Africa-Press – Tanzania. UNDENIABLY, Tanzania at all measures has one of the fastest growing economies in the sub Saharan countries. Its economy has performed well, more than ever in the last five years, conducing to the re-classification of the country from the low income only country to a lower middle-income country by the World Bank.
According to the National Bureau of Statistics (NBS) projections it is expected that the population growth of the country will decline. The national projections indicate that the Tanzania population growth rate will decrease from 3.1 per cent recorded in 2013 to 2.8 per cent in 2035, with a population estimated to reach 89,204,781.
Further analysis of the NBS figures suggests that for the Tanzania Zanzibar, the population growth rate will decrease from 3.4 per cent as recorded in 2013 to 1.9 per cent in 2035.
The relatively high population rate of growth cited here feeds from major economic activities in the sub-region resulting in an urbanization process which is taking place along all Tanzania’s area but more intensely directed to cities where dynamic economic activity is expected to generate not only employment opportunities but taxes to the government too.
This development of rapid urbanization besides changing the patterns of poverty distribution between urban and rural areas is also creating new challenges for the recipient cities and towns ranging from socio political and economic concerns to infrastructure and environmental issues that all need funding to be met.
Daily news dated 26th October 2021 front page traded with president Samia accenting municipal funding in Tanzania, meaning a new innovative financing approach is needed to have in place infrastructure to cope with urbanisation.
President Samia went further ordering Ministry of Finance and Planning to come up with procedure that would see immediate introduction of a municipal funding facility to help LGAs to bankroll their projects.
Much as President’s Samia order to MoFP is well-timed, prompted a recall of a discussion that draw experts’ sentiments on how bonds could be a game changer in financing projects in Tanzania (see daily news 21st September 2021 pg. 18, followed yet by another assessment of critical factors for municipal bond to work in Tanzania (see daily news 5th October 2021 pg. 13).
Bonds are in my view a foundation of public development finance. Bond finance isn’t new and according to history dates to the 19th century. For education reasons, in its simplest form, a bond is a debt, or a loan earned by a governmental entity. These are issued and sold to the investing public, and the proceeds are typically made available to finance the costs of a capital project.
If the bonds are being issued for the benefit of a non-governmental borrower, the proceeds are often loaned to such a borrower, and the borrower then makes loan payments comparable to when principal and interest are due on the bonds.
Bondholders receive interest over the term of the bonds, and such interest is often exempted from national, state, and local income taxes.
The tax-exempt status of certain bonds makes them an attractive investment option for investors. Without dwelling in detail on what are president’s view on this subject, it is enough to state that for this funding instrument to work in our environment policy change and financing behaviour towards revenue generating projects must be re-examined and if possible, policy changed.
Equally, as Tanzania prepares to deepen its use of municipal bonds it may be in my view, valuable to take stock of worldwide experience with these issues and to assess why some nation’s municipals have succeeded but many have failed in preparing the way for broader, market-oriented municipal credit systems.
The purpose of this assessment is to describe how access to tax-exempt financing could not only support local infrastructure investment in Tanzania but highlight what type of projects could qualify and importantly what lies ahead as far as municipal development funds are concern.
Raising capital, carrying onlend capital to municipalities or other institutions investing in local infrastructure projects and collecting debt to service payments is critical for each municipal envisaging to take up this innovative financing.
The way a municipal performs these functions will determine whether it helps or hinders the development of an overall municipal credit system.
This is a crucial issue especially given that local governments have been widely criticized for under-investing in infrastructure projects that could unlock economic potential that remain unexploited across the country.
To place analysis in viewpoint, as government now orders MoFP to look for procedures that would encourage project execution in a whole range of sectors at municipal level, there is a need to clarify difference between financing and funding.
The terms financing and funding are often used interchangeably, and not been able to know what you are looking for one can easily get lost. When bearing in mind how government need to enable infrastructure development, it can be helpful to make a difference, on one hand, between financing of infrastructure, meaning how the construction costs and other development costs are paid, and other hand, funding of infrastructure, meaning how the built infrastructure is paid for over its life.
Government support for infrastructure development may be necessary or desirable at both the financing and funding stage for municipals. To use an example, financing for a road from any source that public or private is unlikely to be available unless it is clear how maintenance costs will be paid, and in the case of private financing that the funding monetary stream for both maintenance and re-payment of the financing must be clear and adequate.
Most of the funding of road infrastructure projects is from taxation with merely a relatively small portion from user charges i.e., tolls. Likewise, the funding of utilities projects to work is dependent on user charges.
While I do appreciate the eagerness for MoFP to open for municipal funding facility as instructed it is very important to remember financing for projects is most challenging in countries where the funding source is not clear e.g., unknown demand or not sufficiently creditworthy or reliable e.g., a thinly capitalised off taker.
Distinction between financing a project and funding a project in my view goes some long thus why despite estimates of huge amounts of private capital being ready to be deployed to suitable set-up projects, comprising capital specifically focused on developing markets or bus terminal etc., the infrastructure gaps have remained while capital chases the more limited number of bankable projects.
It is not my plan to start on why there are no bankable and well-prepared project documents but to open peoples mind on funding and financing issues that occasionally could be misjudged and as result weaken the target envisioned objectives to unearth economic opportunities available.
As Ministry of Finance and planning get ready to come-up with technique to pave way for local authority to grab innovative funding opportunity it is vital to bear in mind that the funding challenge always describes why large amounts of private finance has been available to develop certain for projects at viable interest rates, nonetheless, the same liquidity has characteristically not been accessible for other projects at any cost, despite such projects being critical to the development ambition.
Given the significance of critical infrastructure to economic development, envisaged bonds to be issued by municipals will need to identify which projects can real take off ground.
A call for policy re-thinking on how municipal bond could work in Tanzania is based on fact that no municipal will be able to attract serious infrastructure investment apart from building bus terminal or marketplaces.
Existing overlapping roles and unclear economic power jurisdictions unless changed would hinder municipal to develop user charges or fee-based projects such as to build roads, section of railway line, develop and manage ports, power station and water infrastructure. User charges and the role of government and clear roles between central government and LGAs must be defined.
In addition, there is a need to continue strengthening economic steadiness with a close eye on inflation and interest rates. Together, inflation and interest rates will allow for an investment grade credit that would provide desirable terms for investors and issuers.
There will also be a need to boost the domestic investor base through pension fund reform that currently is unbalanced. Lastly, inducements to inspire capital market growth through appropriate regulations and long-dated issuance by government and parastatals must be realized.
Restructuring of key infrastructure sectors and parastatals, and provision of a regulatory ecosystem appropriate for private participation, including risk justification instruments must be acknowledged.
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