ONOMO Hotel Dar es Salaam

Core Securities Tanzania Interview

Tanzania Capital Markets Overview

TANZANIAINVEST has been interviewing Mr. George Fumbuka, Chief Executive Officer of CORE Securities Tanzania, to learn about the Tanzania capital markets and investment opportunities.

George Fumbuka, Chief Executive Officer of CORE Securities Limited

Mr. Fumbuka is a professional accountant who qualified in London and received an MBA in advanced finance from the University of Strathclyde in Scotland.

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Before co-founding CORE Securities Limited, Mr. Fumbuka worked in the field as an accountant, director, trainer and consultant as a member of the DSE.

Can you highlight the historical development and also provide your own analysis of the current situation of the Tanzania capital markets?

George Fumbuka – CORE Securities Tanzania: The capital markets industry officially began in 1994 with the enactment of the Capital Markets and Securities Act of 1994, but in practical terms, it began when the Dar es Salaam Stock Exchange opened its doors for trading on 15 April 1998.

As a brand new industry emerging from a socialist economy, where less than a decade earlier all economic activities were under the control of the Government, this development was driven by the privatisation process that pitted nascent regulators and Government bureaucrats against shrewd pin-striped attorneys from the first world.

The DSE began with one product – ordinary shares of TOL Limited – that had been the subject of a protracted initial public offering that saw intense wrangling between the Regulator and the Issuer as the subscriptions’ deadline came and went.

Though the deadline was eventually extended, the issue was still under-subscribed, leaving the Government with some 46% of the stock.

It quickly became clear that the TOL prospects had been exaggerated – one can even say grossly exaggerated – in the prospectus.

It proved to be an eye-opener to the handling of privatisation of parastatals via the stock exchange.

Subsequent listings experienced the normal learning curve as mixed fortunes finally moved towards a pattern.

The industry can now be said to have come of age.

The last two IPOs were all managed by local professionals, were well regulated, and achieved their intended purposes.

It is true that IPO prices are still on the low side, but these IPOs of former state-owned enterprises (restricted to citizens only).

One of their aims was to benefit nationals many of whom cannot make it in the secondary market.

We now even have an established unit trust – the UTT – which looks set to cater for the “small investor” and this may be the time for more realistic pricing in order to attract risk funds for private sector investment.

Currently, the Dar es Salaam Stock Exchange still remains in its infancy. Why do you think that is so?

GF: It is true that the DSE remains in its infancy, but the quantitative and (especially) the qualitative changes that we have seen in its first 10 years represent phenomenal growth that have taken other markets several decades to reach.

I believe that {xtypo_quote_right}All the fundamentals are now in place for the DSE to attain the levels of its counterparts in the Region within the next two or three years.{/xtypo_quote_right}all the fundamentals are now in place for the DSE to attain the levels of its counterparts in the Region within the next two or three years.

There is so much money lying idle out there and so many investment opportunities in this young Nation that once we get going the only limit will be the sky.

What are some of the measures that could boost DSE development?

GF: The first one is targeted education for investors.

Past experience has demonstrated the benefits that seekers of funds can get by using the DSE.

With purposeful pricing, it is now possible to convince project sponsors that DSE is the route of choice.

We could have done this in past but it would have been mostly theoretical: we now have practical results to prove the argument.

Secondly, the Regulator should allow the market to develop without assuming that each situation requires regulations or inflexibly, using existing ones so that they appear as inhibiting bottlenecks.

History shows that laws and regulations come after, not before, market innovations.

As it is, no new products are tried because either the regulations are not yet there, or else because existing ones tend to be a disincentive to the entrepreneurial spirit when rigidly applied.

Finally, we are aware that {xtypo_quote_left}The Government is, at the moment, giving substantial amounts of taxpayer or donor funds for market development.{/xtypo_quote_left} the Government is, at the moment, giving substantial amounts of taxpayer or donor funds for market development.

So far, these have ended up with regulators on foreign educational visits or paying foreign consultants.

They may wish to pass on at least some of these subsidies to avail purpose-built premises for the DSE in the central business district, rather than have it operate form fourth-floor rented offices.

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The funds could also pay for improving trading infrastructure (wide area networks, computers and capacity-building for brokers, etc.).

What are the incentives that are currently in place and what other incentives do you deem necessary?

GF: The main incentive is that the withholding tax on dividends paid is only half as much for listed companies compared to unlisted ones.

The same applies to interest on long-lived Treasury Bonds.

Capital gains tax and stamp duty on DSE trades are also exempt, but this is academic because of the practical difficulties that the tax authorities would experience in administering collection of these taxes.

Companies undergoing IPOs are also allowed to write off listing costs against their taxable income, but this goes without saying.

We have just begun collective investment schemes in the form of unit trusts and the biggest incentive here is the exemption from capital gains tax of net asset value (NAV) valuations on purchases and redemptions.

It is not yet clear to what extent a private-sector Manager’s income is exempt from double taxation because the only operator at the moment is Government owned.

To answer the last part of your question, we would like to see more proactive incentives.

In line with global practices, Government needs to make a tax-free allowance for earnings invested in the DSE or other capital markets products, say up to 1 million shillings.

This would not only develop the DSE, but would also encourage savings, which is the cornerstone of national development.

I would also urge the Government to reduce the income tax rate for listed companies because of their higher levels of profitability (in terms of tax collection) and higher levels of disclosure (in terms of tax compliance).

Finally, one could add that, since the normal tax benefits have been tried in vain (to a large extent), Government should think of a tax amnesty for Companies listing, say, in the next 2 fiscal years.

What are the advantages and disadvantages for a private company to float at DSE?

GF: It really boils down to the fact that private companies can access funds more cheaply through the DSE than from conventional bank borrowing or owner’s equity.

Allow me to explain.

There are many companies that have the potential to grow to a much greater size and there are many investment projects that are simply unfunded at the moment for lack of funds.

These are to be found in the agri-business, tourism, mining and services sectors.

Entrepreneurs have tended to look for their own funds before venturing into these businesses and, because there were none, they tried to approach the banking system.

Because banks will only finance established businesses, though they hate to admit it, the end result has been a disappointed entrepreneur and/or untapped potential in the market economy.

The few businesses that appear to have made it, have done so at the cost of broken relationships, opaque disclosures and cost-ineffective operations for want of more working capital, machinery or professional staffing.

The listing requirements – borrowed from Europe – did not help, especially when the tax authorities would be around to see the required disclosures in the Prospectus.

Finally, a self-made businessman who has survived against all odds would rather make less profit and retain 100% family ownership than let go of a small part of the equity by listing in return for higher profitability and reduced toil.

How do you explain the presence of 6 licensed broker houses with only 8 companies listed at DSE?

GF: This is a question of the numerator not the denominator, if you see what I mean.

Any market needs to have a critical mass of Brokers, especially in a huge country like ours, before it can play a serious role in the national economy.

In its wisdom, the Government decided – rightly so in my opinion – to license more Brokers than is justified by existing business so that, in due course, they would grow with the growing business.

If there are 8 listings at the moment, the 6 Brokers can and should push up the number to 80.

To answer your question, the number of listings is too small rather than the number of Brokers being too big and there, of course, lies the challenge.

What is CORE Securities market positioning? How does CORE Securities combine with its advisory for floating activities?

CORE Securities prides itself as being one of the premier Brokerages on the DSE.

We have {xtypo_quote_right}[CORE Securities has] handled the most innovative products, worked with the most international clientele and [has] the most developed IT capabilities.{/xtypo_quote_right} handled the most innovative products, worked with the most international clientele and have the most developed IT capabilities.

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We have been IPO Lead Advisors twice whereas, in the past, this was exclusive territory for foreigners.

We have sponsored products three times on Regional and international stock exchanges and have worked with their Brokers and bankers.

More than many others on the DSE, we have compiled significant databases of useful numbers about the DSE and the national economy.

We have developed world-class stock market indices for tracking the performance of the DSE.

We have designed a fully interactive website www.coresecurities.co.tz

These initiatives support our efforts to deliver unmatched services to our Clients locally and internally.

It is difficult to determine where “advisory” services commence and where pure “dealing” activities end, but we have two licenses from the CMSA: one for “Dealer on the DSE” (CORE Securities Limited) and another as “Licensed Investment Advisor” (Consultants for Resources Evaluation Limited, a subsidiary of CORE Securities Limited).

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TI: What are the most interesting parastatal companies that are still to be privatised through DSE?

GF: There are not many still left, apart from the utilities (telecom, electricity, roads, railways, and harbours), plus tourist hotels, mines and sugar farms.

These are huge and potentially profitable in line with global realities, but they need to be nursed in order to make them attractive.

At the moment, these are being sold, leased out or contracted to management contractors and independent power suppliers at what are generally seen as overly disadvantageous terms.

This leads to public antagonisms.

A faster alternative, in my opinion, is to fund the initial investments through structured finance, whereby capital expenditures would be paid for by long-term bonds financed by ringfenced user fees (road tolls, fares, tariffs).

With proper corporate governance and political will, it should be possible to speed up the eventual listing of these companies.

For the mines (these are not parastatals, per se, but are still seen as “public assets”) the Government can revisit the contracts to require them to fund their local costs (say up to 25% of the equity) through sale shares at the DSE. At the moment they raise all their money in Canada, Australia or South Africa.

Now that the capital markets industry has come of age, it should be possible for us to get the best of what the world has to offer without losing touch with local realities or falling prey to crafty unscrupulous foreign operators.

What is needed is a win-win relationship.

With regard to the overall potential for FDI in Tanzania. Which sectors do you think are the most interesting? What is now and what will be the impact of the new government in place in this sense?

{xtypo_quote_left}The most sustainable areas for FDI in Tanzania are in infrastructure development and utilities.{/xtypo_quote_left} The most sustainable areas for FDI in Tanzania are in infrastructure development and utilities (roads, railways, water, electricity, gas and public works), though the most hyped areas are in mining and tourism.

These require huge amounts of investment and we see them as driving the investment climate in Tanzania fully into the next decade.

Innovative funding modes must be found based on public-private partnership arrangements.

The macro-economic fundamentals are largely in place, with mass support for the Government’s legislative initiatives.

An investor friendly regime is taking shape though the cost of doing business is still a challenge.

Our Government appreciates the enormity of the challenges facing it in terms of the high poverty levels and fast growing population.

In order to sustain these developments, however, they must result in win-win situations.

The capital markets industry has the sophistication to achieve such situations and we foresee the industry playing a more purposeful policy role in the future.

What is your personal message to foreign investors looking at Tanzania? What would you like to make sure they understand about this developing country?

Foreign investors are welcome to come to Tanzania.

They should look forward to an emerging economy with high growth potential, but beginning almost from scratch.

The returns on the market are correspondingly very attractive.

Tanzania is quickly emerging as the economic powerhouse in the Region, with a stable political climate and with all of the macroeconomic fundamentals in place.

It has enormous potential in infrastructural development, mining and tourism.

These resources overflow to some of its neighbours but the centre of the action is here.

You can look forward to a sound, world-class regulatory regime for capital and financial markets, a young, educated workforce, and a huge consumer population that promises profitable operations beyond break-even, even under the most competitive situations.

The Government website www.tanzania.gov has links to its opportunities and the statutory bodies that can assist foreign investors.

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