Financing of Infrastructure Projects with Domestic Capital Markets

Improving infrastructure is not only critical for economic growth but essential for ensuring the improved wellbeing of the people. Easing and enhancing efficiency in which movement of goods, services, people, etc are conducted has significant impact in unlocking economic potentials. Empirical research shows that there is a strong link between infrastructure development and economic growth.

According to the African Development Bank (AfDB), road access in Africa is less than 35 percent, that just about 5 percent of agriculture in the Africa is under irrigation, that Africa’s average national electrification rate is about 45 percent, that the total electricity generated by Africa’s 54 countries (for its more than 1.2 billion people) is equivalent to electricity being produced and consumed by a single nation in Europe, such as Italy or France or the UK – but with about 60, 65 and 68 million people, respectively. There are also cases where the total electricity generated in an African nation, with 60 million people, is not enough to power a single airport in a developed country.

Will a continual dependence on foreign nations and/or financial institutions fill this funding gap for the infrastructure development? I guess, the answer will be no. We have been through this kind cycle and experience again and again. What Africa needs is to look into and develop its capital markets to facilitate mobilization of finances for its infrastructure development.

In these past few years, i.e., at least from 2015 today, our nation has been a good example (in my opinion) of how the capital markets could be used to mobilize domestic financial resources for strategic infrastructure projects – whether by issuance of Treasury bonds, or divesting part of the shareholding in a listed entity and placing the proceed on strategic investment projects or requiring payment of dividends to the Treasury to enable investment in such projects. On the Treasury bonds issuances and listing for example, the trend has been from TZS 595 billion in 2015 to TZS 1,225 billion in 2016, TZS 2,300 billion in 2017, TZS 1,895 billion in 2018 to TZS 2,395 billion in 2019 and TZS 3,500 billion in 2020, and a significant portion of these funds were directed to infrastructure project. Note that almost all of these funds a locally mobilized, as foreign investors are currently restricted to invest in such instruments (with the exception of East African). As a result, there has been also an increase of investor base (including retail investors) who invest to finance these projects, consequently a vibrant primary and secondary bonds markets, i.e., from turnover of TZS 305 billion in 2015 to more than TZS 2,100 billion in 2020.

What is the context? sourcing funds to finance a sizeable infrastructure project in Africa has always been fraught with difficulties. One major challenge is that the multilateral development finance institutions, which are dominated by the western developed countries, often impose stringent policy conditions to loans, and they are rightly so. But it also appears that the funding required to close the infrastructure gaps in a timely fashion is simply not easily in existence on these institutions’ balance sheets.

Another issue is that the major lenders, i.e., development banks, have historically been more active in financing social infrastructure such as health and education. Their approach to development in Africa has by and 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 serious attention in this region. While social infrastructure is important for economic development, however, economic infrastructure is even more urgent. Wealth creation and capital accumulation are facilitated more by investments in economic infrastructure.

The fact is the old approach of countries relying heavily on multilateral and development financial institutions to fund infrastructure has proved to be challenging. It is also incapable of closing the financing gap of such magnitude. 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, the pace for closing the infrastructure gap will be very slow.

The approach where geo-economic relationships are largely based on trade and investment as well as encouraging African countries towards looking inwardly for solutions related to financing our development, instead of the historical aid and assistance model, sounds like the better route to take. Furthermore, recent economic challenges in most nations have made traditional development finance institutions hesitate to provide resources for the significant but critical infrastructure investment required.

The truth is, our domestic markets are still relatively small, however needs to be developed slowly by introducing new infrastructure-based financial instruments by governments (i.e. infrastructure bonds, green bonds, retail-savings bonds, etc), municipals and local governments (municipal bonds), or even State-owned-entities and parastatals issuing bonds in local markets where both domestic and international players can access, then we can as well supplementing these efforts with pots to international markets issuances for Eurobonds or Diaspora bonds.

Traditionally, most African countries, have not consciously seen the capital markets as a critical source of finance for development. Yet raising debt financing in the capital market is one of the most potent sources of finance for rapid infrastructure development. This is because countries are able to raise funds for earmarked projects without policy conditionalities. And the cost of the funds, while relatively expensive compared with concessional loans from some International Institutions and multilateral sources, is often cheaper than loans from international banks.

It is on these bases, that countries have to be encouraged to pursue the development of domestic capital markets to raise funds for infrastructure projects. However, these funds should not be used to finance consumption or get misused and abused (like recent cases for some countries) but should be channeled directly into the financing of the much-needed economic infrastructure.

The railways, bridges, roads, canals etc in developed nations were largely financed with funds raised via issuance of bonds in the capital markets. This is because national budgets are often unable to support the required infrastructure expenditure. Country’s balance sheets in most cases lacks the fiscal space to accommodate the substantial financial outlays required for infrastructure development. That’s why nations should turn into tapping domestic market to raise finances for infrastructure development – that way also provide room for inclusive economic development, financial inclusion, etc.

Investing is shares — Understanding of sectors and companies

The need to carry research, analysis and/or investigation of the economy and sectors within the economy, when you are in the process of valuation of companies and shares one intends to invest into cannot be over emphasized. Such research and analysis, which then informs you whether you are about to pay the right price for a share you intend to buy, or not. In previous articles about similar topic, we indicated that one of the useful tools for analysing the outlook for an industry or sector is to use the Porter ‘five forces’ framework. We indicated that these forces identify the five underlying factors determining future profitability of the company you have invested into or are planning to invest into, these industry forces are:

  • Threat of new entrants
  • Threat of substitute products
  • Bargaining power of suppliers (buyers)
  • Rivalry among the existing competitors
  • Bargaining power of suppliers

Let’s look a little closer at the questions we need to ask when investigating an industry.

Suppose that you have to bet your entire nest egg on a football game. All you need to do is select a winning team. These are your choices: Young Africans, Simba, Azam, Biashara United, Tanzania Prison, KMC, Ruvu Shooting, or any of the 16 participating clubs in the Tanzania Premier League, probably the obvious choice for most of us would be either Yanga, or Simba, or Azam, given the odds.

Fortunately, this is where the comparison between football (or other) sports and investing in shares ends.

You don’t have to choose the absolute winner in investing in shares because there are lots of winning shares in second place, too. The basic point is that you can increase your odds of winning when you choose a winning industry or sector in the economy as part of your investment strategy. In the race to build wealth, all you need to do is to pick decent shares in a decent industry and do so on a long-term basis in a disciplined manner. Remember that investing in shares should be a long-term value investment as opposed to short-term speculative motives.

As mentioned above, a successful long-term investor (a value investor) looks at the sector just as carefully as he looks at the individual share of a listed company that s/he intends to invest in.

The important questions to ask yourself when you are choosing shares of a sector you intend to invest in, are:

  • Is the sector depicting the growing trend? – The saying “the trend is your friend” applies when choosing a sector in whose shares you intend to invest, as long as the trend is an upward one. If you look at three different shares that are equal in every significant way, but you find that share X is in a sector growing at 10 percent a year while the other two types of shares are in industries that have either little growth or are shrinking, which share would you choose? – Obviously the common wisdom, and other things being equal, will propel you to choose shares belonging to a growing sector.
  • Are the sector’s products or services in demand? – Look at the products and services that the sector provides. Do they look like items that the society will continue to want and demand for a foreseeable future? Are there any products and services that are on the horizon that could replace them? Does the sector face a danger of going out of fashion?
  • What does the sector’s growth rely on? – Does the sector rely on established historical trends, or on factors that are losing relevance?
  • Is this sector dependent on another sector? When one sector suffers, you may find it helpful to understand which sectors will subsequently suffer. The company or shares that you intend to invest into may be in the sectors that will be affected by side effects.
  • Who are the leading companies in the sector? – Once you have chosen the sector, you can choose from two basic companies, namely established leaders, which is a safe way to go or innovators, which have more potential.
  • Is the sector a target of government action? – Intervention by policy makers and politicians can have an impact on a sector’s economic situation.

Which category does the industry fall into? – Most sectors normally fall into two categories, namely cyclical category and defensive category. This translates into what the society wants and what it needs. Society buys what it needs in both good and bad times. It buys what it wants when times are good and holds off when times are bad.

Cyclical industries are those whose fortunes rise and fall with the economy’s rise and fall.

Defensive industries are those that produce goods and services that are needed no matter what’s happening in the economy i.e., food, housing, clothing, medical and health services, education, transportation, etc.

Once understood where the economy/market/sector is situated, based on the research and analysis — then comes the hard decision – which company’s shares should you buy from the stock exchange? Although every part of the investment decision-making process is important, this part is equally crucial and critical because it is your share-selection that will ultimately determine your investment performance relative to the rest of the market.

A very common question is, ‘how many different companies’ shares should I have in my portfolio?’ The answer is, ‘As many as you like’ – provided you have the capability to acquire them and are also capable of keeping track of all your shares by following on their corporate performance, corporate announcement i.e., dividend payments, appointment of people to fill in key positions in the company, rights issues, bonus issues, etc) market movement and other investors’ sentiment on the particular company.

Research indicates that if you own shares on only one or two listed companies, your portfolio is likely to experience a relatively high level of volatility (up and down share price movement) relative to the rest of the shares in the market. The volatility declines steadily, however, as the number of companies to which you hold shares increases. But be careful – if you spread your investments too widely, the performance of your portfolio will begin to simulate that of the market index, which you should be hoping to outperform.

Market Integrity and Good Governance: Trends and Changes within Exchanges

Market integrity is a cornerstone of fair and efficient markets, ensuring that participants enjoy equal access to markets, that price discovery and trading practices are fair, and that high standards of corporate governance are met. For this purpose, market integrity includes monitoring for market abuse and manipulative trading, fostering nondiscriminatory market access, price formation/transparency, strong disclosure standards, and investor protection. Stock exchanges play a pivotal role in supporting integrity: through overseeing listings, approving and supervising market participants, managing risk through settlement and custodian banks, reporting data, and enforcing rules as defined by regulators and by Stock exchanges themselves.

The 2007/8 global financial crisis prompted governments and regulators to develop and implement wide-ranging regulatory reforms. Throughout this period, Stock exchanges have demonstrated a high degree of resilience, reemphasizing their instrumental role in ensuring financial market effectiveness and systemic stability globally.

What has been the recent trend?

Regulators and Policymakers

In recent years, policymakers across the world have strengthened the regulatory framework with an emphasis on ensuring systemic stability and enhancing governance and good conduct in financial markets. Legislation has expanded the scope of instruments that must be transacted through stock exchanges, which are investing to meet this increased demand. The new regulatory demands span financial and non-financial risk management (including cyber risk): conduct of business, investor and data protection, prudential requirements, and fitness requirements for individual risk-takers and market participants.

The scope and complexity of these regulations has created an extraordinary challenge for stock exchanges, market participants, and regulators alike. Regulators broadly concur that ongoing dialogue between regulators, stock exchanges and market participants is desirable and that in some areas industry standards and codes of conduct may be preferable to a proliferation of legal rules.


The appropriate supervision and oversight of the entities who use financial markets to raise capital and whose securities are publicly traded is a critical element of market integrity. For example, setting minimum listings standards and ensuring appropriate disclosure of information is integral to the protection of investors. However, the changing profile of issuers (including small- and medium-sized enterprises (SMEs) as well as state-owned enterprises) and how Stock exchanges are responding to ensure the continued preservation of market integrity is becoming vital.

(i) Small- and Medium-Sized Enterprises

Allowing companies to access external finance enables funding of new investments, innovation, economic growth and job creation. To accelerate economic and productivity growth, policymakers are looking to exchanges to address some of the funding gap for SMEs. This gap is partly the result of the regulatory constraints placed on bank-based intermediation imposed in the wake of the 2007/8 crisis. Many exchanges have responded by launching dedicated SME offerings aimed at reducing fixed regulatory costs associated with listing, while still ensuring appropriate levels of investor protection. At the end of 2020, among 70 WFE member exchanges, there were about 40 SME platforms, with over 7,000 listed companies and a combined market capitalization of US$1.5 trillion.

(ii) State-Owned Enterprises (SOEs)

The rapid growth of economies with state-directed developmental models has increased the relative influence of state actors in the global economy. State actors are consequently becoming more prominent participants in financial markets. While the listing of public equity in SOEs is not a new phenomenon, it has become more common. The Fortune Global 500 index of the largest listed companies by revenues included more than 100 state-owned enterprises in 2020, compared to about 30 in 2000. As SOEs raise capital or simply list on markets, exchanges and regulators seek to maintain rigorous standards of investor protection, while accounting for the idiosyncrasies of these institutions (such as golden-share voting rights for state owners, state-appointed directors, or politically determined objectives). About 45 percent of Exchanges indicate that they have tailored listing requirements for state-owned enterprises in their jurisdictions.


Facilitating orderly investor participation in markets, while maintaining a level playing field, are key elements of ensuring market integrity. Stock exchanges serve a diverse set of investors with differing priorities and requirements for disclosure, market access, and investor protection. As investor expectations and composition change, stock exchanges have responded through, for example, investing in education of retail investors, adjusting disclosure requirements to take cognizance of evolving investor needs, ensuring the fair dissemination of regulated news, and the design of technology underlying matching engines and best execution solutions. Increasingly prominent institutional investors have their focus on market structure considerations, the trend towards greater demand for environmental, social and governance (ESG) disclosures, and the preservation of market integrity in the context of cross-border investment.

(i) Institutional Investors and Market Structure Issues

Over the past 50 years, at least in more developed markets, ownership of public equity has become increasingly concentrated in the hands of institutional investors. One study estimates that as at 2020, institutional investors owned around 75% of the outstanding shares of the top 1000 US companies by market capitalization, compared with 80% retail holding in the 1970s. In accordance with their increased prominence, these investors are becoming more vocal about a range of market structure related issues and demands of stock exchanges. Given their size and importance, Exchanges and regulators must consider their views while still accommodating sometimes competing demands from other investor groups and market intermediaries.

(ii) Foreign Investment and the Role of the Exchange

Cross-border investment is an engine of economic development and a substantial source of capital in frontier and emerging markets. Cross-border investment and market participation brings benefits to markets in terms of enhanced liquidity and the development of the local buy-side and investment community; however, it also poses new considerations for market integrity (such as cross-border supervision, currency convertibility in trade settlement, and equitable treatment of foreign investors). Many frontier and emerging market governments have adopted economic strategies to encourage such foreign investment and look to their local exchange as a key partner in such intermediation. Stock exchanges have, for their part, introduced mechanisms and adjustments to market structure to facilitate foreign investment and market participation.

Enhancements to Corporate Governance and Disclosure

Investors, such as sovereign wealth funds, public-sector pension funds, global asset managers, millennial retail investors, are pushing for enhanced disclosure of financially material ESG information. These include climate risks, compensation practices, diversity and inclusion, labor relations, responsible sourcing, and supply-chain management. Furthermore, investors are starting to demand that large corporates articulate their stances on the diverse challenges facing society. These investor demands are expanding the conception of integrity in public markets.

Because exchanges are often responsible for determining disclosure requirements and monitoring compliance, they tend to be at the forefront of building consensus and setting standards. Exchanges have taken the lead by requiring enhanced disclosure in their listings requirements or through issuing ESG-disclosure guidance for listed issuers. Between 2015 and 2020, over 30 exchanges published ESG disclosure guidance for their listed issuers. Exchanges also provide ESG-related training and information services for their listed issuers.

SMEs Experience of IPO and Listing

The 2017 World Federation of Exchanges (WFE) research which sought to understand companies’ experience of being listed and how this experience compared with expectations at time of listing – had asked companies whether, given their experience and what they now know about being listed, would list again, or not. Nearly three-quarters of all surveyed companies indicated that they would. This positive feedback among listed companies holds into our own jurisdiction where majority of companies also shares their generally positive experience following their listing.

In the said research, companies were also asked to indicate whether their experience of being listed was better than, worse than, or in line with their pre-listing expectations across a range of factors. While there are significant differences across indicators and geographies, companies across jurisdictions consistently reported a better-than-expected listing experience for certain indicators. The areas where companies consistently reported a better-than-expected experience were: (i) Impact on visibility and reputation; (ii) Effect on financial performance/profitability; (iii) ability to raise capital from a diverse investor base; (iv) Corporate social responsibility.

On the other hand, a reasonable proportion of companies reported a less-than-expected experience across the following factors: (i) Time and costs of aligning financial record keeping and reporting with listings requirements; (ii) Level of liquidity of the stock; (iii) Volatility of the stock price; (iv) Time and costs associated with meeting ongoing listings requirements.

What keeps SMEs Away from Listing? Our own experience

In examining the motivations and experiences of listed firms, the DSE’s 5-years participated in the Top 100 Mid-Sized Companies survey (as a co-sponsor) where questionnaires sought to understand what prevented unlisted firms from using public equity markets were shares and responded into, on it more than a half of the surveyed unlisted firms said they had need for capital financing and may consider listing but so far decided not to list. For these firms, the reasons for their decision not to list for now varied considerably across. Some SMEs decided that listing was too costly while others felt that meeting the listing requirements would involve changing too many internal business processes. Some SMEs were particularly concerned with transparency and also about costs of maintaininga listing, even though this was also given as a reason for not listing. Based on these responses one would conclude that, lack of information about listing contributed to the thinking and decision-making process for many SMEs.

Among the unlisted firms that said they had not considered listing, the reasons similarly varied across. Several companies mentioned concerns about the need to comply with various regulations, transparency and disclosure requirements, reporting standards, and associated costs being the major reasons, while a few companies mentioned unwillingness to lose control of the company. In line with the response that companies felt they didn’t know enough about listing, about half of firms said they had never considered listing.

Interestingly, very few companies that either considered listing and decided against it, or who had not considered listing, gave the availability of alternative sources of funding as a reason for not listing. This finding seems to reinforce the existence of a funding gap and the need to continue focusing on finding viable funding options for capital-constrained SMEs.

Firms were also asked about their associations with being a listed company. Unlisted SMEs had relatively unfavourable views of what it means to be a listed company. However, based on what surveyed firms said they associate with being a listed company, some of these views may be based on misperceptions about the experience of being listed on a main board rather than an SME board. The views of unlisted SMEs seemed to be shaped more by the experience of firms listed on the main segment than by those listed on the SME/EGM segment. For example, some unlisted firms strongly associated being listed with greater shareholder pressure and loss of company control. Likewise, strong associations of listing with shareholder pressure and illiquid trading more closely align with the reported experiences of smaller firms on DSE’s main investment market. In all these cases, there may be an opportunity for the stock exchange to emphasize the experience of firms on the EGM to counter these views among the pool of SMEs the DSE targets for future listings.

On the positive side a large majority of surveyed unlisted SMEs have more favourable associations with being a publicly listed firm. More than half of surveyed SMEs thought listing would have a positive impact on their visibility and reputation. Related to this, three-quarters expected that listing would lead to greater public scrutiny. And over three-quarters of these firms expect that listing would enhance their financial access. This would suggest that the decision not to list is a function more of a lack of information than a negative perception about listing.

How could listing be made more accessible?

While acknowledging that one of the major factors for companies not to consider raising public capital and listing is the lack of information, that’s why the DSE is currently addressing this challenge by implementing the DSE Enterprise Acceleration Program (DEAP) , the program aiming at building institutional capacity for SMEs’ owners and managers so they can run their firms sustainably, cognizant to the fact that to be able to attract diverse forms of capital finance including bank finance, private capital and public capital finance requires 360-degree way of managing firms affairs.

The difficulty in simply extending the more traditional equity market solution to SMEs is that the nature of SMEs (given their smaller size and often fewer years in existence) means that the relative costs of listing and compliance (initial and ongoing) may be higher than they are for larger, more established companies. Their more limited institutional capacity also means the quality of their disclosure is likely to be lower than that of larger, more established firms. Finally, SMEs are also often intrinsically riskier than more established firms. Therefore, the challenge for the DSE is to find ways to reduce the cost burden without unduly compromising investor protection. The suggestion could be the need for addressing both direct and indirect costs of listing while also improving prospective firms’ understanding of what it means to be listed, including their ability to meet the listings requirements. But also raising awareness, building capacities and gaining experience of listing by DSE introducing the non-trading listing platform whose aim is enhancing SMEs visibility and profile while also enjoying the listing experience may be helpful.