Municipal Bonds, a Viable Option for Funding Local Governments

In the past five years we, at the stock exchange together with some of our key stakeholders have been engaging local government authorities on the idea of using municipal bonds in the financing of local government projects, especially infrastructure projects. Up to this point, we have, in various forums and platforms engaged with municipalities of Kinondoni, Ilala, Ilemela and Tanga. We have also done the same to city councils in Dar es Salaam, Mwanza and Arusha, as well as Songwe region and in the next few days I will be in Simiyu on the same mission. Unfortunately, it is been five years of engagements and no single municipal bonds have been issues, while at the same time there is no deficit of social economic infrastructure projects that needs funding. In fact, we haven’t gone as far, despite opportunities in some cases of helping identify potential projects and preparations of Draft Information Memorandum framework that could have guided their further consultations. Why efforts such as these are necessary? and why are we still pursuing this cause? I will explain:

Municipal bonds are debt instruments issued by sub nationals such as local government authorities, municipalities and cities. They enable local governments to raise money to fund public projects, paying bondholders interests for the debt as the cost of raising funds. In the U.S, where such bonds were first issued during the urban boom of 1850s, their outstanding bonds issuance by states, cities and other sub-national entities exceed US$ 3 trillion, as of 2018. In Africa, only the Republic of South Africa cities of Cape town, Johannesburg, Ekurhuleni and Tshwane have issued bonds, so as Douala in Cameron. Dakar in Senegal as well as a few cities in some states in Nigeria have tried but so far has been without coming to its finality. It is therefore apparent that municipals and sub-national bonds market is still infant in not only to us, but in Africa, and countries municipals/sub-national entities are not allowed to borrow via issuance of municipal bonds.

I think it is important to appreciate the fact that it is not only the municipal bonds market that isn’t developed as it should, but so are other types of bonds, i.e. government bonds (issued by central governments and backed by national governments); Agency bonds (normally issued by stated-owned-entities, government agents or government sponsored entities); corporate bonds (issued by public and private companies); sovereign bonds (issued in foreign currencies and guaranteed by national governments targeting foreign investors); diaspora bonds (issued by governments and directed to citizens originating from the country but live somewhere else); nor are Islamic bonds (issued by government or Islamic banks and institutions targeting people of Islamic faith) — these are all underdevelopment in most African countries, despite funds mobilization challenges and the need for financing.

In spite of the above, the truth is that our Governments are overwhelmed by the rapid growth of cities, however, strategic planning has been insufficient as it is for the provision for basic services to residents, and the situation isn’t getting any better by the day. For instance, since 1990s, (earlier than that for us) widespread decentralization and devolution has substantially shifted responsibilities for dealing with urbanization to local authorities; yet municipals and local governments across Africa receive just aa small share of the national income to discharge their duties and responsibilities. Responsible and proactive local governments, municipals and city authorities are examining how to improve their revenue generation and diversify their sources of finance. Municipal bonds may be a viable financing option for some capital cities, depending on the legal and regulatory environment, governance and control mechanisms, viability of proposed investment projects, viability of vehicles for implementation of project financing and projects’ implementation, investors’ appetite and the creditworthy of the borrower.

Massive construction programs for roads and pavements, roads rehabilitation and parking, street and traffic lights, shopping malls, downtown markets, bus terminals, waste management facilities, flood management, sewage pipes, environment management as well as other social programs such as school milk programs, free uniforms and computers, etc. all these can be financed efficiently via issuance of municipal bonds by municipals and cities without over-reliance to central government for funding.

I understand that under the current legal/regulatory framework provides for a limited scope to increase resources by way of revenue collections because this role if highly concentrated to the central government, also there are several overlaps between the central and local governments in this space. However, it is also fair to argue that institutions that are closest to the people i.e. local government — must have pro-poor development programs that can be financed using internally determined financing channels such as municipal bonds. Therefore, reforms that will enable cities and municipals to borrow efficiently in the process of reducing their financing dependency on the central government, should be encouraged and pursued.

Much as there exists limited alternatives for raising finances to finance local governments development projects, but the attraction of bonds issuance may be clear, it will enable cities to borrow large amounts in lump-sum at a relatively competitive interest rates from a wide and diverse investor base than what could be provided in bi-lateral commercial borrowings. Once done, this will be a strong signal of determination by local government authorities, municipals and cities not to overly rely on concessional financing and confidence in their abilities to manage large revenue-generating investments. But this requires close leadership by a champion within the local government governance structure, such as a mayors as well as the political and administrative discipline that goes with such initiatives.

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Basics of raising capital for startups and SMEs

Capital is the lifeblood of business. If you run out of it and lack access to additional resources, in many a case the game is over. As the founder of a startup, you’ll find that raising capital is a significant part of your efforts and, for better or worse a major challenge. Unless you have a clearly defined plan and a path you will follow, you’re going to end up wasting precious time that could have been spent elsewhere.
So, understanding the basics of raising capital will be critical to your success. If you’re clear on what you need to do to get from where you are to where you want to be, you’ll be less likely to derail while you’re in the thick of it. Here are the factors to consider:
Preparations, Preparations, Preparations
This step is often overlooked but unless you want to be constantly pumping your own resources into your business, you’ll want to assess and address various aspects of your company to ensure its overall readiness. Not only will you need to examine your team’s overall health from every angle, but to research your industry, competitors and the market, define your products prepare financial projections and determine how much money to raise, plus decide whether to tap into debt or equity.
Preparations may be the most time-consuming and effort-intensive aspects of raising capital. But if you know what you want and outline the rationale behind those choices, you’ll find it easier to figure out whom to target and ask for what you need. Remember, as you court investors and financiers, they will be asking the tough questions. So, you’ll have to be equipped with all the relevant information you need that will make them understand the business you’re in closer to how you know it.
Just because you have decided whom you are going to go after and what amount to ask doesn’t necessarily mean you are going to get what you’ve requested when it comes to financial matters, the more options you can identify, the better. That way, you will always have a backup plan when you need it.
Among the different types of investors out there that you may consider are: family, friends, banks, microfinance institutions, venture capitalists, angel investors, private equity firms, business incubators, investment groups, crowd funding pledges and the stock market.
Keeping in mind that some forms of funding are costlier and riskier than others, you can also use lines of credit (i.e. letters of credit and guarantees), bank loans, notes and bonds offerings and the like. These financing options are often last resorts or backup initiatives, as they are more contingent on the condition of your personal finances and assets, versus the value or potential value of your business.
Searching from the web or engaging capital raising consultants will inform you about the necessity of a “pitch deck” (basically a brief presentation, created using PowerPoint, or Keynote which is used to provide your audience with a quick overview of your business plan. Usually used during face-to-face or online meetings with potential investors, financiers, and such business partners) and the ways in which to put an effective presentation. The fundamentals are that your presentation should be used to highlight the most attractive aspects of your business.
Keeping your target audience in mind and knowing what’s important to investors is key.
Generally, 10 to 15 of pitch deck slides containing information your company, your team, competition, target market, milestones, future plans and funding requirements is sufficient. Armed with this information, your prospective investors should be better able to decide on a course of action.
You can never know too many people. While networking, you don’t necessarily need to be constantly promoting your business; you should make sure you are helping other people. This will help you garner a positive reputation, and when you help others get what they want, they will be more likely to help you.
Keep in mind that you will face rejection when discussing your business with others. Some investors may not be looking for an opportunity right now. For other people, your concept simply won’t be the right fit. Knowing this while going in can save you a lot of heartache and stress.
Researching various investment groups and resources online can prove worthwhile as well, especially during this time and age where internet and web searches resources are significantly helpful. Just make sure that you don’t get so much sucked into the bottomless blackhole of the internet. Once you get what you want from the internet, use that in trying to reach out specifically. Such as by making phone calls or sending emails to specific individuals, so that you specifically address what you want while you also remain proactive when reaching out.
This will assist in finding tailored solutions streamlines your process of finding capital and getting the source of capital convenient and aligned to your business objectives and needs while addressing the growth aspect of your business.
It is however important to note that, even with all your ducks in a row, there are no guarantees you’ll get the capital you need from the investors you’re courting. But no problem-solving is part and parcel of entrepreneurship. Knowing all your options and what you can do to get the money you need can give you greater confidence when you encounter bumps in the road. And that is something you unfortunately, can count on.
In line with the above, as one of the interventions to help bridge the gap for the SMEs sector in the context of access to capital, the DSE is considering introducing the “DSE Enterprise Acceleration Program” with the objective, among others, providing capacity building to identified growth-start up and SMEs in order to enhance their capacities in key areas of their growth ecosystem as well as easing their access to various sustainable capital raising and financing options, both locally and internationally.

Stock Markets and the Economy

In last week’s article we covered years of stock market’s experiences for both the UK and the US, covering 119 years for the period starting from year 1900 to date. This was from the recent Credit Suisse which was the eleventh edition dubbed the 2019 Global Investment Returns Yearbook: 119 years of financial history and analysis.
Now, year 1900 was a long time ago. A lot has changed ever since, for instance over 80 per cent of the value of invested assets during then was in industries that are today too small or are extinct altogether, on the other side — a high proportion of today’s equity raising, and listed companies come from industries that were small or non-existent in 1900. But then, we quoted a line from the Biblical book of Ecclesiastes 1:10 which asks and says: Is there anything whereof it may be said, see this is new? It was here already, long time ago – nothing is new under the sun. So, it’s been 119 years of experimentation and experience and nothing new.
As you reflect on 119 years, add this into that — the first stock markets were established in 17th century London coffee houses. During this time, people who were interested in owning commercial shares of businesses came to places like Jonathan’s Coffee House. There, innovators such as John Castaing posted stock and commodity prices for “marketable securities in London,” according to the London Stock Exchange’s historical record. This was the “earliest evidence of organized trading,” moving from coffee houses to an actual exchange on March 3, 1801. Now, compare that to the typical of today’s market with sleek electronics and frenzied trading floors; but even with this, still nothing is new as has been foretold.
Whether new or not, in countries around the world, stock exchanges are being used to help businesses raise capital and give investors opportunities to back new and established enterprises. In recent times, there seem to be no geographical limit or bias to the stock market which means that individuals from a diverse array of countries can use stock markets to build wealth and invest responsibility. By any standard of measure, the functionality and utility of the stock market is becoming universal by the day – now this may be something new. In today’s article we go back into the basics, we will try to answer the question — what is the role and impact of the stock market in the economy?
Raising capital
Stock markets are, first and foremost, financial institutions established to help businesses and entrepreneurs come together to transact (buy, sell and trade) shares for the purpose of providing capital to enterprises that need it. Were it not for stock exchanges, entrepreneurs would be left to their own devices to find investors, and consumers could wind up at the mercy of unlicensed and unregulated financial products with no oversight.
Servicing Investors
Another role of stock markets is to act as an intermediary for large and small investors seeking to make money outside the realm of standard banking institutions. The role of a stock exchange in an economy is to maximize return on savings that might otherwise languish in static bank accounts with low returns. Stock exchanges promise and often deliver higher profits, and in return, investors receive measures of assurance, diverse opportunities and flexibility. Further, a stock exchange offers investors assurances via formal oversight on investments. There is the negative side as well, where for some reason the companies listed in the stock market does not perform as expected, and investors risking losing value of their investments.
Barometer of economic health
A stock exchange can serve as a barometer of a nation’s fiscal health, broadcasting the ups, downs, trends and shifts of the domestic economy. For matured markets, the relationship between a society and its stock exchange is so deeply embedded that analysts can influence both the domestic economy and/or the stock market it relies on by signaling optimistic outlooks, or the opposite.
Good governance and financial accountability
Sophisticated financial market systems require credibility and accountability if they are to function on behalf of businesses and investors as interested in ethics as they are in profits. For this reason, a stock exchange benefits from a formal structure upheld by rules, laws and regulations. Management and operational standards set by governments, bureaucrats and agencies overseeing stock exchange operations add authority and oversight to the institution, giving stockholders, investors and businesses checks and balances necessary for investor confidence.
Economic effects
The direct effect of stock market activity can impact a nation’s economy in multiple ways. Stocks fall, spending stops, consumers lose confidence and a nation’s financial state begins to falter. Conversely, stocks rise, confidence spreads, spending and investments grow. A nation’s mood can rise or fall on stock market activity and performance, which shows how important the role played by a stock exchange can be in a society’s social and fiscal fabric.
Expanding diversity
If one of the stock market’s roles is to bring together like-minded investors, exchanges also serve as fiscal melting pots, giving minority businesses an opportunity to place shares of new company assets before potential stakeholders who might not otherwise learn about diverse new products were it not for the existence of stock exchanges. Few economies can hope to flourish without infusions of new ideas, systems and opportunities — all represented by cash — which is why this confluence of financial needs and wants regularly merges on the floor of a vibrant stock exchange.

Important Lessons from Years of Equity Markets

Credit Suisse recently published their eleventh edition report dubbed the 2019 Global Investment Returns Yearbook: 119 years of financial history and analysis. The report covers 23 national stocks and bonds markets and almost all financial products, from stocks, bonds, currencies, and indexes that trade in these markets. Countries and markets covered in the report represented 98 percent of the global equity markets in 1900, but still represent 90 per cent of the investable universe as at the start of 2019 – some closely reflecting what is being said in the book of Ecclesiastes 1:10 — “Is there anything whereof it may be said, see this is new? It was here already, long time ago”. And so, here are some of the highlights from the 119 years:
At the beginning of the 20th Century in 1900, the UK equity market was the largest in the world accounting for about 25 percent of the world market capitalization, followed by the US (15 per cent), Germany (13 percent), followed by France, Russia and Austria-Hungary. This hasn’t changed significantly – 119 years later, the US market is now dominating, accounting for 53 per cent of the total world equity market value. Japan (8.4 per cent), and the UK (5.5 per cent).
Then there are some shifts in sectoral concentration in the equity market, but not so stunning. Markets that started in the beginning of the 20th Century were dominated by railroads, which accounted for 63 per cent of the US stock market value and almost 50 per cent of the UK value. Over a century later, railroads have declined almost to the point of extinction in the stock markets listed securities market cap, representing under one percent of the US markets and close to zero of the UK stock markets. It may be interesting to note that, although railroads stocks have declined reflecting the decline in the industry itself, but railroad stocks performance beat the overall market performance and indices in the US market. In fact, railroads stocks outperformed both trucking and airlines since these industries emerged in the 1920s and 1930s. Learning from this, could we finance then, Ok, there is nothing new – should we our SGR and other railroads projects by issuing stocks or infrastructure bonds to the DSE?, or would we be going to the US and UK of the 1900s? Anyways, if we decide otherwise, at least we know this is how history records the financing of railroads whose demand by those countries in the 1900s may be similar to our current case.
Another interesting set of facts presented by the Suisse Report which show the similarities between 1900 and 2019 are: the banking and insurance sectors, which was important then, continue to be important now. Industries such as beverages (including alcohol beverages), tobacco, utilities were largely present in the early 1900s and still survive today, as they continue to be among the top sectors represented in stock markets. In our case, we have only seven listed banks (out of more than 55), no insurance listed company, only one alcohol beverage, only one cigarette company listed – again no insurance company, no soft drinks company, no utilities company among the listed securities at the Dar es Salaam Stock Exchange. Isn’t it odd! Why is this the case at this time and age — with globalization, free enterprising, free markets, broad access to commonly shared prospects via common ownerships, over a century of experience and learning that we could easily be leapfrogged, why are such companies outside of the stock market space?
In the UK, quoted mining companies were important in 1900 just as they are in the London Stock Exchange today. Out of the many mining companies operating in our local environment because of our endowment, and they are very important to us today, but unfortunately none of them is listed in the Dar es Salaam Stock Exchange to form part of the domestic equities and domestic market capitalization. Are we such backward in this perspective to the point of being not closer to the UK and US of the 1900s? – what is the meaning of learning, what about the idea of inclusive growth and citizens economic empowerment?
Deflecting a little from Ecclesiastes, it is similarly interesting to note that of the US listed companies in 1900, over 80 per cent of their value was in industries that are today too small or are extinct altogether. The same situation applies for the UK, for the rate is 65 per cent. Other industries that have declined significantly over this period include textiles, iron, coal and steel. Now, as we pursue these industries, in 2019, should we understand that same industries controlled significant value of listed firms and market capitalization for stock markets in the UK and US in 1900, that citizens in those countries owned companies in these industries and benefited from their common ownerships via the stock market?
However, it is equally true that a high proportion of today’s equity raising and listed companies come from industries that were small or non-existent in 1900; actually, it is 62 per cent by value for the US and 47 per cent for the UK – what prohibits us from pursuing industries such as those in ICT, sciences, etc?
All in all, the value of the Credit Suisse report isn’t some sort of a roadmap of investment returns expectations and opportunities. It instead gives us a better sense of where the equity market has come from and its evolving in these past 119 years. We also should be mindful to the fact that a lot has happened during this period – two world wars, several recessions and financial crises, reshuffling in the global equity, financial markets and economies. If we only could reflect, learn and assimilate – so Ecclesiastes 1:10 implies.