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Bankrolling the next phase of development

  • Published at 12:53 am March 22nd, 2018
Bankrolling the next phase of development
Bangladesh has just graduated from being a least developed country (LDC) to a developing one, which was to be expected as a result of well-planned, long-term economic strategies. Several military interventions and devastating natural disasters were some of the major obstacles that delayed the achievement, but they were not able to diminish the Bangladeshi people’s indomitable spirit. While this hard-earned success is likely to bring all the large investors into our board rooms more often, we now have to make sure that complex financial investments actually impact everyone in the country in a beneficial manner. We need a prudent strategy to build institutions around this success which will live for generations and take us to the next level, no matter what the country may face. In my recent article before this significant recognition, I mentioned that the reward doesn’t come without some additional challenges. This new phase in our development will require much more advanced and sophisticated financial planning. We must prepare for the inevitable decline in foreign loans and grants in the wake of the country’s financial upgrade. The capital market can be harnessed to provide a powerful boost to the economy.
At the moment, investors in Bangladesh are unable to minimize risks due to a lack of options for diversifying their portfolios
We have to learn how to make use of complex financial instruments and investments vehicles like mutual funds and hedge funds.

Rural and regional development

The majority of our population -- just under 65% -- still lives in rural areas, so for us to become a developed nation, we have to ensure significant improvements in their overall quality of life and a dramatic increase in income. That means investing in rural and regional development through large infrastructure projects, which would entail raising considerable capital. Municipal bonds are ideal for that. At the moment, investors in Bangladesh are unable to minimize risks due to a lack of options for diversifying their portfolios. In the US, we manage risks by diversifying and almost always add some local or state government-guaranteed bonds in the mix, as they are essentially capable of making payments during any economic crisis due to their capacity to collect revenue from public utilities and their taxing power. These bonds, of course, will offer the investors guaranteed returns and investment security through the local government under some kind of federal insurance, like in the US. In any developed country, local development projects are done locally and almost always funded by issuing municipal bonds. Even in India, which is a developing country, the state of Maharashtra issued a municipal bond in June last year, at a coupon rate of 7.59 and raised over Rs2 billion.

Laying the groundwork

The first order of business is to create an advisory committee to prepare guidelines for issuing municipal bonds. The bonds will be of two types -- general obligation bonds and revenue bonds. General obligation bonds are backed by the “full faith and credit” of the local government or agency, such as Rajuk, which has the power to levy taxes on residents to pay bondholders’ interest. Revenue bonds are issued by agencies such as those responsible for managing railroads, bridges or airports, which can use the revenue generated from the specific facility or source to pay interest to bondholders. For example, the Mongla port authority can issue bonds where the interest payments will be guaranteed by the port’s revenues. But it’s essential that local governments engage high caliber, productive, and talented Bangladeshis to work for them and pay them well. Otherwise, we will lose our best and brightest to other countries. If you put project management skills as a key requirement to run for the local government seats, most of the existing leaders will be looking for something else to do! As I explained in my previous article, there is an abundant pool of fresh university graduates we can count on. With proper training, they can lead us to great success. The only catch is to hire the right candidate for the right job. The central government can play a vital role by designing best practices to guide and assist local governments in the selection of finance and other professionals. Each local administration will require specialized professionals like municipal financial advisors, bond counsels, underwriters, underwriters’ counsels, and many more. The financing team must be able to craft a project plan showing how the revenues will be adequate to pay the bondholders, allocate required sinking fund, underwrite cost and estimate costs for distribution channels, through commercial banks and brokerage houses. The process will require developing offering documents, engaging with rating agencies, availing investor presentations, marketing bond offerings to investors, pricing the bonds and closing the transactions. The process is complex and this will require a lot of public information and disclosures which will also bring some discipline at the local level that could play an instrumental role in ultimately eliminating the prevalence of widespread corruption.

Other considerations

Municipal bonds are different from the savings bonds currently circulated by Bangladesh banks. Savings bonds are a direct IOU from the government and there is no secondary market. We have to redeem them directly from the government. But municipal bonds can be traded on the secondary market. I would recommend having a separate trading platform like what DSE is running, as these are debt instruments and should have different laws and transaction processes to protect both the investors’ and bond issuers’ interests. It will allow people to switch back and forth from stocks to bonds, and this flexibility will encourage more investment. Municipal bonds also react to interest rate fluctuations so investors to can adjust their positions. If the interest rate drops, the local government can issue new bonds to buy back old bonds issued on higher rates. And finally, this process of localizing financial institution will encourage diversity in local leadership from the get-go. My proposed idea will create new opportunities and start leveling the playing field for women and minorities by giving a much-needed fresh start and by giving others a chance to run for office. A local institution will be more capable to communicate with people that are going to invest in their local purposes and will be earning benefits variable to their actions that will be added to the fixed interest on their investments.   Mazher Mir is a financial advisor for Morgan Stanley, USA. He has 15 years of experience in the American financial industry, and is registered with NYSE and US Investment Authorities. He is advocating for international investments in Bangladesh by consulting for technological infrastructure developments.