On the Financing of our Infrastructure

During these past 20 years, many African economies have tried to develop domestic capital markets hoping to enhance local capacities to mobilize domestic resources for funding development projects and enterprises. And so, during these two decades number of stock exchanges in the continent has almost doubled, to the current 29 stock exchanges representing 38 countries, including two regional exchanges.

These exchanges though have a lot of disparity in terms of size, depth, liquidity, trading volumes, etc. The fact is the continent is characterized by a handful of prominent exchanges and then many new small exchanges. Yes, efforts are being made to boost exchanges by improving investor education and confidence, access to funds and make the procedures more transparent and standardized, however the outcome hasn’t been satisfactory. Almost all African exchanges lack a significant local investor base, as well as financial products such as those which can finance infrastructure projects, i.e. Infrastructure bonds. While, many countries have embarked in different infrastructure projects – for roads, railways, airports, ports, bridges, energy, irrigation, etc but only three out of 29 exchanges have infrastructure bonds issued and listed in their stock markets.

According to the African Development Bank (AfDB), road access in Africa is only about 35 percent as compared to 50 percent in other developing regions. In agriculture, just about 5 percent of agriculture in the Africa is under irrigation, compare to almost 40 in Asia or 15 percent in Latin America.

Africa’s average national electrification rate of 45 percent, is poorly compared to over 85 percent in developing countries in Asia and 98 percent in Latin America. According to AfDB, the amount of capital required to close the infrastructure gap in Africa is estimated to be in the region of over US$90 billion annually. So, we know we face a significant infrastructure deficit and its financing means.

In these three decades China has stepped in funding many infrastructure projects in the continent. Of course, with other countries, international development agencies and other development partners have continued to play the role in this space as well. But the question is, for how much long should Africa continue to highly depend on foreign countries and institutions to fill its infrastructure funding gap? Is there a possibility of enhancing its efforts to facilitate domestic mobilization of resources? Can these efforts be aligned to financial inclusion, economic empowerment and financial sector development policies and programs?

As we now know, sourcing funds to finance infrastructure project in Africa has always been fraught with difficulties. One major challenge is that development finance institutions often impose stringent policy conditions to finances, rightly so. But the fact also is that the funding required to close the infrastructure gaps is simply not easily in existence on these institutions’ balance sheets; hence a combination of both significant domestic resources mobilization and external funding is worth pursuance, at least in the short to medium term.

The other factor is that western lenders have historically been more active in financing social infrastructure such as health and education, their approach to development in Africa has by large been related to “poverty alleviation”. As it turns out, financing social infrastructure for poverty alleviation objectives isn’t the same as financing economic infrastructure which plays a critical role in spurring economic growth, which in this moment in time, has not been accorded the attention it deserves. While social infrastructure is important for socio-economic development, but, economic infrastructure is more urgent. Wealth creation and capital accumulation are better facilitated by investments in economic infrastructure.

The other fact is, the old approach of countries relying heavily on multilateral and regional development finance institutions to fund infrastructure has proved less effective, somehow incapable of closing the financing gap of the magnitude and size we face. In fact, neither the old nor the new institutions have the risk appetite for the kind of investments needed. If African countries continue to rely on these organizations and institutions, then the pace for closing the infrastructure gap will be relatively slow.
Given such context, the game-changing infrastructure projects that can make a dent in the infrastructure deficit and move economies to a higher growth path need to come from Africans’ own resources, and in some cases be supplemented by what we can be accessed from international financial markets. And, the place to start would be the debt (bonds) market where domestic savings will be intermediated and be able finance our significant economic infrastructure projects.

It is on such basis, that countries have to be encouraged to facilitate enhancement of capacities of domestic capital markets to raise funds for infrastructure projects. The good news about this is that ways can be found where external financiers and investors can use our domestic capital markets to finance local projects and enterprises, somehow enhancing our investor/financier base.

Railways and canals in America, and Europe, were/are largely financed with capital raised through issuance of products such as infrastructure bonds. From records of history, big infrastructure projects have been financed with funds from the capital market, why? because national budgets are often unable to support the required infrastructure expenditure. Country’s balance sheets in many cases lacks the fiscal space to accommodate the substantial financial outlays required for infrastructure development.

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Challenges and Opportunities for Regulating Commodities Trading

As it is — ambiguity, uncertainty, and lack of clarity regarding policy and regulations around commodities trading impacts the efforts to harness the potential and prospects in commodity markets; this fact applies across, at the local, regional and global levels. The possibility of integrating and harmonising the legal/regulatory framework and embedded institutions could unlock the potential and empower the commodity trading ecosystem to grow and mature in a manner similar to that of securities markets.
In the case here, integration and harmonization of legal/regulatory frameworks around storage, warehousing, marketing, trading, pricing and other supporting infrastructure around this space could be a matter of necessity. And so, the legal/regulatory environment relating to Warehouse and Warehousing Receipts Systems; the Mercantile Exchange, Cooperative Unions/Societies, Agricultural Produce Marketing Boards, Capital Markets and Securities, etc will have to harmonised to enhance the coordination for efficiencies.
Commodity markets are critical — studies point out high correlation of commodity prices with domestic economic growth, inflation and the pace of exports in developing countries. To bring this perspective into context – let us consider our case: as data indicates – we are a commodity dependent country, agriculture is still one of the most important economic sectors contributing about 25 percent of the National GDP and over 75 percent of the rural household income. The Sector provides almost 95 percent of the National Food requirement and livelihood to more than 70 percent of the population. The Sector contributes about 30 percent of total exports and almost 65 percent of the raw material requirements for industries. These, and others, are clear indications that the sector has a strong influence in the national economy.
However, for the realization of expected sectoral growth level of not less than 8 percent (it has been at about 7 percent according to recent data), it is important to ensure that formal commodity marketing and trading systems are effective and efficiently working, capable of guaranteeing social and economic benefits to producers, traders and consumers. As it stands, the current commodity marketing and trading system is yet to attain such desired outcome. The marketing and trading systems and its embedded institutions are fragmented, uncoordinated and unpredictable. There are sentiments that for most agricultural produce, farmers are receiving the low end of the bargain while consumers’ prices are high with no relationship to the transaction costs. Likewise, the regulatory systems, marketing institutions and enforcement mechanism are somehow inefficient to the expense of farmers and sometimes consumers.
The development of organised commodity market(s), exchange platforms and related market infrastructure and ecosystem has of recent assumed significant interventions in the financial development policy of many countries. As stock markets assumed importance as instruments to enhance allocative efficiency of financial resources, commodity trading /exchanges emerge as a powerful instrument in managing price risk management, so vital for sustained economic growth.
The Regulatory Agenda
This being the case, what should be the regulatory agenda of commodities regulations? We underscore that we are at an early stage, but as we strive to become sophisticated, let’s consider where the global regulatory agenda is as far as commodity trading is concern. These are some global trends: (a) Paper trading value for commodity far outstrips physical trading; (b) There is prevalence of a complex range of trading strategies and technologies; (c) Trading houses are emerging as major players, in some counties, replacing banks; (d) There is financialisaton of commodity trading with more of fund management, investment products and diverse categories of investors participating in trading.
Other global trends include: (e) Consolidation of the commodity exchange industry that extends to other market segments; (f) the growing power of commodity producers; (g) growing linkages between commodities markets across the world and a wide range of investment and trading products; (h) volatility in commodities markets quite often turning into issues of public unrest leading to ad hoc policy interventions and measures; (i) and the issue of managing the interests of various stakeholders engaged in the value chain of commodities trading, and so on.
Influencing factors
These trends and developments could surely have a bearing on the regulatory framework that needs to be built up, going forward, our commodity trading system will have to make way for a complex market structure with more players, products, instruments and innovations that could call for a proactive and agile regulatory framework. At present, the scope of merchantile exchange is quite narrow and limited to just few envisaged products. Some brokers have been identified, trained and licenced, but as it has been the case for our stock exchange — the strategic and operational roles of banks, market makers, liquidity providers and institutional investors as far as trading in commodities exchange is concerned is yet to be clearly determined, this could limit appetite and liquidity in the exchange.
Historically, at the global level, the development of regulation of commodities trading has evolved under these six key areas: (a) price stabilisation and liquidity enhancement instruments; (b) transparency and reporting; (c) regulation of Over the Counter (OTC) trading and dealing activities; (d) banning certain trading strategies and actors; and (e) strengthening regulatory and supervisory authorities and international cooperation.
The background for an integrated framework for commodities regulation at the global level was initiated by the G20, followed by several other global and regional regulatory initiatives that, among others, include: the Dodd Frank Act, IOSCO (Principles for the Regulation and Supervision of Commodity Derivatives Markets), Markets in Financial Instruments Directive (MiFID), European Markets Infrastructure Regulation (EMIR), Markets in Financial Instruments Regulation (MiFIR), and Market Abuse Regulation (MAR). By the way MiFID II has further strengthened the scope of monitoring trading activities.
Regulatory issues
In conclusion, with respect to regulation enhancement and better coordination, the key issues to consider include: (a) bringing commodity firms, venues and products under the merchantile exchange regulatory scope; (b) greater regulatory oversight by transaction reporting for commodity trading; and (c) commodity benchmarks used in financial contracts to be brought under regulation.

Unlocking the Potential of Unclaimed or Abandoned Assets

Almost daily, for the past ten years, on my way to the office and back — I pass a property (a beautiful two-floor house) which seem to have been abandoned by its owner(s), or to the best of my guess – the owner may be a deceased fellow whose next of kin does not know there is beautiful property in that Ununio Street left unattended by their “passed-away relative”, outside the house there is a car nearly destroyed by the constant rainy and sunny weather plus the effect of a house built in the swamp area. During these past 10 years, as I pass this house, I (albeit unconsciously nowadays) have always said to myself — how many such properties, monies, shares, bonds, dividends and interests, etc, that remains idle, abandoned and unclaimed in this country? which could better be converted into investable productive assets? I know the answer to my “how many?’ question calls for improbable responses – but the spirit to it is that there is need for raising consciousness, development of a policy, creating the necessary legislative framework/environment as well as ensuring there are instruments and the infrastructure to enable us unlock the potential buried in such unclaimed assets or abandoned properties.
As we contemplate this, we may wish to appreciate the extent of such unclaimed assets or abandoned properties may be significant – I have recently read the situation in Kenya. In Kenya, where there is already a legal framework (i.e. Unclaimed Financial Assets Act) as well the Institutional infrastructure (i.e. the Unclaimed Financial Assets Authority (UFAA)) to address this issue. The UFAA has recently published its past financial statements ending June 2017, as at that date, the Authority held Kshs.8.5 billion (equivalent to Tshs.170 billion) in unclaimed assets mainly received from banks, SACCOS, and Insurance Companies; while the amount held in trust for listed shares was valued at Kshs.16.4 billion (equivalent to Tshs.330 billion), these being shares held in trust pending the transfer of title to the UFAA. This is a whopping total of Tshs.500 billion of unclaimed financial assets, excluding other assets classes such as properties. I have not come across statistics here at home that gives us a glimpse of the size of unclaimed financial and other assets or abandoned properties – probably there might be the need for commissioning a survey to work on this revelation.
By the way, I seem to be moving a bit too fast — what is the meaning of unclaimed assets in the first place? Unclaimed assets include, but not limited to: savings or checking accounts with banks, uncashed cheques, payroll and wages, matured certificates of deposit, shares, bonds or mutual funds (also known as unit trusts), travelers’ cheques or money orders, contents in the safe deposits, gift certificates, insurance company demutualization proceeds, death benefits from life insurance policies, etc.
Let us make some more sense by considering the case for assets in banks — in a bank, accounts may be at risk of becoming unclaimed assets when there is no demonstrable owner activity, such as depositing or withdrawing money from an account, or logging in to an account or communicating with the bank. In practice, an account is considered inactive when the customer has not shown any interest in the account/asset for a considerable amount of time. In such cases, the practice of many banks, when the account has been inactive for a certain amount of time, will be to close it; which begs the question, when the account is closed where are these assets remitted? Similar cases apply for dividends on listed companies, or interests on investment in bonds, or insurance claims, etc.
What is the argument? – the argument is, each year billions of Shillings in dormant or lost bank and investment accounts (either with banks, or the stock exchanges’ brokers, or insurance companies or listed companies, etc) go unclaimed, renders them not effectively used as productive assets within the economy. In other places, such unclaimed financial assets or abandoned property will put be under the Government’s Authority, either a division within Treasury/Ministry of Finance or a separate Regulatory Agency responsible for holding in custody and safeguarding those assets until the rightful or until claimants come forward or are located. While under the Government custodian, and as efforts are being made (with no cost to the owner), to reunite rightful owners or heirs with their unclaimed assets, which is remitted to the Government Authority by some of the above mentioned entities after the business loses contact with a rightful owner, for a period of a prescribed number of years – such assets could be legally and formally used as investments in productive activities within the economy, and in the process creating jobs, earnings the Government more revenues, enhancing liquidity within the economy, increasing the country’s gross domestic products, etc.
Who could potentially be holding unclaimed assets? As alluded above, unclaimed assets or abandoned property holders include banks, savings and credit unions, insurance companies, stock brokerage firms, utility companies, businesses, listed companies, etc.
In conclusion, there is another argument to this – by developing policies and enactment of the unclaimed assets and/or abandoned property legal framework, the Government will be executing one its duties and commitments, as per the social contract, the duty of protecting the citizens and their properties, i.e. by returned millions of shillings to current and/or former owners of such assets.