News Column

Prescribed Asset Status Alone Not Sufficient

May 16, 2014

Victor Makanda



Housing development news is taking centre stage in daily public newspapers on both the positive and negative side.

Some banking institutions are slowly reviving and some setting up mortgage desks to cater for this area.

To banks, real estate companies, insurance companies and pension funds, housing development appears to be an attractive investment area considering the backlog of over 1,5 million housing units in the country.

Last week, the Finance Minister Patrick Chinamasa told delegates at an official ground breaking ceremony at the Fidelity Southview Park that the government would give prescribed assets status to such projects.

"Any housing project which comes my way, I will give it prescribed asset status just as what happened with Fidelity Life," Chinamasa said.

He said insurance companies and pension funds are a channel of resource mobilisation. Housing developments require huge capital outlays and currently most land developers have failed to develop stands and build houses due to lack of funding.

Fidelity in this case has created a special purpose vehicle to raise US$5 million through a bond for the development of residential stands.

In analysing this move by government to support land developers, an evaluation on whether assigning prescribed asset status on bonds will assist in infrastructure development is critical.

Access to long term capital in Zimbabwe's financial markets soon after adoption of multi-currency system has been a challenge due to a combination of external and internal factors.

External factors emanated from effects of the global financial crisis that were witnessed between 2008 and 2009.

Internal factors include sticky issues on property rights and policy inconsistency which has driven away potential investments.

All these factors have gradually worsened the liquidity crisis that has gripped the economy.

Nonetheless, the growing need for social services such as provision of clean water, electricity, housing, health and education has also been rising despite the absence of funding from the domestic front.

It is against this background that the Finance Ministry is slowly opting prescription of assets as a way of developing infrastructure projects.

Prescription of assets is a regulatory move by government for insurance and pension companies to hold a minimum of 10% of their assets in such instruments.

Thus from this perspective, the prescribed asset status appears to be a step in the right direction.

Tagging housing developments with prescribed asset status aside from the government taking this move as a tool for its failure to unlock funding from foreign sources, is beneficial to insurance and pension funds.

The major advantage being that such assets have tax benefits. With the relatively high taxation rates in the economy compared to peer countries, pension and insurance companies stand to benefit.

Whilst acknowledging the positives, two critical issues determine the success rate in as far as infrastructure development is concerned and these are; the use of these funds and features of such bonds.

Firstly, the targeted use of funding determines success. The Finance Minister highlighted that all projects which were accorded prescribed asset status ought to be used for critical development such as housing and small hydro-projects rather than consumption.

Despite the comments being noble, implementation of such projects have in most cases suffered stillbirth.

This is supported by the recent Treasury Bills that were issued by the government in February which considering the bloated fiscal structure went mostly towards meeting recurrent expenditure.

Thus there is need for the government to address its fiscal structure to avoid crowding out of capital projects by recurrent expenditure mainly the civil service wage bill.

Apart from according prescribed asset status, other key features for these development projects may possibly go a long way in determining or promoting infrastructure development.

A number of projects in Zimbabwe have been accorded this status but still failed to raise the required funding all because of unappealing features. Key features include the coupon rate, guarantor of the bond and to a lesser extent the duration.

Except for the IDBZ bond, other bonds such as the AMA agro-bills, IPEC Housing Bond, and NMB SME bonds, have received low uptake.

Whilst the yield structure is not yet fully established, it remains crucial for issuers of such bonds to consider the coupon rate. Most issuers especially the government have been offering relatively lower rates consequently leading to low uptake.

Furthermore, research has shown locally that most bonds that have the government as the guarantor have relatively under-performed compared to the ones which have other guarantors aside from the government.

The reason being that confidence in the government has declined due to its failure to service debts both from local and foreign sources.

Hence, the government may need to solve confidence issues as a way of assisting issuers who focus on infrastructure development.

Overall, the government has a lot of work that it must address as a way of reviving infrastructure development.

Chief among these relates to the continuous call by the International Monetary Fund to address the fiscal imbalance which is skewed at recurrent expenditure. By achieving this goal, capital formation will be attained.

Developing a secondary market for bonds also is critical especially with the illiquidity in the economy as it allows players such as insurance companies and pension funds to trade these assets as a way of meeting their financial needs.

Development of a yield curve also will present a guide in which interest rates can be set. This is also critical if ever the domestic bond market can be developed as a way of complementing efforts by the government in supporting infrastructural projects.

Overall, offering prescribed asset status alone is not enough in developing infrastructure in Zimbabwe.


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Source: AllAfrica


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