Why EA should craft diaspora bonds

An Hydro Dam: Investors wary of the construction risk

ALTHOUGH ALL DATA available is not comparable, there are indications that the East Africans in the diaspora remit  home an estimated US$3 billion a year. 

Kenyans lead the pack remitting home US$1.3 billion last year, Ugandans came second remitting up to US$800 million last year. Although the numbers are uncertain, Tanzania remit an estimated US300-400million a year or thereabouts.

We are talking about an estimated US$2.5 billion or more flowing into the region mainly for subsistence consumption. The east African diaspora comprises of highly paid, highly skilled manpower living and working abroad. If we assume that the remittance level forms 10 per cent of their total earnings, then the diaspora earning are nearly as large as Tanzania’s GDP in 2012. Tanzania’s GDP in 2012 stood at US$28 billion.

This means that the diaspora is potentially a large source of sustainable finance for the regional infrastructure. All it needs is ways to tap into it. Several attempts have been made to mobilise funds from this sources with little success. Kenya’s National Housing Corporation has on several occasions tried to attract the Kenyan diaspora to buy houses through it. Also Tanzania Investment Centre has tried to attract the Tanzanian diaspora to invest in Tanzania, also with little success.

This suggests lack of creativity in developing investment instruments that are dependable, convenient and easy for the diaspora. Not all want land, houses or can set up factories in east Africa. It is other institutions that need these assets. Their business should therefore be to mobilise the funds from the diaspora to invest in these assets. Investment in real assets will mean additional administrative costs that the diaspora may not be keen on.

In this respect, Ethiopia has blazed the trail. She developed a US$4 billion long term infrastructure bond to build the Grand Renaissance dam, GERD. The dam will generate some 6,000MW of power some of which will be sold to her neighbours, Kenya, Sudan and she is also said to be targeting Yemen to the east. In other words, Ethiopians in the diaspora are helping their country create a future export service in addition to increasing power supply at home. Increased power supply is a catalyst for further industrialization in their country.

 East Africans too are in dire need of infrastructure that will pave the way for further development of their country.  In the next 17 years, Kenya needs to invest at least US$1 billion a year in enhancing power generation capacity. Tanzania, estimates show will need to invest at least US$3 billion a year over the next 10 years also to enhance power generating capacity. A more or less similar amount is needed to finance energy production in Uganda over the next decade. We are talking about US$70 billion to be invested in the energy sector only.

This is besides investment in; paved roads, airports, railway lines, sea ports, schools and health and hygiene infrastructure. The demand for investment is colossal and calls for creative thinking.

 East Africa should develop infrastructure bonds for the diaspora to finance infrastructure bonds for projects that sale their products/services at the market prices. One such area is the energy sector. Energy, especially electric energy, is a major bottleneck to east Africa’s development. Tanzania for instance needs to invest some US$3 billion a year over the next ten years just to match demand for the commodity. Kenya and Uganda too need huge chunks of money to generate more power to keep their economies rolling. And power is sold to consumers at the market price which means that the money raised from the sale of electricity can be used to service the bond and eventually retire it.

An Airport terminal: Such self financing projects

 suitable for  Diaspora bonds

 KenGen, Kenya’s power generation giants need to raises US$1 billion every year to develop generating capacity of 17,000MW by 2030. It has even proposed an asset backed bond to raise the debt finance needed to generate electricity.  Since the firm will need to borrow regularly, perhaps it should consider an asset backed bond programme rather than a project.

The conditions are favourable for such a move and the infrastructure is in place. First the bonds are listed at the local capital markets. This gives any investor an exit route should the need arise. Two, the Capital market in east Africa is vibrant and modern it even has listed and trades in long term bonds. The yield curve is attractive too averaging 13-14 per cent for long term bonds. This kind of yield is not available elsewhere. Further, the investment is secure as registration of one’s certificate is electronic meaning that no one can disappear with an investment certificate.

As in the case of Ethiopia, the diaspora in east Africa could be tapped for funds into risks which other investors are unwilling to finance. The dam building risk in Ethiopia was such that other investors may were averse.

The same applies to other countries in the region, investors are not ready to stomach the drilling risk in geothermal development for instance, but they are willing to stomach the generating risk. The diaspora, together with local institutions with deep pockets can be mobilized to fund these risks in order to hasten development in their mother land.

Mobilising diaspora funds through a bond will release tax-payer’s money to finance other developmental needs such as expanding schools, health and hygiene infrastructure where the rate of return is unattractive to investors. This will ensure that social economic infrastructure, which promote social-well being are also in place. 

India and Israel have made great developmental strides because exploiting their diaspora's resources. East Africa should jump on the train.