Municipal Bonds, a Viable Option for Funding Local Governments

In the past five years we, at the stock exchange together with some of our key stakeholders have been engaging local government authorities on the idea of using municipal bonds in the financing of local government projects, especially infrastructure projects. Up to this point, we have, in various forums and platforms engaged with municipalities of Kinondoni, Ilala, Ilemela and Tanga. We have also done the same to city councils in Dar es Salaam, Mwanza and Arusha, as well as Songwe region and in the next few days I will be in Simiyu on the same mission. Unfortunately, it is been five years of engagements and no single municipal bonds have been issues, while at the same time there is no deficit of social economic infrastructure projects that needs funding. In fact, we haven’t gone as far, despite opportunities in some cases of helping identify potential projects and preparations of Draft Information Memorandum framework that could have guided their further consultations. Why efforts such as these are necessary? and why are we still pursuing this cause? I will explain:

Municipal bonds are debt instruments issued by sub nationals such as local government authorities, municipalities and cities. They enable local governments to raise money to fund public projects, paying bondholders interests for the debt as the cost of raising funds. In the U.S, where such bonds were first issued during the urban boom of 1850s, their outstanding bonds issuance by states, cities and other sub-national entities exceed US$ 3 trillion, as of 2018. In Africa, only the Republic of South Africa cities of Cape town, Johannesburg, Ekurhuleni and Tshwane have issued bonds, so as Douala in Cameron. Dakar in Senegal as well as a few cities in some states in Nigeria have tried but so far has been without coming to its finality. It is therefore apparent that municipals and sub-national bonds market is still infant in not only to us, but in Africa, and countries municipals/sub-national entities are not allowed to borrow via issuance of municipal bonds.

I think it is important to appreciate the fact that it is not only the municipal bonds market that isn’t developed as it should, but so are other types of bonds, i.e. government bonds (issued by central governments and backed by national governments); Agency bonds (normally issued by stated-owned-entities, government agents or government sponsored entities); corporate bonds (issued by public and private companies); sovereign bonds (issued in foreign currencies and guaranteed by national governments targeting foreign investors); diaspora bonds (issued by governments and directed to citizens originating from the country but live somewhere else); nor are Islamic bonds (issued by government or Islamic banks and institutions targeting people of Islamic faith) — these are all underdevelopment in most African countries, despite funds mobilization challenges and the need for financing.

In spite of the above, the truth is that our Governments are overwhelmed by the rapid growth of cities, however, strategic planning has been insufficient as it is for the provision for basic services to residents, and the situation isn’t getting any better by the day. For instance, since 1990s, (earlier than that for us) widespread decentralization and devolution has substantially shifted responsibilities for dealing with urbanization to local authorities; yet municipals and local governments across Africa receive just aa small share of the national income to discharge their duties and responsibilities. Responsible and proactive local governments, municipals and city authorities are examining how to improve their revenue generation and diversify their sources of finance. Municipal bonds may be a viable financing option for some capital cities, depending on the legal and regulatory environment, governance and control mechanisms, viability of proposed investment projects, viability of vehicles for implementation of project financing and projects’ implementation, investors’ appetite and the creditworthy of the borrower.

Massive construction programs for roads and pavements, roads rehabilitation and parking, street and traffic lights, shopping malls, downtown markets, bus terminals, waste management facilities, flood management, sewage pipes, environment management as well as other social programs such as school milk programs, free uniforms and computers, etc. all these can be financed efficiently via issuance of municipal bonds by municipals and cities without over-reliance to central government for funding.

I understand that under the current legal/regulatory framework provides for a limited scope to increase resources by way of revenue collections because this role if highly concentrated to the central government, also there are several overlaps between the central and local governments in this space. However, it is also fair to argue that institutions that are closest to the people i.e. local government — must have pro-poor development programs that can be financed using internally determined financing channels such as municipal bonds. Therefore, reforms that will enable cities and municipals to borrow efficiently in the process of reducing their financing dependency on the central government, should be encouraged and pursued.

Much as there exists limited alternatives for raising finances to finance local governments development projects, but the attraction of bonds issuance may be clear, it will enable cities to borrow large amounts in lump-sum at a relatively competitive interest rates from a wide and diverse investor base than what could be provided in bi-lateral commercial borrowings. Once done, this will be a strong signal of determination by local government authorities, municipals and cities not to overly rely on concessional financing and confidence in their abilities to manage large revenue-generating investments. But this requires close leadership by a champion within the local government governance structure, such as a mayors as well as the political and administrative discipline that goes with such initiatives.

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