Africa-Press – Tanzania. Experts are suggesting that bonds present prospects to raise funds to finance long-term capital-intensive ventures. However, municipal fathers this option has drawn little attention to local government policy makers. ‘Daily News business reporter, ABDUEL ELINAZA, interviewed DR HILDEBRAND SHAYO to establish why authorities in the country are yet to tap into this potential.
Question: Across the country economic infrastructures have increasingly become one of the drivers of growth. How can the country finance these infrastructures using alternative sources?
Answer: Most recently, there has been an exaggerated emphasis on raising funds through alternative financing ingenuities, particularly capital market borrowing. In my point of view, with a steady decline in the obtainability of bank loans, our government and project creators are more and more using or suggesting different funding sources such as wealth funds, pension funds, public-private partnerships, and bonds to finance infrastructure projects.
But, for innumerable causes the use of bonds to finance such projects in Tanzania remains short or decision makers are afraid.
Question: Why?
Answer: In my assessment, there is absence of vigorous secondary market on which bonds can be traded, there is immature state of non-bank financial institutions, there is a weak institutional investor base and lack of proper rules to secure investors and make bond issuers accountable, and importantly a high level of strangeness with the process of structuring and issuing bonds to decision makers.
Question: What type of a bond should the central or local government issue?
Answer: Bond is a debt security allotted by a public agency to raise money, habitually for infrastructure projects financing. Sovereign bonds are generally used by national government(s), and municipal bond(s) are used by many cities to finance assets that can have long erm multiplier effect to the issuer and to the economy.
In Tanzania, both government agencies and businesses can select from diverse types of bonds to fit the best vehicle for raising capital desired. Not all bonds are the same; in fact, the structure of a bond is of itself a robust determining factor for money investors may be willing to pledge. Issues of interest rate, maturity period and elasticity in paying interest, and the length of the lock-in period are in my view amongst the most imperative determining factors.
Question: Are bonds works well for the government than banks loans—interest wise?
Answer: According to maturity, these financing instruments differ on the interest rates they offer. Nearly, bonds pay a fixed rate of interest up until the bond matures, while others offer floating rates that are reset regularly [usually every six months] to adjust to changing market interest rates. There is one exceptional bond termed as zero-coupon bonds. This type, differ from other types of corporate bonds in that no interest payment is made to holders until the bond matures.
At the maturity, for zero coupons a single payment is made that is higher than the initial price at which the bond was bought.
In general, bond can be classified as secured, senior unsecured bonds, and junior or subordinated or unsecured bonds. Important thing to note is that secured bonds are financed by specific assets that businesses must pledge as collateral. Unsecured or loose bond that has no collateral backing are recognized as debentures and as such has a general entitlement on the business’s assets and cash flows.
Question: The country has five cities and several local governments comprised of urban and rural district councils that have autonomy in their geographical areas. Why aren’t these entities using bonds to finance their projects?
Answer: To-date, I haven’t heard of any city or local government entity to have issued bonds in the country. From time to time, this disturbs my thinking as I want to know the problem behind. We all know that these entities are in distressed need for infrastructure investment for constructing public assets for instance; bus terminals, market centres, wholesale water, long-haul truck parking areas, leisure centres, private parks you name them. These projects also open business and employment opportunities. Municipal bonds, if structured well could go a long way to tackling this gap.
To best of my knowledge, there are many reasons and without being specific and without offending anybody who might be touched by what I am about to say I will mention just a few.
On one hand there in my view a lack of local capacity and technical ability to prepare a municipal bonds instrument. Thus, within these entities, projects that could attract investors are either politicised or are not structured in ways that ensure a sufficient return to prospective investors.
On the other hand, there is also a sense that municipal leaders, whether appointed might lack the interest or ability and capacity to use such transparent financing instruments since most civil servants and who would be prospective investors are not exposed to comprehensive financial best practices or necessary lack skills to help them get engaged efficiently.
Question: What are other reasons denying cities and municipals to issue bonds to finance projects?
Answer: Listening the manner and discussion on bonds for instance, municipal bonds, agency bonds, corporate bonds, sovereign bonds, diaspora bonds and Islamic bonds are salted and potential of their use in Tanzania (excluding government) bonds—Treasury bills, Treasury notes, Treasury bonds and Treasury inflation—protected securities as source of financing option there is one vital feature contributing factor that is often ignored. This is the weakness in principles governing the roles and powers of cities or LGAs to raise finance and the capacity of central government to fine-tune these regulations based on political impulses.
Policy makers in President Samia led government may have diverse opinions but in my view, flaws create an uncertain environment in investment venture. In any given economy, prospective issuers cannot be assured that their preparatory work will ultimately lead to a transaction and likewise can’t be sure that their efforts can be undone at the last minute by a government.
Question: Is there connexion between creditworthiness of a city or a particular municipality and ability to issue a bond to raise capitals? What is determining factor?
Answer: To attract investment from institutional investors like pension funds and insurance companies, city or a given municipality must prove their creditworthiness. Here creditworthiness can be understood as both the willingness and the ability to borrow. When national regulation and capped limits isn’t clear, this alone limit issuance worthwhile. Likewise restrictive behaviour of national government to cities or municipals can also constraints them from issues a bond.
Question: Given constraints on municipal or cities bonds are created by systems beyond their control, what should be done?
Answer: I think President Samia’s led government and the team supporting her in resource mobilisation for various strategic projects need to simplify enabling regulatory and legal settings on the sub-national level. These rules must clearly explain how much cities or municipals can borrow and under what conditions. Only then will the country’s cities be able to use bonds to finance the infrastructure their citizens so desperately need. Trust me, this will be a game charger in financing trajectory in Tanzania and a mammoth multiplier effects will be seen.
