Why we should consider Capital Market for Infrastructure Financing

Improving infrastructure is not only critical for economic growth and development but essential for ensuring the improved wellbeing of the people. This is backed by empirical researches which shows that there is a strong link between infrastructure development and economic growth and development, where infrastructure development can be used as a strong platform that facilitate economic development, but also in the process of infrastructure development, economic growth is created — through enterprises jobs creation and other factors of production which are put into use down through the value chain, etc.
Looking at this from the African continent perspective — recent research report by the African Development Bank indicate that road access in Africa is only 35 percent as compared to the 50 per cent in other developing regions. And that just about 5 percent of agriculture in the region is under irrigation, while in Asia, 40 percent of the agricultural land area is under irrigation and 15 percent for Latin America. Furthermore, Africa’s average national electrification rate of 45 percent compares poorly with over 80 percent in developing countries in Asia and 98 per cent recorded in Latin America. No wonder then that the continent is the least developing.
Now, the overall African predicament is our predicament. For instance, the amount of capital required to close our energy infrastructure gap (from generation, to transmission and distribution) is estimated to be about US$ 18 billion by the year 2025 — given our intent to have developed the capacity to generate 10,000 MW of power in the next 8-years. And, if we take into account other financing needs in economic infrastructure areas such as transportation (roads, bridges, ports, railway, airports); telecommunications; irrigation; etc -– our financing need in economic infrastructure projects can be in the tune of US$ 30 billion in a space of less than a decade.
In the recent few years, many of us have been holding a view that with China stepping in and funding many economic infrastructure projects, as well as the establishment of BRICS Development Bank, that the funding gap may somehow be filled; but after all this long and undesirable pace of progress that we witness, experience shows that we are far from the truth. Much as it is true that funds can be accessed from wherever in the global financial markets space to finance our development financing needs, but we can not kick our development candle down the old financing mechanisms road — economic experimentation puts minimal expectation on this route. Thats why, to my humble view we need to consider seriously the issue of developing our domestic financial markets, especially the capital markets which in most cases has not been on the front thinking or priority areas of resource mobilisation by our political leaders and policy makers, not only in Tanzania — but also as we look across the continent (excluding South Africa).
What is out there for us to know
Sourcing funds for huge infrastructure development, especially for us, has always been fraught with difficulties. One major challenge has been that the multilateral development finance institutions, which are dominated by the rich western countries, often impose stringent policy conditions to such financing requirements and mechanisms that it appears difficult in some cases, given our circumstances and our governance mechanisms to access it when we need, as we need it. Further to that, it also appears that the funding required to close the infrastructure gaps in different parts of the developing world and the continent is simply not available on the balance sheets of the major Multi-lateral and Regional Development Financial Institutions. So there has to be some further thoughts on substitutions and complementaries.
Another issue is that the major lenders have historically been more active in financing “social infrastructure” such as health and education. Their approach to development to us, has by and large been related to “poverty alleviation”. And therefore, the critical role of “economic infrastructure” (roads, railway, ports, airports, irrigation) in spurring economic growth has not been accorded serious attention. While social infrastructure is important for economic development and social prosperity, however, economic infrastructure is equally urgent as it is important — it is important to note that wealth creation and capital accumulation are facilitated more by investments in economic infrastructure as well as the financial infrastructure and its institutions.
The truth is that the old approach where our countries relied heavily on multilateral and regional development finance institutions to fund infrastructure has proved to be not effectively workable after being in test for all these years. It is also incapable of closing the huge financing gap. In fact, neither the old nor the new institutions have the risk appetite for the kind of investments needed. If we continue to rely on these organisations and institutions the pace for closing the infrastructure gap will be very slow, as has been.
The possible way forward
The point is that traditional development finance institutions are hesitant to provide resources for the huge but critical infrastructure investment we require. The emergence of the new multilateral development institutions is a welcome development, but they are in no way a panacea to current infrastructure financing challenges. The game-changing infrastructure projects that can make a dent in the infrastructure deficit and move our economy to a higher growth path need to come from elsewhere. The place to start would be the time-tested sources of long-term finance such as the debt market — especially if this can be developed and blended from domestic perspective.
In my other articles I have tried to provide evidence in support of this argument and how this capital market concept worked in developed countries and now works in emerging economies, where infrastructure development bonds, industrial development bonds, municipal bonds, diaspora bonds, etc have been the cornerstone of infrastructure development in these economies. Since time immemorial huge infrastructure projects have been financed with funds from the capital markets. This is because national budgets are often unable to support the required infrastructure expenditure. In other words, the balance sheets of states lack the fiscal space to accommodate the huge financial outlays required for infrastructure development. On the other hand project finance and finances from the capital markets provides off-balance sheet resources that do not compromise the fiscal balance.
For example, the railways and canals in America were largely financed with capital raised through bonds in the first half of the 19th Century — “the American railways securities”, as they were called, were financed from both domestic and foreign sources —then why can’t we start to think that it is possible for us to build our railway systems, canals and bridges via this mechanism in the 21st Century? once we seriously decide to consider this approach, what will happen is that development financial institutions, global fund managers, global private equity firms, international banks, etc will participate as investors in our bonds issuance programmes, but whose pricing is determined by ourselves dictated by market conditions, as long as the investment climate is attractive.
I understand and appreciate the fact that our domestic market is still small and that meanwhile we may need a phased approach — to which I agree. International capital markets provide a viable source of capital where, for instance, local debt markets, like ours, are shallow and thin in liquidity. But as we engage in the process of achieving a sovereign credit ratings, which is a prerequisite to efficiently accessing finance from international capital markets, let us develop diverse local currency and foreign currencies bonds issuance programs which can also be accessed by international investors and listed in the local market.
Whatever the form and means, the truth remains to be — raising debt financing in the capital market is one of the most potent sources of finance for rapid infrastructure development. This is partly because we will be able to raise funds for earmarked projects without policy conditionalities. And the cost of the funds, while relatively expensive compared with concessional loans from multilateral development finance institutions, but can be cheaper than loans from banks. At the same time we get the benefit of enforcing our appreciation of the need for more transparency and good governance in financing our development in a sustainable way.
We therefore should encourage ourselves to go into capital markets (both domestic and international) to raise funds for infrastructure projects. Once raised, these funds should not be used to finance consumption but should be channelled directly into the financing of much-needed economic infrastructure.
Any suggestion that traditional finance institutions or development finance institutions would be willing and able to fund the mega projects required is an illusion. We must turn to the market to raise capital.

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Strategic Reconfiguration of Domestic Financial Resources

In the last two weeks, my articles highlighted some of the ideas proposed with regard to financing our industrial development which are covered on the book we launched two weeks, titled: “Tanzania’s Industrialization Journey 2016-2056: From an Agrarian to Modern Industrialized State in Fort Years”.  The book, now on book stores is co-authored by Mr. Ali A. Mufuruki, Mr. Gilman Kasiga, Rahim Mawji and myself. In today’s article, which is also the last in the series, I summarize some of the other thoughts and ideas we propose on financing of industrialization journey as well as our socio-economic development. Read on:

Developing and Increasing the Depth of Capital Markets

Our capital market is still underdeveloped. The local stock exchange lacks the depth, liquidity and velocity that can propel the financing of major developments within the economy (domestic market capitalization to GDP was only about 10 per cent; similarly, liquidity ratio is less 10 per cent of the domestic market capitalization while there are less than 20 domestic listed equities and currently only four outstanding bonds issued by private enterprises). Due to this low level of development global agencies fails to categorise us, even in the “frontier market” category – where our attractiveness to access global capital could be enhanced.

One thing that is clear is that for the past three decades, the stock market has not been a strong part of the country’s economic policies or its development plans, despite our embrace of the open market liberal economic policies, whose package includes the development of capital markets whose role includes facilitating long-term financing of enterprises and development projects, capital formation, the democratisation of wealth and income redistribution. The DSE has not been considered a primary national engine of economic development by the government or donors. For instance, instead of driving most privatizations through the DSE and creating a tax efficient structure for companies listed on the exchange and investors in listed securities, different policies have been chosen. The consequences of these policies are an economically weak stock exchange without adequate supply of securities in the marketplace. This is a big lost opportunity for financial inclusion, domestic capital formation as well as broad-based and inclusive economic development.

The Electronic and Postal Communication Act (EPOCA) as well as the Mining Act, both of 2010 contains provisions that requires companies in the telecommunications sector as well as companies with special mining licences respectively to sale portions of the shares to the public and subsequently list their shares into the local stock market. With some amendments in these laws, there has been some levels of compliance. Upon full implementation, these two pieces of legislation provides an opportunity to transform the landscape of the local capital market in a significant way.

Despite EPOCA and Mining Act, to avoid repeating similar mistakes (to those made during privatization) in the future, we all should deliberately aim to revolutionize the growth and vibrancy of the stock market in Tanzania by ensuring that for example, all new privatizations of state-owned enterprises should be conducted through the stock market. Tax structures should be enhanced to use tax as a strategic tool for capital market development and all key stakeholders should support growth of the local exchange. With a vibrant stock market (brought about by, among others, privatization through DSE, legislative actions aiming at, among other objectives, creating a more transparent corporate Tanzania, democratisation of wealth via economic empowerment by way of enterprises ownership, etc), entrepreneurs, industrialists and business owners will be attracted to use the capital market for enterprise growth and this act encourages more savings and capital formation. However, in the same vein — private sector should also be awaken to the understanding of its role in the capital markets space – as issuers, underwriters to transactions, as fund managers, as investment bankers, as investors, as market makers, etc.

Strategic Partial Privatization of State-Owned Entities

As indicated above, currently, Tanzania’s domestic listed companies market capitalization is only 10 percent of the GDP and total investment financed by listed equities is less than 3 per cent of the GDP while stock market turnover ratio is less than 10 per cent of the market capitalization. These ratios are way lower that where our attempt should be. This is a strong message that the country hasn’t been able to utilize the capital market to finance its development activities.

As it is, blending private domestic and foreign investment through shareholding of state-owned enterprises is vital for creating a vibrant local capital market especially for small markets like Tanzania. A combination of government’s 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 with strategic/industrial investors will bolster the financing of the national industrialization project.

If we can learn from our own experience, SOEs that are being partially privatized through a combination of controlling state ownership + strategic/industrial investors + IPO (and public listing) such as TOL, TBL, TCC, Swissport, Twiga Cement, Tanga Cement, and NMB have been socially and economically more impactful than other forms of privatization. Going forward, targeted and strategic partial privatization, where the state retains controlling ownership stake, combined with an invite for strategic/industrial investors to own and manage identified enterprises while allowing public ownership (via IPOs), should be encouraged.

State-owned enterprises and parastatals such as TANESCO, should be restructured and be encouraged to list into the stock market in order to access private funding sources. Entities with similar nature and mandates within the region are efficiently run following their restructuring and listing in local exchanges; KPLC and KENGEN in Kenya are both listed in the Nairobi Securities Exchange. Umeme of Uganda is dual listed in the Uganda Stock Exchange and Nairobi Securities Exchange. The same strategy may apply to TPDC and/or STAMICO, as companies with similar models and mandates within the region are listed into local exchanges e.g., ZCCM in Zambia is listed in the Lusaka Stock Exchange. Due to actual and psychological competitiveness and other requirements for listed companies, these companies perform far better compared to the situation prior to going public – they are all jointly owned by governments and private institutions and individuals.

Following their listing, these companies will be run efficiently, better governed/managed, more accountable, and will reduce using taxpayer money used to pay for inefficiencies and other economic burdens.

Privatization through listing will have several benefits such as: (i) provide access to efficient finance for entities, hence more quality job creation; (ii) democratization of wealth via economic empowerment to citizens; (iii) more government revenue (by way of taxes); (iv) growth of the local capital market; (v) ensuring transparency and good governance

Unlocking and reforming Pension Sector for Financing Industrial Development

There is an urgent need to better leverage our pension funds reserves, recent data indicates that our pension sector size is Tsh. 11 trillion, to benefit the industrialization project. Using pension funds money to finance the emergence of new industries is not a one-way street, because more industries will mean more jobs and therefore more paying members for pension funds. Without growing the numbers of paying contributors, our pension funds face an uncertain future. For many years now, pension funds in Tanzania have spent far too much money on lavish and unprofitable real estate investments, many of which are facing sustainability challenges at the time of this writing.

For Tanzania to utilize pension funds for industrialization and economic transformation, pro-active implementation of the recent reforms in the pension sector should urgently be pursued. Reforms such as segregating administration from investment mandate of pension funds, introduction of independent funds managers, introduction of supplementary schemes, etc. will unlock pension savings (funds supply side) for investment in industrial development. On this, the country may learn from Chile. Chile, back in the early 1980s launched reforms of their pension sector by introducing privately run pension funds. The monies these funds accumulated, running into hundreds of billions of dollars, enabled the implementation of the Chilean industrialization program. As a result, Chilean companies and projects prospered and expanded their operations far beyond their country’s borders to the point where they now dominate the entire business sector in Latin America. Chile is a good example of smart leveraging of the pension sector for sustained economic growth. On these basis, the importance of a well-functioning pension sector is hard to overstate.

One of the proposals to implement this is to set aside a certain percentage of the pension funds reserves (via investment guidelines and policies) that can be allocated to finance enterprises and projects in the sector identified under FYDP II. The financing model can be via private placements using special purpose vehicles (SPVs), participation in IPOs and debt/bonds issuances, investment through asset managers, private equity and venture capital funds, direct investments in safe projects, etc.

Strategic Reconfiguration of Financial Resources Mobilization

Last week we launched a book, titled: “Tanzania’s Industrialization Journey 2016-2056: From an Agrarian to Modern Industrialized State in Fort Years”.  The book, now on book stores is co-authored by Mr. Ali A. Mufuruki, Mr. Gilman Kasiga, Rahim Mawji and myself — it covers several topics relevant for the industrialization journey. One of the key topics discussed is that of financial resources mobilization. In today’s article, I summarise some of the thoughts and ideas we propose on financing of industrialization journey. I, however, will only focus on the enhanced role of financial market (especially banks and capital markets) in financing industries we propose. Last week I covered the role of FDIs. Read on:

As it should be, the process of capital formation requires us to consider key reforms and transformations in the banking sector (i.e., we need a good mix of commercial, investment and development banks) as well as the vibrant capital markets. Today, we have over 50 banks and non-banking financial institutions with combined assets about 30 percent of our Gross Domestic Product (GDP). However, the majority of these are commercial banks mainly focusing on providing short to medium term (up to 3 years) working capital funding to businesses — mainly supporting trading activities and consumer loans. A mix of banks including banks that will provide financing to industries is therefore urgently required.

In this endeavour, the government and private sector should consider introduction of financial instruments that will be used as investment platforms and vehicles for mobilization of investable funds i.e. common stock (for common ownership of enterprises), collective investments such as mutual funds (also known as unit trusts); specialist institutions such industrial development banks for industries; or instruments such as infrastructure bonds for infrastructure projects; municipal revenue bonds for local government projects; etc.). Such financial instruments should be linked to practical industrialization projects and entities that need such funding. This will require a lot of work, with strong coordination among various ministries, agencies and private sector and other supporting institutions – however, it is the right thing to do, and can be done.

Commercial Banks

Our commercial banks, we argue in the book, should be encouraged and motivated to get heavily involved and align themselves with industrialisation and transformation goals. By building their capacity to finance long-term projects and enterprises, for instance — banks should be able to extend their credit tenor to long term projects and can then match their long-term lending activities with capital finances that can be sourced from capital markets (i.e. by issuance of long term debt instruments and shares). Currently, there are only four corporate bonds outstanding in the stock market worth only about Tsh. 100 billion, all issued by banks. However, it makes sense for more commercial banks to tap into public money (via IPOs and bonds issuances) to maximize their ability to finance long-term projects and enterprises – Exim Bank and NMB have recently issued such bonds targeting retail investors, with good success. In other countries (e.g., Sri Lanka, India, Nigeria, etc), banks, by business model, are compelled to partly access public money, through an issuance of shares, bonds and other commercial papers, and to list into the stock market. Such long-term sources of capital are then matched with long-term investments and credits.

Banks should consider participating in the investment banking space (currently there is a big gap in this space), providing deal sourcing transactions and corporate financing advisory services, underwriting IPOs, arranging syndicated credits, etc.

In the past ten years (with the exception of 2016 where growth was subdued), Tanzania banking sector has recorded a compounded annual growth rate (CAGR) of about 15 per cent. This growth may be maintained. With such growth, by 2021, our banking sector size can be about Tsh. 45 trillion, up from Tsh. 27 trillion in 2016. Lending activities by banks, currently at Tsh. 16 trillion — about 60 per cent of the total banking sector assets. If we target to encourage banks to heavily engage in FYDP II priority projects and manage to direct 25 per cent of the total lending activities into the FYDP-II super priority projects, this will translate into a cumulative addition of Tsh. 10 trillion of money available to FYDP-II identified projects from our banks in the next five years!

To play such an envisaged significant role, banks have to be motivated to participate in the risky industrialization programs – this can be in the form of credit guarantee by the central government (or other institutions created for such mandates), interest rate subsidy, etc. Banks should also be encouraged to build their capacity to provide long term soft loan schemes for pre-selected industries such as textile and garments, constructions and furniture, cement, sugar and special engineering industries. With proper incentive and motives, banks can also be instruments for financing modernization, replacements and renovation of industries necessary to achieve economic level of production as envisaged in the FYDP-II.

Sector Specialist Banks and Financial Institutions

Tanzania should also establish specialist banks/financial institutions such as: (i) industrial development bank (targeting the manufacturing component of industrialization with mandates to also coordinate and integrate activities of various financial institutions providing finance to industries i.e. arranging syndication lending for industrial projects, etc.); (ii) more development banks, as is the case with TIB and TADB that provides wholesale lending for industrial and agricultural projects respectively; (iii) construction industry focused banks lending to building materials manufacturers; (iv) banks specialising in lending to small and medium (SME) industries, etc.

These specialist banks/institutions should be tailored to support industry-led projects and enterprises. Ownership and governance of such financial institutions should be strategic so as to enable accountability and efficiency. They should be public-private owned with clear mandates, among others, to provide direct and indirect financing to industrialization projects. These financing facilities and mandates will include seed capital, long-term credits at subsidized financing costs for pre-selected projects as identified in the FYDP II, rediscounting bills, providing guarantees, underwriting of and direct investment to industries issuing financial securities, etc. The government and private sector should see this as a backbone of the modern industrial economy. In this undertaking, the government should be willing and ready to take risks that cautious entrepreneurs would tend to avoid by providing heavy capital investments in pre-selected priority industrial sectors.

To facilitate establishment of these institutions, the government should therefore provide seed capital to these banks, while private sector (local and foreign) should participate via a combination of private placement and IPOs. With IPOs and listing, these institutions will be able to efficiently raise future capital by way of rights issues and/or bonds issuances.

Banks such as TIB Development Bank, in addition to the government’s equity financing, should consider to pro-actively access other sources of funds i.e., public funds from the local capital markets as well as strategic partnerships with international financial institutions that have shared interest like AfDB, IDC and PIC of South Africa, EIB of Europe, China Industrial Development Bank, etc. This will allow the bank to continuously access public money and other such sources whenever substantial funds are required, via rights issuances, issuing of corporate, infrastructure, industrial, or revenue bonds at competitive and efficient cost of funding set by market forces. Furthermore, this will increase TIB’s (or other established specialist financial institution’s) institutional capability to lead or arrange syndications with both local and international financial institutions.

Emphasis on Banks’ Financing of Small Scale Industries

Non-availability of credit and other forms of financing on easy terms has been one of the major handicaps of small industries in Tanzania. At different moments and capacities, the government and other financial institutions have conducted various schemes to assist industries in this sector by obtaining credit facilities, SME Credit Guarantee scheme is among these efforts. As it is, these efforts have not resulted into meaningful results, therefore, the need for the economy to have financial institutions that will finance small industries on comparatively liberalized terms with long term repayment periods i.e. 5-15 years and long term moratorium 12-18 months cannot be emphasized.  With the view of providing speedy flow of institutional finance to this sector, institutions such as those providing insurance and credit guarantees to cover major part of the risk on such schemes will be necessary.

To fast track the process, there can be a Small Industries Development Bank(s) – such bank(s)’ role will be to promote, finance and develop industries in small scale sector as well as coordinating activities of agencies which provide finance to small enterprises. Such financing and assistance can be in the form of equity type assistance by way of seed capital, can be via direct discount and rediscount of bills arising out of sale of capital equipment in small scale sector, etc.

The government may also consider providing capital subsidy to a certain percentage of fixed investments (such as land, building, machinery, equipment, etc.) units for expansion, diversification and modernization programs and expansion in order to promote small scale industries – industries such as furniture making, sports goods, writing materials, etc. can be reserved specifically for small industries.

In Financing our Industrialization Journey – A Smart way Forward

A few months ago friends (Mr. Ali A. Mufuruki, Mr. Gilman Kasiga, Rahim Mawji) and I, set out to pen down our thoughts about the nation’s industrialization journey, as we imagine it. These thoughts are now in a form of a book, titled: Tanzania’s Industrialization Journey 2016-2056: From an Agrarian to Modern Industrialized State in Fort Years. The book covers several topics relevant for the journey. One of the key topics discussed is that of financial resources mobilization. In today’s article, I summarize some of the thoughts and ideas we propose on financing of industrialization journey. I however will limit today’s piece on domestic capital formation and how foreign direct investments (FDIs) can facilitate this in the short-to-medium term period. Other proposals may be discussed in later pieces.

In the book, we propose and submit to our readers the appreciation of the fact that the process of capital formation is key to the success of the industrialisation project (which we also refer as a nation-building project). We argue that, for us to succeed, our industrialisation (and economic transformation) plan and strategy must be underpinned by an equal transformative change in our financial system and its institutions. We propose for the creation of indigenous systems of capital formation that would go hand in hand with efforts to industrialise. We see this as imperative to the process.

We have laboured the details about the necessity of public and private sectors working together in this aspect of industrialisation and its financing. We hold a view that sustainable industrialization depends so much on the availability of substantial volumes of financial resources and other forms of capital emanating from private sector, we argue that a high dependence on the capacity of the government to mobilize all the financial resources will mean unsustainable industrial development. It is on such basis that we propose a strong partnership between the government and private sector in mobilizing financial resources that will spur and fast track the country’s industrial development.

The Need for Cultural Change in National Finance Management

According to recent data, our country’s total gross savings as a proportion of our GDP is less than 25 per cent of GDP while our investment rate per year is about 35 per cent of GDP. We see this ratio of savings relative to GDP being far too low and far lesser even relative to other poor countries. We therefore argue for smart and thorough thought through policies, that will give the country the opportunity to enhance its national capacity to mobilize financial resources. Going by the recent global trend, we are on the view that the way out of underdevelopment lies in raising the level of our nation’s savings and capital formation.

Our development financing gap is covered by foreign money in the form of FDIs, loans and grants – which by itself isn’t bad, however, for sustainable growth, we argue, the country needs to gradually reduce this gap. This requires policy makers, the people and a whole nation to make a cultural reorientation, from a cycle of low savings and high consumption to high savings and high investment. East Asian countries have done that very well during their industrialization journey – China reached a savings to GDP ratio of 50 per cent and used its savings to fund industrial investments.

For us, the target should be a savings/GDP ratio of at least 30 per cent per annum in the next 5 years. We are not too naïve as we propose this, we appreciate our limitations as a country, as a society – however if we make industrialisation (and its financing) “a nation-building project”, that requires re-orientation and sacrifices for our current and generational development, then many possibilities are open, including this. At the current GDP of about Tsh. 100 trillion and at the anticipated compounded GDP growth rate of 7 per cent, and if we save by the rate we propose and can come up with financing tools that will mobilise such resources and channel them into productive industrial sectors of our economy, this will translate into an annual savings quantum of Tsh. 45 trillion per annum or (30 per cent of the projected GDP by 2021) from the current level of Tsh. 25 trillion per annum. The Central Bank and the Treasury can create monetary and fiscal policy tools, strategies and plans that can encourage savings and eventually create a cultural change in this area.

The need to attract more capital from foreign sources to fast-track Industrialization

In the book, we propose that as the country consciously increase its capacity to save and improve its capital formation capacity, in the short-to-medium term, we should target to leverage the growing economy and the opportunity it offers to investors by bringing in capital from foreign sources of funds (grants, FDIs, Diaspora investments and development finance). In 2015, Net FDI flow to Tanzania was about 2 per cent of the total FDIs to Africa – FDIs to Tanzania were mainly “resources-seeking”. We argue for the re-orientation as we target both “resources-seeking FDIs” as much as we do for the “market-seeking FDIs”. With such as strategy, the country should target at least 5 per cent of FDIs to Africa by 2020.

Our strategies should be to pursue FDIs flow into what we call super priority industrial projects i.e., garments/textiles industries, agro-processing industries, footwear, solar energy, construction and furniture, fisheries, trade in tasks/parts on electronic and assembly, etc. Upon managing to make Tanzania an attractive investment destination (by way of smart policies, conducive business environment, enhanced infrastructure, relatively good labour skills, etc.) we should achieve the objective of increasing FDIs flow into our economy.

Borrowing from the South Korean experience, once raised, foreign capital should consciously be utilized to gradually build our own capital formation capabilities. We need to match the mobilized foreign capital with a clear intent to monitor, manage and prudently utilize funds raised from external sources. That is, having managed to attract foreign funds, the aim should be to use the same for financing importation of capital goods, some raw materials and foreign technology that are to be used in the industrialization program. There should be no squandering of foreign capital or use of the foreign money for importation of unnecessary consumable items.

This is why we argue for the country to adopt a strategy of smartly balancing the inflow of resource-seeking FDIs (extractives, oil and gas, forestry products, agri-produce, etc.) on the one hand that normally bring in large amounts of investment dollars but do not create many jobs, and markets-seeking FDIs (light manufacturing such as garments, textiles, footwear, electronics assembly, paper industries, construction materials, agri-business and agro-processing, etc.) on the other hand that initially come in smaller quantities of money, but if properly tapped, can flow in much larger quantities, can create many jobs, bring in new technologies and build the capabilities of the nation over time.

Markets-seeking FDIs must be vigorously pursued especially in countries where light manufacturing industries such as China, Malaysia, Brazil, etc (garments, textiles, leather, electronics assembly, furniture, construction materials, etc.) are looking for alternative locations following the increase in cost of labour. The Chinese light manufacturing industries are currently paying US$ 500 per month, whereas Ethiopia and some other countries in Africa labour cost per month is US$ 50-70 per month. Bangladesh and Vietnam such costs are at US$ 100. Despite this, other key components of costs of industrial production that needs immediate unlocking by policy action include: unreliable, and expensive power as well as inefficient, underdeveloped, and expensive logistics.

We should take these into consideration as we position ourselves to host these industries by leveraging on our strategic geo-location, inexpensive and skilled workforce, trading blocs/pacts in which it has open market access (EAC, SADC, AGOA), competitive investment laws, high-quality infrastructure, competitive energy prices, domestic market size, and stable macroeconomics.