16 May 2017

Tanzania: Infrastructure Development Bonds for Financing Industrialisation


In my last week's article, I wrote about industrial development bonds and their relevance in industrialisation as well as how this financing concept works/might work in our environment.

In this piece, I cover the Infrastructure Development Bonds. Larger part of this article is dedicated into emphasizing the relevance of infrastructure development to a society. In the later part of the article, I will explain the concept of infrastructure development bonds.

As it is, infrastructure remains the dominant challenge for Tanzania (like in many other African countries) as we seek to enhance the pace of development and economic growth and as we pursue further growth via the Five-Year Development Plan (FYDP-II) whose main theme is industrialisation - now, it is difficult to industrialise without the supporting infrastructure.

The infrastructure challenge remains significant and somehow daunting; however, it is possible to identify specific areas that need to be prioritized.

Indeed, it is important to priorities, in order to ensure that resources are allocated efficiently and that the most pressing needs are met. In the mix of all this, financing remains a key constraint; and it seems to me that there is no single solution to our infrastructure financing gap. For citizens, policy makers and development partners, the most effective approach in addressing the existing infrastructure financing gap lies in creating a series of initiatives which help to catalyze a response from a broad spectrum of players in the financial markets.

The truth is that infrastructure financing gap cannot be tackled by the public or private sectors in isolation. What is needed is an effective collaboration of the public and private markets.

Building a 21st-century infrastructure is a critical component of the country's efforts to accelerate economic growth, expand opportunity, create jobs and improve the competitiveness of our economy. Investment in infrastructure is vital for sustained economic growth. Energy, transport, water and information technology services remain well below international standard, and this creates serious bottlenecks as we try to achieve the transformational rates of growth that have been witnessed in other emerging markets. The need is particularly stark in the light of rising populations, and rapid urbanisation.

It is therefore necessary for the government and its agencies to work to bring private sectors capital and expertise to bear in finding new financing ways to increase investment in ports, airports, roads, bridges, communication networks, drinking water and sewer systems and other projects by facilitating partnerships between the government and private sector investors.

Investing in a 21st-century infrastructure is an important part of the FYDP to build on the progress our economy is making by creating jobs and expanding opportunity for all hardworking citizens. Infrastructure like roads, bridges, ports, water purification plants and reservoirs provide critical services to consumers and businesses while protecting public health and the environment.

Traditional tools of financing infrastructure i.e. international development financial institutions, development aid, fiscal mechanisms, and domestic capital markets (via issuance of general purpose bonds) needs a re-thinking and re-strategizing because the current level of infrastructure investment is far too low, for them only, and as a result too many worthwhile infrastructure projects go unfunded. However, the government's initiatives and activities (such as those depicted in the FYDP-II) might help interested parties to build more of infrastructure projects by bringing together the public and private sector to identify challenges and explore creative financing strategies-in water, transportation, energy, communication, etc. Proposals in this (and others) echo into a growing push to make infrastructure financing more accessible to a wider range of institutions and individuals, provide more flexibility for the government, and offer more opportunities for the private sector to take an active role in financing, designing, building, maintaining, and operating public infrastructure assets. As a country, we should be poised to take significant steps in mobilizing new sources of funding to finance our infrastructure development. There is thus an urgent need in developing a financing strategy for infrastructure that aims to increase the resources available for investment such large and complex projects which requires us to mobilise different sources of capital through a variety of financial instruments, vehicles and markets. As is, our financial sector development has been hampered by the lack of liquid, longer-term, domestic investment instruments. This has made it difficult to address the vast and growing infrastructure needs. However, the current declining access to external funding highlights the urgent need for the government to mobilize resources from domestic capital markets to meet our development needs. This is where ideas such as infrastructure development bonds gains their traction.

In addition to funding, new structures are required to channel resources for our development. Given the nature of physical infrastructure projects that normally require large-scale and long-term financing in a mix of local and foreign currencies, attention has recently been paid to "infrastructure development bonds". We do not have to invest the wheel, we can draw useful lessons from emerging countries in terms of infrastructure development. Countries, like Malaysia, Korea, Hong Kong, Chile, Brazil, even Kenya have already begun to do this (Kenya's infrastructure bonds market is currently worth about Ksh155 billion, equivalent Tsh2.6 trillion). These countries have positioned their own private sector to play a role in infrastructure projects, and also to engage in strategic partnerships with foreign companies.

They have also created an enabling environment for effective public-private partnerships (PPPs). Since a major challenge in our country is a weak and fledgling private sector, it is clear that lessons need to be learned from these countries as to how to nurture the private sector.

Infrastructure bonds can be a more efficient form of financing as they reflect the long-term nature of infrastructure financing, which is often not available from the banking system.

They also bring more transparency to the transaction, and to the financial market as a whole.

To convince the private sector to increase its involvement in infrastructure financing, our government need to continue financial market reforms, targeting institutional capacity, market structures, product mix (in line with specific needs), etc. This will develop efficient markets for infrastructure bond financing, and foster an investment environment suitable for private sector activities.

I will end up by defining infrastructure bonds - these are bonds issued either by governments or by private entities for the purpose of financing infrastructure related projects, be it physical infrastructure such as in transportation, communication, sewage, water, electric systems, etc or social infrastructure such as hospitals, schools, parks and conventional centres and so forth.

 Marwa is the Dar es Salaam Stock Exchange Plc chief executive officer.


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