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.
notesfrommoremi 