Sunday, October 25, 2020

Bond markets vs infrastructural funding: How the scale is tipped

Funding infrastructural projects requires first that the bond market understands the challenges that come with it.  

Banks are subjected to high costs of regulation and capital required of them by the Central Bank which as a result makes it expensive to fund infrastructural projects. 

Bafana Molomo, Chief Investment Officer at Botswana Development Corporation (BDC), expressed this at the bond market conference last week Thursday when expounding that in the wake of this non-deferrable cost to the banks, it therefore follows that the market should “look for institutional investors who don’t carry that much cost”. 

Molomo was part of a panel discussion that sought to answer questions relating to the bond market with particular regard to how it supports economic growth, how challenges in infrastructural funding can be addressed and the role of government (Central Bank) in promoting such. 

Kgotso Bannalotlhe, Head of Corporate and Investment Banking at Barclays Bank Botswana, simply defined the bond market as a platform that “allows you to move capital from those who have it to projects that need to be done”. This intermediary role does not differ from that of bank funding but as was pointed out by Molomo, the route of debt financing through banks is proving insufficient to address the development needs. 

He proposed that for the bond market to meet the shortfall it was necessary that the investors understood the risk that is involved so as to meet the infrastructural funding challenge with innovative ways of cushioning the risk.  He went on to elucidate that the challenges are not insurmountable. However, what lies as the biggest challenge to Botswana is the fact that the users of public infrastructure are not allowed to pay the true cost; a consideration which investors regard important. 

“Cash flow coming out must be able to pay for the cost,” he said. He proposed that with respect to that that there was need for regulatory power to correct the problem lest it turns investors off. 

He also mentioned that though government may provide guarantees in relation to the project, what is referred to as credit enhancement, “it doesn’t give cash flow” which could also pose a difficulty to investors given that bonds have to be serviced. He reiterated the need for innovation to ensure that all the thinking is taken into consideration.    

Bannalotlhe shared the view that central banks, which tend to be primary dealers, have a big part in their role as regulators. He recognised that the local primary market has sufficiently robust primary dealers, which refers to entities that buy securities directly from government so as to resell to others in the secondary market. 

According to Bannalotlhe’s observation, the local capital market is sufficiently well placed in terms of infrastructure and cited the example of the Central Securities Depository Botswana (CSDB), a clearing and settlement unit, which however remains underutilised. What is lacking, said Bannalotlhe, is for the market to “take the next step of using the infrastructure” for the benefit of the market. Another recommendation he made was that the different regulatory bodies should learn to let go of a part of their mandate for the benefit of improving the market. To illustrate this point, Bannalotlhe asked why government bonds were not on CSDB given that if it was as effective as it was professed to be then it makes it redundant that government bonds trade separately from corporate bonds instead of on a single platform using the infrastructure available. 

He said that accelerating the use of the available infrastructure requires commitment in working together. “Government has to see itself as a steward in assisting the market to grow,” he said.  

Traditionally infrastructural projects remained within the ambit of government in terms of their funding but Botswana Public Officers Pension Fund (BPOPF)’s Chief Executive Officer (CEO) Boitumelo Molefe aptly expressed that “we should now be thinking development bonds rather than government funding,” in meeting infrastructural needs.

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