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.

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