Several communities in Ghana do not have access to potable drinking water, electricity, good roads, schools and health facilities.
The communities most affected are the rural areas who serve as the hub of agriculture where the cash crops and food needs of the country are produced. Cocoa (the country’s number one cash crop) growing communities are no exception.
Ironically, there are rural banks in these communities, whose vaults are mostly chocked with savings from indigenes (especially during harvest seasons) with managers left in a huge pool of funds but no viable vehicles to invest in to earn acceptable returns, apart from marginal loan applications from the community.
A huge portion of the remaining funds often find their way into the purchase of treasury instruments from the central bank and government. There are others in the rural areas who rather than deposit their money in the bank decide to keep it under their pillows largely due to the lack of savings culture, which is a result of lack of financial literacy, and partly due to the meager interests accrued on savings with banks.
A lot of money still remains unbanked (80% of Ghana’s population remains unbanked: PWC’s Ghana Banking Survey 2011) especially in rural communities when in fact, a little financial engineering would see these funds channeled into productive and development projects in such communities.
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Our cities are not any better in terms of provision of electricity, water, roads, schools and health facilities. Providers of these services (e.g. electricity and water) lack the needed financial muscle to undertake necessary capital intensive projects to resolve, or at least mitigate the appalling services they provide.
The central government (the major financier of electricity, water, road and other social projects) is burdened with so many responsibilities and at the same time constrained with scarce resources that effective allocation of funds to vital projects (such as electricity, water, etc) becomes a daunting task, if not a mirage. Ironically, commercial banks, investment banks, pension funds, provident funds, etc have in their vaults billions of cedis with most fund managers faced with the question of where to invest their funds for acceptable returns.
The capital market in Ghana despite its tremendous development over the past decade, has only a few available financial instruments for fund managers to invest in thus leaving them with no alternative than to invest in the money market with an appreciable percentage remaining in financial instruments, mostly speculative in nature, circulating among financial institutions with no real addition to productive capacity and development.
This, in my opinion, creates artificial financial strength with no real development to support such wealth. Some would argue that these investments definitely find their way into production or into the hands of government through the purchase of treasury instruments and the government would then be able to fund more projects due to the availability of funds.
This argument is not far from right: however, central government is burdened with so many responsibilities. How does a cocoa farmer who invests his profits in a treasury instrument hoping that these funds would support the government to undertake development projects (apart from coupon earned) ensure that the muddy road in his community is constructed? What about the provision of electricity, water, schools, health facilities and other social amenities in his community?
As an alternative, local authorities who are directly responsible for the implementation of development projects under their jurisdiction and who have relatively fewer responsibilities at hand compared with the central government can pool funds from private individuals and institutions to finance pertinent development projects.
This is where Metropolitan/Municipal/District Bonds (referred to hereinafter as Metro Bonds) come to the fore. This is a type of long term financing arrangement made by a Metropolitan/Municipal/District assembly, which is similar to the treasury instruments issued by central government to finance projects. This source of financing would add to the appropriation received from central government and other internally generated funds of the assemblies.
The bonds market in Ghana is currently under-utilized with only a few long term investment vehicles available in the country. The deregulation of the pensions industry and the introduction of the three-tier pension scheme only make matters worse with huge funds scouting for long term investments. Effective utilization of the bonds market would see such funds channeled into Metro and other corporate bonds.
How it works
For instance, Kpando Municipal Assembly needs to undertake a series of development projects aimed at improving the living standards of its citizens but is constrained with the quantum of funds made available to it by the administrator of the District Assemblies Common Fund.
With the funds provided, the construction of a six unit classroom block for Kpando Gabi L/A Junior High School and the construction of a fifteen kilometer road from Kpando Kudzra (where most of the food needs of the municipality are supplied) to the market centre in Kpando are mutually exclusive projects. These two projects are equally important but only one can be pursued given the appropriation received from the consolidated fund.
In such a situation, the Kpando Municipal Assembly can issue a Municipal Bond to the public to raise funds in order to construct say the road while using its share of the common fund to construct the classroom block. The assembly would then build a toll both on the constructed road to mobilise funds for the repayment of the bond at maturity.
The same principle of seeking long term financing from the public through Metro Bonds can be adopted to undertake several (especially revenue generating) projects such as housing projects, building of market/stores/storage facilities, etc.
What about the electricity, water and health sectors? The provision of power is a lucrative enterprise but the Electricity Company of Ghana (ECG) Ltd has been unprofitable partly due to factors such as non-payment of bills but largely due to the lack of appropriate capital investment to ensure that systems work efficiently to reduce wastages and to ensure constant and reliable power supply. The loss of revenue during power outages and losses resulting from wastages in power distribution are enough to improve the cash flow of ECG.
The issue of corporate bonds by ECG to raise funds to purchase equipment for efficient distribution of power would eliminate wastages and improve the revenue of ECG thereby giving them the necessary cash flows to pay bondholders. This same principle can be adopted by others such as the Ghana Water Company, Ghana Railways Authority, Ghana Ports and Harbours Authority, Ghana Airports Company Ltd, etc.
One cannot deny the existence of management inefficiencies in the institutions that supply power and water in Ghana: same can be said of other institutions. The ability to raise enough funds to undertake capital investments is not a guarantee that ECG and other institutions cited above would become profitable if square pegs are placed in round holes.
Article by Frederick Kwasi Dah
The writer is an Investment Analyst with the Funds Management Departmentthe Securities and Exchange Commission