MARKET DATA REVIEW: Hurdles of raising funds for infrastructure development

Raising funds for infrastructure development is difficult, not only to us but in many African economies. The experience may be different among and between countries, i.e. the process being slightly easier to others, but difficult to many. For instance, countries such as South Africa, Nigeria, Botswana, Mauritius, and Ethiopia are said to have made some significant progress, relative to others, in developing their infrastructure financing framework (regulatory environment, financing availability, capacity to get deals done, etc). On the other side, much as Tanzania has the necessary regulatory environment and has sufficient economic opportunity to be attractive to investors in infrastructure development, but it lacks financial availability and has limited capacity of public and private sector to get infrastructure deals done. This is according to the recent report by the Africa Finance Corporation and the Boston Consulting Group, the report titled ‘ Infrastructure Financing in Sub-Saharan Africa -- Best Practice from Ten Years in the Field’, dated May 2017.

So, there has been some progress in some countries, the report says, however further financing innovations are needed. Much as financing is not the only obstacle in infrastructure development i.e. relevant policies and timely execution capacity are also fundamental; however in this article, the focus is on the financing aspect.

Tanzania, like in many African countries face a significant infrastructure deficit, statistics reveal that more than two-thirds of Tanzanians have no access to power, and that reliable road access rate as well as access to clean water is still less than 30 per cent, compared with 50 per cent in other parts of the developing world. It is further estimated that we lose between 1.5 per cent and 2 per cent of our GDP annually due to inadequate infrastructure—a circumstance that is daunting but correctable, through appropriate investment and collaborative action.

Estimates of Tanzania’s annual infrastructure gap put us between $5 billion to $7 billion – as is, every dollar of that gap represents a drag on our development and a diminution of the potential we have, i.e. unless and until we acquire good transport systems, power generation capacity, and other basic infrastructure that we need, we will continue to lag behind not only the developed world but other emerging countries as well. That’s why current efforts by the government coupled by sufficient political will to significantly invest in our infrastructure development is commendable – it is a clear indication that our government recognize and appreciate the magnitude of the infrastructure problem we face and the need to seriously do something about it. However, it is also a fact that despite all the good intents, we have limited domestic financial resources and capacity needed to close the gap. There is a need for creating the environment that will enable private capital and expertise to be mobilised for fast pacing this development.

According to the World Bank’s just-released report “Africa Pulse”, by closing the infrastructure gap we would increase per capita GDP by about 3 per cent a year; but to do this, we need at least $5 billion per annum, as is, only about half of this amount can be raised from domestic revenues, development finance institutions (DFIs), public-private partnerships (PPPs), natural resource-backed contracts, bi-laterals, and the like. “the like” by this World Bank report, I presume will mean, among them, is developing our financial markets – from the narrow and illiquid markets, into more deep and mature financial markets, especially the capital markets space.

As it is, our financial system need upgrading -- in sub-Saharan Africa, it is only the banking sectors of South Africa and (to a lesser extent) Nigeria currently offer financial markets sound enough to be tapped for infrastructure projects—although, Kenya has also developed a framework for infrastructure bonds and have been actively using their domestic infrastructure bonds market to finance some of the key transport and power projects.

Whatever the status we are in, we need to unlock infrastructure investment via developing our domestic capital and debt markets so as to increase access to local currency financing for infrastructure projects. In particular we need banks and the capital market that have the financial muscle and internal capability to finance large, transformative infrastructure projects.

More specifically, our government has to enhance its support in the creation of instruments that enable projects to tap debt markets (bonds and project bonds) and enable private operators to access capital (equity raising) and manage risk (hedging instruments and other derivatives). Building capital market instruments will also permit long-term investors (such as pension managers and insurance companies) to take positions in the infrastructure market without being locked in to a project’s capital structure.

To create a vibrant secondary market, our government could allow passive equity investors to exit after a period of time and resell their position to a non-operating equity provider (to prevent a disruption in operations). The government could accomplish this by creating a convertible share that DFIs, multilateral development banks (MDBs) or others could buy to free equity investors after a certain amount of time. DFIs/MDBs could finance specific tranches in the capital structure of PPPs without entering the project within the special-purpose vehicle. Hence, they could resell their position in the capital structure—an innovative proposition—but not carry the burden of the full investment to operations.

Furthermore, our government need to raise more domestic revenue and diversify the overall income sources. I do understand our emphasis on enhancing tax collections, however, taxes are sometimes not sufficient to accommodate our diverse investment needs – in this case a means must be found to diversify and mobilize more long-term savings to finance extended development projects in infrastructure.

For example, further regulatory changes are needed to enable pension and insurance funds to invest more broadly in infrastructure projects whose SPVs are listed in the stock market to allow efficient exit. A broader mix of financial instruments would spread risks across a broader group of investors.

The government and the private investor should aim for fresh approaches to infrastructure investment. The government needs to be more creative in attracting investment and organising project financing, and private investors should use their expertise and international experience to approach investment in innovative and localised ways.

India, is currently piloting Infrastructure Investment Trusts, a listed vehicle that lets investors gain access to project portfolios – we could consider also consider using collective investment schemes to finance our infrastructure development.

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