DFI role to correct market failures, complement government’s resources mobilisation

THE quest of economic growth and sustainable development is one of the central macroeconomic objectives in every nation.

Any economic growth is principally pinned on the development financial institution set-up of a country and this is underlined by the fact that, an effective DFIs obligation and the way its role is supposed, in-addition to economic change starring role, offers the possibility of better mobilisation for resources needed to finance development projects.

It is continually taken for granted when scrutinizing differences between development finance institutions and commercial banks operation space. Even though these institutions might look similar, how are used to inspire country’s growth is not the same.

Unlike commercial banks, DFIs provide financing and technical expertise for project undertaken where the private sector will not invest, in that way bringing capital and skills to underserved markets.

Due to their development mandate, DFIs can offer loan pricing and tenors that might not only be uneconomical for a private sector investor but no go zone for commercial banks such as start-ups.

The core objective of DFIs the likes of TADB etc. is an instrument of economic development as pro-actively takes an active role to promoting projects and to develop institutions entrepreneurs, while commercial banks are more placed to reactive to business opportunities.

Criteria for financing and appraisal process for DFIs rely on projected cash flow thus assuming project risks without dwelling on too much collateral and taking appraisal process as the key part to determine the viability of the project submitted for financing.

For Commercial banks, on the other hand, uses risk asset management as a tool to assess the borrower focusing on the so-called five C’s of credit, i.e., character, capacity, capital, collateral and condition.

These are some, not all; basic differences that if not well understood could derail financing undertakings. Judging different criteria between DFIs and commercial banks and how DFIs starring role is being conserved and even being teased by those looking for finance that DFIs have lost their direction, there is on-going debate on how effectively DFIs can be used to stimulate economic growth, while discharging pressure on government traditional fiscal.

Presenting the 2019/2020 budget estimate, lawmakers have been asked to approve trillions of Tanzania shillings for recurrent and development expenditure, that include Tanzania shillings 9.73tril/- (Daily news 4/6/2019) to service outstanding national debt.

Amidst proposed budget, is it a high time for the government to think through separating commercially viable development projects from social projects in relation to new ways of resource mobilization or implement it within business as usual approach?

As country sets its strategic direction towards being a solid middle income country by 2025, the way DFIs will be used to stimulate economic growth would matter a lot.

Thus why midst lawmakers you won’t stop hearing those arguing on whether national development financial institutions are still relevant.

Others industrialist taking a step ahead, eager to know why there are deliberate sound initiatives to make use of DFIs that in principle could be used on behalf of the government leverage and syndicate to finance development projects.

Multiplying the available resources for more results that could support achievement and implementation of 2019/2020 fiscal budget could in my opinion easily attained with positive success through making use of DFIs; preferably government wholly owned institution such as TIB and TADB to leverage and to syndicate build robust lines of credit to fund strategic development ventures.

Lack of ability to see how vital these institutions are especially as call for separating commercially viable strategic development projects from social projects gain impetus would lead to among lack of local development financing consequential to high cost of finance for development projects; reliance on external financiers to finance development that could have conflicting priorities; expertise on project preparation disappearance and importantly depriving the government of the opportunity to take advantage from the benefits of growth of its own home-grown financial sector. It is well acknowledged that strategic envisioned project would in future turn around the economy of Tanzania.

The mega projects the like of about to be handled over terminal III at Julius Nyerere international Airport (JNIA), on-going construction of SGR central railway, implementation of power projects as well as construction of roads and major bridges and their routinely maintenances will swiftly be completed using different kind of funding approach. Without thinking out of the box, financing challenges to the Development budget for country such as Tanzania would remain. Why?

Overdependence of government budget relying tax sources to finance development may be overwhelmed with unstable flow of revenue that could heavily limit timely completion of projects.

In the same way, lead to slow pace of adoption of new innovative way of financing development projects that could tap into accessing private funding that are slowly gaining importance through public private partnerships. Functionally, weak capital market and lack of bankability of development projects could hinder intended objective to be achieved within envisioned timeframe.

Across the African continent that also include Tanzania, lack of ability to meet all budgeted items in yearly fiscal budget account for an average of up 2% or more decline in economic growth per annum.

Being able to meet and complete on time what countries budgeted can enable increased intra-regional trade and investment and enhance the productivity of business and manufacturing; access to clean water and sanitation improves the general health of the population, thus enabling more people to work and contribute productively to the economy.

On the other hand, weak and inadequate means to fund envisioned budget impacts severely on economic growth and human development. Research quoted in the media indicates that Africa needs an estimated US$93 billion per year to cope with development projects with two-thirds required for new physical infrastructure and the remainder for maintenance and operations.

Thus why in an attempt to address mentioned challenges, In Tanzania, we need to look beyond traditional funding approaches, particularly with regard to financing envisioned budget estimates.

The scope for making investments of the required scale will always be severely constrained by government finances and that is where DFIs exist to fill the gap.

Lacking proper funding methodology and appropriate structure, meeting the financing gap can be the thorn in the flesh for the government’s determinations to alleviate funding needed to implement strategic national projects.

Development Finance institutions in developing countries exist traditionally to address market failures and as a complement to government resources and market financing.

The dual roles of these institutions to those who might not be aware involve financing development projects and acting as facilitator of finance in the broader industrialization and economic development strategies of country.

In addressing critical national development challenges, DFI’s in addition to their existing mandates, seek to enable expansion of already existing pro-poor infrastructure and act as catalysts for accelerated industrialization, economic growth and human resource development.

Presently, Tanzania has the following development finance institutions in existence, which by and large have these objectives as well; TIB DFI and TADB.

Wholly owned by the government and Ministry of Finance which act on behalf of the government are to a larger extent mandated to provide financial services to sectors and projects that would contribute to the growth of the economy.

Despite the options available for government to raise finance, the overwhelming consensus is that it cannot be done without private funds.

At their best, private fund ease budget constraints and raise efficiency by leveraging private sector management expertise and innovation. Public-Private Partnerships refers to an arrangement between the public and private sector for the delivery of public infrastructure or services.

Both parties function as partners in project development and implementation, and share the responsibilities, resources, risks and returns. In some case, the private sector may play a more active role in service provision, however, it is imperative to point out that the government is in the end accountable and responsible for the provision of quality services that meet the needs of the public.

Public-Private Partnerships engagements are usually long term in nature and provide a prospect for government to make use of private sector capital to finance developmental projects particularly commercially viable development projects.

The private sector benefits from the investment through service charges from the public body or revenues from the project. Public-Private Partnerships also enable the private sector to play a greater role in the planning, finance, design, operation and maintenance of public assets. For the public sector, it provides an opportunity to transfer risk to the partner who is best able to manage them.

The major benefit of Public-Private Partnerships is their ability to deliver value for money in public service procurement and operations. They enable the public sector to raise capital and bridge the financing gap, whereas making efficiency gains in the process. However, certain key factors are necessary for publicprivate partnerships to be effective.

These include the need for a clear institutional framework to govern public-private partnerships, legislation and its enforcement, transparency, political will as well as developing the capacity of staff in government to effectively prepare viable and bankable projects and implement projects.

Thus, in order to change the position to perform the role envisioned, the DFIs need to be granted operational autonomy supported by government guarantee for them to work intandem with private sector nationally and internationally.

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Author: Dr Hilderbrand Shayo

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