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Cities’ DIY route to capital raising

Cities’ DIY route to capital raising

Municipalities in Africa are increasingly looking to local and international capital markets to fund infrastructure projects. 

market hall in Dakar, a series of high-rise apartments in Lusaka and a fleet of green buses in Johannesburg might not be the kind of big-ticket projects that usually excite the attention of international investors. However, ambitious local authorities, driven by a need to modernise infrastructure and keep up with booming populations, are increasingly looking to capital markets to fund the bread-and-butter improvements upon which the future of African cities will depend.

The explosive growth in Africa’s debt market – sovereign borrowing via internationally marketed bonds ballooned from just $483m in 2005 to $11bin last year, according to Dealogic – has raised hopes that local municipalities might be able to successfully jump aboard the funding bandwagon. But with municipal bond issuances still a rarity, opinions vary on the extent to which cities and regions can shape their future on the back of enticing yield curves for investors.

Zoya Sisulu, a member of the debt capital markets team at Standard Bank, believes that the development of national capital markets and the success of sovereign issuance is already having a positive knock-on effect on the ability of municipalities to head to
the market. 

“What we typically see in those markets is the sovereign will set the pace and start to issue and develop a curve, and from that the market will start developing naturally into government related entities such as municipalities or utilities,” she says.

This could be good news for major cities in countries with robust capital markets. Last year, Kenya’s Eurobond issuance powered to $2bn and remained wildly oversubscribed. Other countries to have successfully tapped the markets last year include South Africa, Morocco, Côte d’Ivoire and Zambiasuggesting a healthy appetite among investors for the yields offered by new African issuance. 

However, having a strong central government with a tight grip on the purse strings which also dictates rules and regulations around funding can leave municipalities out of the loop. Omar Siddique, senior urban specialist at Cities Alliance, says it is important for municipalities to have their own sources of revenue – such as a significant tax base – in order to avoid dependence on unpredictable and irregular fiscal transfers from central government.

Such fiscal independence is essential for persuading credit ratings agencies of a local authority’s ability to repay its debts – a key requirement for launching a bond.

As well as asserting a degree of independence however, Siddique says that it also essential that cities or regions gain the support of their central governments in getting projects off the ground.

“It really depends on the overall decentralisation framework of the country. If the country believes that sub-sovereign authorities should have the authority for infrastructure development then you can really talk about municipal borrowing and cities going to the market.”

Few examples demonstrate the potential for disagreement more clearly than February’s last-minute delay in the issuance of Dakar’s $40m bond to fund a new market for the city. Despite outside technical and financial support from a number of international agencies, including USAid, the Bill & Melinda Gates Foundation and Cities Alliance, central government concerns over responsibility for the debt put the future of the project on hold.

Cédric Mbeng Mezui, coordinator of the African Financial Markets Initiative (AFMI) at the African Development Bank, says that to prepare the ground for a successful launch, governments should have a clear roadmap for developing domestic bond markets, building local capacity and codifying rules and regulations.

“Before you go with a municipal bond, you need to look at debt management. If there is no decentralisation, if the framework for debt management is not in place, you cannot let the municipality issue local bonds because it will affect the country’s domestic debt”, he said.

For Standard Bank’s Sisulu, a lack of maturity in bond markets rather than stubbornly centralised governance is often the factor holding back municipalities from the bond market.

“I think it’s more a matter of regulatory and market maturity – in South Africa we have a highly regulated environment which quite clearly sets the base for municipalities issuing and the rules and regulations around how they can issue. I think it’s more about developing that framework for central governments to become comfortable to start having municipalities issue independently.”

Sisulu cites the importance of the International Finance Corporation’s support of early South African municipal bond issuances as providing a stepping stone for the development of the market – reassuring investors who are now content to invest without such guarantees. Johannesburg has since become an established issuer of municipal bonds and last year launched an oversubscribed R1.46bn ($125m) green bond.

Cities Alliance’s Siddique says that municipalities are increasingly learning from other successful examples, and says that even if the Dakar bond fails to go ahead, lessons learned in the preparation and credit ratings process, as well as the formation of a debt service fund, will lay the ground for future fundraising efforts.

Ultimately, there is a hope that municipal bonds marketed to a local investor base could be a more sustainable format than headline-grabbing international issuances. AFMI’s Mbeng Mezui, who says that international fundraising is a long way off for most municipal authorities, argues that in some sovereign bond issues there has been a worrying gap between the money raised in the markets and the ability of projects to take on new funding – meaning that funds are often accruing expensive interest while parked in the central bank.

“I don’t think it’s a good thing to have many countries going to international markets, because most of the countries don’t use the money efficiently. A city like Cape Town or Johannesburg can go international, and Lagos state can maybe do the same. But for most of the countries I think it’s a long way, they should start to do municipal local bonds first.”

Despite the positive outlook for municipal bonds, Cities Alliance’s Siddique says that his organisation cautions that loans or borrowing arrangements with central governments may be more appropriate in some cases than bond issues.

However, pointing to the vibrant market for municipal bonds in the US, he jokes: “Our aim is that one day this type of bond is just going to be really boring news for developing countries.”

David Thomas

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Written by David Thomas

David Thomas is deputy editor at African Business Magazine. He has also been published in the Financial Times, the Wall Street Journal, the Economist and South Africa's Cape Times.

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