In Targeting Capital Markets, Local Govt Makes Daring Attempt [opinion]

Those running Uganda’s local governments are finally starting to think outside the box. Faced with high expenditure bills, and with less money trickling in from the executive, the ministry of Local Government recently came up with new guidelines on how to source funds from the capital markets by issuing bonds.

The Local Government guidelines on the issuance of bonds, if followed, could change the outlook of this country.

Bonds are simply securities that are issued to source for money with their maturity usually ranging from four years and above. Those who invest in bonds earn an interest.

The interest on the local government bonds will be pegged to the usual government securities. The bonds will be listed on the Uganda Securities Exchange, and the issuance will conform to the rules as set by the Capital Markets Authority.

According to the local government guidelines, the money from the bonds will be used to invest in infrastructure such as industrial parks, commercial buildings, urban transport and council housing estates, just to mention a few.

An investment plan that clearly shows how the proceeds from the bonds will be spent has to be in place before money is sourced. The money will be saved in a separate account, and will be managed in the most prudent and ethical way.

These are the kind of plans that spark huge optimism in this country, where much of everything appears to be going wrong.Then again, a lot needs to be done before the local government can generate proceeds from investors.

The local governments have to prove to the market that they adhere to the highest standards of corporate governance. By committing to follow corporate governance rules, the local government’s books of accounts have to be in order scenarios where the local government has more than 100 bank accounts, as was revealed with the Kampala City Council a few years ago, cannot be tolerated.

Board meetings have to be well attended with investment decisions made based on a majority vote. The minutes of these meetings should also be available. Examples of conflict of interest, a habit that is deeply rooted within government agencies and ministries, have to be dealt with. In other words, corruption has to be kept at the lowest levels, which might be too hard to ask of many of these agencies.

In a country where relatives get jobs because a senior government official wrote a chit to the human resource manager where senior government officials have set up companies to win contracts from the very ministries they work for and where taking kickbacks to a government official in exchange for a favour is the order of the day, efforts to venture into the capital markets is a bold attempt.

However, these efforts should be applauded. Perhaps, it is in the capital markets, where there is little room for dirty deals, that local governments can finally start to see the essence of having ethics. To focus on local governments would also be wrong. The capital markets need to be supported. Issuing more local government bonds might not necessarily mean there is enough capital out there.

Opening up a well-regulated pension industry can be one of the starting points to widen the pool of money available for investments in the local government bonds. Having the National Social Security Fund as the single biggest investor in government securities is not sustainable, and it is high time the market witnessed some bit of intense competition.

The rules governing who invests in bonds also need to be revised. Currently, only six banks – Stanbic, Barclays, Standard Chartered, dfcu, Centenary and Baroda – are allowed to invest in government securities such as treasury bills and treasury bonds. There is a need to widen this segment.

Licensed broker dealers such as African Alliance and Crested Stocks, who are always struggling to attract both local and foreign clients, should be offered a window to invest in government securities. Bringing more players to invest in bonds could probably reduce the fees that the six banks enjoy while investing money in the treasuries, and also stop the banks from ignoring those private businesses seeking for credit.

Government has to sell shares to the public in some of the companies it still has a stake in. Companies like Uganda Telecom were supposed to have been listed on the Uganda Securities Exchange some time back. Listing these companies could attract investors to Uganda’s capital markets, with some of these funds also channelled to the local bond markets.

Either way, the ministry of Local Government has to be applauded for taking this move.

Twitter: @jeff_mbanga

The writer is the Business Editor of The Observer.

Source : The Observer

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