purpose of financing their growth and development, improving the welfare of our people, and achieving financial and economic empowerment through ownership of companies and projects in some key sectors of our economy.
For commercial and community banks (either privately owned, publicly owned or those owned by the government), capital inadequacy or lack of long term funding sources or because of maturity mismatch challenges have been some of the key reasons hindering their lending capacity to key productive sectors of our economy, especially those with a long term view, such as real estate development, agriculture sector, manufacturing and projects that requires long term financing . Such a situation cement further to what has been the key embedded structural challenge on the role of commercial banks in financing long term development projects. I know this challenges have been addressed by individual banks in one way or the other, but accessing such from the capital market has not been one of their favourite approaches.
As it is, commercial banks are such a dominant element in our present financial system, and therefore there has been a natural tendency and debate to assume that commercial banks must carry the major responsibility for delivering even the long term financing to projects and sectors that requires long term financing; in reality commercial banks by their nature and business model are either relatively poorly equipped to take such role or do not necessarily have the capacity to do that.
And, the central, even though not the only explanation, is that commercial banks typically have high level of dependence on mobilising deposit (usually short term) from retail/private individuals and corporate organizations or institutions who have surplus funds, for on-lending to those in need of financing, being the government, business enterprises or private individuals. Since most of these deposits are normally held with banks for a relatively short-term period of time, there can be an argument that banks may need to make a significant maturity transformation for them to be able to provide lending facilities for long term enterprises and projects. This, and other explanations confirms that the difficulties that banks face in transforming substantial proportions of their available funds into longer term lending are structural and deep-seated. I understand that this will not be a relatively easy task and the risk that banks potentially perceive in making the maturity transformation will vary over time as will the actual proportion of such transformation that banks will regard as prudent and acceptable.
So, commercial banks structurally, and by their nature and business model are meant to solve the short (and to some extent medium) term financing challenges in the economy. Long-term development projects are usually left to be financed by development banks, private equity funds or by accessing long term funds whose source includes issuance of securities (shares or bonds) to the public investors (retail and institutions) followed by listing those securities into the stock market to enable easy and efficient exit and the liquidity creation.
I understand that there is a no simple or one dimension solution that will timely facilitate engaging commercial banks with significantly financing long term development projects and/or in such sectors that requires long term capital but the extent of deposit-loan maturity mismatch and capital inadequacy recent voices has been, looking for financing options that will enable banks to lend long to some of these sectors and projects would be one the preferred approaches. It is been common for banks, for example those with government ownership requesting, time and time again, for the government’s recapitalization, others have gone to their shareholders (normally a handful, for privately owned banks) for recapitalization through rights issuances, others (especially international banks operating in our local market) have gone to their parent companies seeking for recapitalization and even others have gone into International development financing institutions seeking long term debt financing for on lending to long term projects. But what has been less observed is for banks to seek approvals from their shareholders to access public money via issuance of shares and bonds.
Having observed this trend, sometimes engaged in these debates and given my understanding of the extent to which the local capital market can offer or unleash its potential, I am propelled to say something.
About 30 percent of commercial banks in Kenya are listed into their local stock market — the Nairobi Securities Exchange. These banks do regularly use the capital market for taping in new capital whenever needs arises – they use rights shares issuances, they use corporate bonds (which is accepted by central banks as tier II capital) that then enable them to lend long term into sectors such as real estates, manufacturing, agro-processing light industries, even in commercial agriculture. Over 30 precent of banks in Ghana are also listed into their local Exchange. More than 70 percent of commercial banks in Nigeria are listed in the local exchange and benefits through various capital raising options that are provided listed companies. Over 80 percent of commercial banks in Sri-Lanka are listed into the local stock market, and so the list goes. In the opposite, our market is predominantly a private banking system where private banks, we have over 50 commercial banks, but less than 10 percent of them are listed in our local market.
As is, banks, like other business enterprises or public institutions may use the stock market for capital raising. They can increase their equity investors base, allowing these banks an access to better priced efficient capital in case of future expansions and growth from a pool of wider and diversified group of investors – this availability of future funds will be enhanced, as a rights shares issue may be used to secure further equity if the need arises; the stock market makes it easier and less costly to obtain other forms of finance i.e. issuance of corporate bonds (which qualifies as Tier II or Supplementary Capital for banks); capital raising, listing and using the stock market provides for an efficient and effective basis for the valuation of the bank’s investment; it also enables implementation of share incentive schemes that may result in a significant improvement of the motivation of its staff and management — listing into the stock market makes such a scheme more attractive to employees, there is also an enhanced status brought about by a listing favorably affect relations with banks, suppliers, customers and the Government, improve in corporate governance there are tax incentives for being listed to the company and to investors in the company and other many benefits.
I believe, if our banks may opt to use the capital markets to compliment their other efforts of capital raising to facilitate the funding of long tern enterprises and projects with our economy, especially at this time and age where our economy is geared into the industrial economy, then we will have addressed our long term development finance challenges in a significant way.

What makes us economically and socially better, and how best can we do?

Let me divert from the common topics that I write about: finance, investments, economics, capital markets, stock exchanges, good corporate governance, etc into a topic that I am not so conversant about, but of which I have recently taken a great interest on it — and I am trying to learn. History and Philosophy.
In the process of living, it is fairly expected that, we, humans in our own ways we should always try to pursue ideas that will unleash our potentials in the process of creating a good society — a society where citizens are largely satisfied, where the society is defined to be good, where people are happy as they thrive in their undertaking. The society that values decency, responsibility, justice, tolerance and where natural human rights are observed. The society that debates, builds consensus, and make good choices in the pursuance of a good and happy life. Does this sound like a utopian ideal of a society? Yes and No.
That’s why in the history of human kind and humanity; great thinkers, political and moral philosophers, etc in different eras dating as back as history can record; philosophers such as Confucius, the Chinese philosopher, and his disciples such as Mencius; great greek philosophers like Plato, Aristotle, and disciples like Alexander the Great; Thinkers and philosophers such as Niccolo Machiavelli, Charles Darwin, and Thomas Hobbes; all have tried to conceive the idea of an ideal society — the society that is generally happy in the ways and conducts; in such a society, the role of individuals, the role of institutions within a society and role of the state is somehow defined.
Recent political and economic thinkers such United States of America founding fathers: George Washington (who founded their nation), Thomas Jefferson (who gave it the Constitution), Abraham Lincoln (who preserved their union during challenging times in mid-1800s), Alexander Hamilton (the father of the US financial and banking system) to mention but just a few. As well as Eastern philosophers such as Karl Max, and Friedrich Lenin, to contemporary thinkers and leaders in the ideas and ideals of a good society such as Jean Rousseau, Vladimir Lenin, John Keynes, Friedrich Hanes, Martin Lurther King, Arthur Okun and many others — all these came up with differing ideas as they struggled in different eras of human history, in different way and circumstances, in different places using their intellectual, political and moral capacities trying to pour their thinking in envisioning what attributes will make a good society.
Reading from their philosophical thinking and learning from them one may notice many different concepts about the topic; however the following four concepts would come out clearly and easily: (i) Liberty/freedom (both political and economy freedom to members of society in their pursuance of a fair, just and happy life); (ii) Equality (political and economic equality to members of the society as well as equality of opportunity to utilise available resources in the betterment of their lives); (iii) Efficiency — (this can be achieved on the basis on the idea that a society can organise and order their political, social, humanistic and economic activities as well as creating or maximising wealth, using institutions and entities set up as key vehicles to propel society’s betterment — encouraging efficiency use of natural and human resources for greater good and economic efficiency for wealth enhancement); and finally (iv) Community (encouraging the use of intellectual and political process/activity to create a fair and just society that looks in the shared and communion interests).
What does all this mean? As it is supposed to be, national states and/or societies should define themselves according to what deeply matters to them, what are their fundamental values and principles — what is broadly the society’s character, how is the society defined or rather how would it like to be defined by the outside world. For some nations — for example, upon the mentioning liberty and efficiency as core values to a nation, it wouldn’t be difficult to relate these values to the U.S.A; for the U.S since their time of enlightenment and independence in 1770s — these has been largely their fundamental values and interests. For the Chinese, especially during Mao’s time it was squarely about equality (especially equality of economic and social opportune) but recently the ideas of efficiency and community has come into the fore in the Chinese society and in their means of governance as they try to create what would be a good society for them. For the Japanese, soon after the World War tow (WW2), their society have defined itself as a society that deeply cares about efficiency. For Europe, many nations have been trying to find a good compromise between freedom and equality and for western Europe, with some form of efficiency as well. And so, different countries have been either using democratic processes or other governance and decision making platforms as means towards achieving these four fundamental concepts for society endurance and betterment.
What about us — how are we defined, how can we be defined? what are our societal values? what do we hold deeply as our fundamental principles? how does the outside would define us as a society? how do we use our governance systems and tools to debate, to build censuses, to make choices to enable us as individuals and in our collective way to pursue our happiness, to unleash our goodness, to unlock our potentials in a shared destiny?. Does we, as individuals, corporations, political institutions, civil society movements, government institutions, etc within our society in pursuance of our ambitions, clearly understand what is it that we value most in the process of creating a good society?.
Let us assume that we were a society that values equality and a great sense of community values as our fundamental principles — if this was the case, have we then been pursuing policies and activities that aims on closing the gap between the rich and poor or between haves and have-nots within our society? as an example, are we using a progressive tax system or a tax code that taxes the rich more than it does for the poor? do we give appropriate access to an affordable and standardised education and health care to all our people? do we promote efforts that encourages collective goodness? do we ensure that the quality of life for our people meets the basic human standards? do we give equal opportunity for all in our society to participate in our governance decision making and in participating in economic activities? or do we discriminate some members of our society (by gender, religion, ethnicity, etc) from pursuing opportunities which should be equal to all?
For corporate entities operating within our system; the system that were to value equality and community — do they know that meritocracy system isn’t the way our people are hired and rewarded? that egalitarian and humanisms are our values when it comes to corporates relations with their employees, that we require employees protection against various forms of risks through entitlements, that employees have job guarantees and security and that they are paid as equally as possible, that organisation policies and practices are structured in pursuit of enhancement of all employees personal growth; that employees participates in decision making and in career-learning.
Remember, I started these last two paragraphs by saying, let us assume… I therefore do not intend to portray that what I have just prescribe above, as to mean that’s how our society is defined. But then, how is it defined? when we collective pursue our different political, economic and social activities that fundamentally makes us happy and satisfied as human beings and citizens of a country endowed with resources to be used in making peoples lives better and just.
And so in our societal struggles, in our imaginations, in our challenges and crisis, in our adaptions and adoptions, in our pursuance of humanistic, social, political and economic orientation; let us and especially our leadership re-define and re-educate us as to what are our deeply held values as a society, so we can collectively aim towards living these values.

Stock Exchange: A tool to finance key sectors

Many development economists supports the idea which says that for us to achieve the rapid economic transformation we probably highly need, there are three main interventions that we seriously need to consider. The most important intervention, which is in often cases overlooked/or lip-serviced is the need to maximise the output from agriculture, which employs the vast majority of people in our poor economy. And, given our resources, our location within the universe and the state of our affairs, we need to be thinking the idea of maximisation of our agricultural output within the context of a highly labour intensive household farming. As it is, this will allow us, as a country, to make better use of almost all the available labour, which is largely either lesser-educated or semi-educated, and will allow us to push up our agricultural yield and output to the highest possible level on the basis of a model that says the more engaged the population in economic activities, the more the output (its doesn’t the quality or the efficiency). Of course there are issues like the need for land reforms and forms of land ownership — these two factors are of paramount importance as they have an opportunity to either hinder or unlock the potential that land has (especially in accessing finance for agricultural activities and beyond), added into it — are the need for enhanced use of agricultural technology, improving our agricultural infrastructure (such as more use of irrigation systems), etc.

The second key intervention, in many aspects, is the need for direct investment and entrepreneurs towards manufacturing, and this is because manufacturing industry makes the most effective use of limited productive skills of the workforce of developing the economy, as workers becomes more trained, and as workers begin to migrate out of agriculture, manufacturing sector should be the one to absorb them. Relatively semi-skilled labour create value in factories by working in machines that can be purchased on the world market. Of course for this to work effectively, especially during the infant stage of industrialisation where local industries can not effectively compete in the global market, there is a need for state subsidies and other forms of protectionism.

And the next form of intervention — which is the focus of my article, is in the need to develop the financial sector so that it can focus on providing capital to these two major interventions as stated above — i.e. the financial sector and its various institutions should clearly focus on intensive, small-scale agriculture and on manufacturing development, and so provide the required capital to accelerate the economic transformation. Under these circumstances, the state’s role is to keep money target at a development strategy that produces the fastest possible outcome and which promises high future profits for enterprises and entrepreneurs. Therefore, banks, the stock market , private equity funds and other financial institutions should be encouraged, despite their own short term strategic desires, to consider engineering financial products and services targeting these specific areas of economic transformation interventions. The Dar es Salaam Stock Exchange’s Enterprise Growth Market (EGM) window is a reflection of this. The EGM is a financing window that allows small and medium companies, new business ventures and loss making enterprises (with plans for turn around) from either of the above sectors and beyond to access public money via Initial Public Offering (IPO) and direct it into productive sectors of our economy, for the benefit of many.

The DSE’s EGM is often considered the lesser of the two trading platforms — the Main Investment Market (MIM) segment and the Enterprise Growth Market (EGM) segment. However, if one dwells into it a bit deeper will come to learn that this statement, is a myth, because what is supposed to be is that the EGM should equally be seriously considered as a tool for new ventures, small and medium-sized local and foreign businesses to raise capital, attract investors — including institutional — as they grow and gain their exposure.

With a total market capitalisation of Tsh. 120 billion at 30th August 2016 and listing totalling 5 companies, EGM has proved that it is catalyst for growth. EGM offers opportunities for small and medium-sized companies to migrate from their current status into more sizeable corporates playing key catalyst roles in our economy in terms of: jobs creation, enhance the efficiency utilisation of various factors of production, providing more revenue to the government, offering more locally produced goods and services, increase export of our goods and services and earn foreign currencies reserve, etc.

As it were, liquidity is a necessary ingredient for listed companies, and it does not matter whether the listing is in the MIM or EGM. To partly address the issue of liquidity, at the DSE, we established the Mobile Share Trading platform with the main objective of providing many people an access to DSE services, so that many within our society can invest in DSE listed companies. The clout around this platform, as it is for the EGM has not been as we anticipated, however, as for many other new ideas, new services, new products — time and patient is important in order to ensure success. The fact is that many of us, practically or in perception do define the stock market in the context of either an instrument for relatively big corporate entities (for capital raising purposes) and/or an investment vehicle for rich-educated individuals (as investors); and so it takes time to address this notion.

The other aspect of liquidity is that, the experience has so far been, EGM listed companies enjoys lower priority, I guess the idea is that until these companies matures in their business cycle and are ready to relinquish more control or be seen as companies that have the potential for further growth, the situation will remain the same for a while. The other common misconception around these small-cap companies listed in the EGM, has been around the argument that institutional investors don’t (or shouldn’t, or can’t) invest in them; unfortunately there are specific investment guidelines by some institutional investors that prohibit these institutions from investing in start-up-small cap companies listed in the EGM. Again, I guess the assumption here is that these companies are more risky and that corporate governance is of sub-standard. However, Investors may wish to note that this is not the case, and sometimes EGM listed companies have superior corporate governance and risk management practices compared to companies on the Main Investment Board and they do maintain extremely such high level of practices throughout. One of the key requirement for companies to list their shares in the EGM is need to register a designated advisor (called Nominated Advisor) who guides them throughout their listing into the EGM, before they migrate into the Main board. What is important for us all is to demonstrate that EGM listed companies and other small cap companies are investable cases for institutional investors.

Furthermore, compliance to continuous listing obligations, especially on the key issue of good governance, applies the same across all listed companies; it a fundamental requirement that all companies listed in the DSE comply with the rules and regulations of the DSE and also ensure high standards of corporate governance, transparency and disclosure.

To re-emphasize, the EGM has and is offering the opportunity for individuals and institutions to invest in quality small and medium sized companies that have growth prospects. There are enormous benefits for SMEs in the agriculture or manufacturing sectors to raise capital and listing on the EGM. Such decision give issuers (i.e. listed companies) a much larger investor pool and provides opportunity for growth in a more wider context. It also provide issuers with an opportunity to profile themselves, as companies listed on the DSE form part of the market analyses conducted by research analysis, reports from DSE and daily DSE information on the news media. Through share options, companies on the EGM are also better able to retain and motivate staff.

Another factor to consider is that small and medium–sized companies’ growth strategies may include an element of acquisition of other attractive companies. Listing on the EGM provides companies with the opportunity for growth not only organically but also by acquisition. Therefore, as we make the necessary efforts to bring companies into the EGM, the DSE also fully support companies wanting to move from the EGM segment into the Main Investment Market (MIM) of the Exchange and we view this as one of the EGM major achievements. EGM started in order to give smaller and medium-sized companies a chance to raise capital, list and grow. We know that there will be companies that will grow sufficiently to qualify for migration or graduation into the MIM – this will be a moment of testimony that our broader objective has been met.

As is, much of our country’s growth and development emanates from small-to-medium enterprises. As we strategise on how to finance our agricultural and manufacturing industries, many of these will need to access affordable and efficiently priced capital to continue their growth trajectories — this is where the relevance of DSE and particularly, the EGM comes in.