The real reason why cities in sub-Saharan Africa aren’t issuing municipal bonds

Cities all over the world have been able to finance their long-term investments with municipal bonds for a long time. The first documented transaction took place at Genoa around 1150. In the US, more than US$111 billion was minted between November and December to fund infrastructure pension obligations and other essential demands across the country.

Bonds are security issued by a government institution to raise funds, usually to finance infrastructure-related projects. Governments across the world commonly use these bonds, while municipal bonds can be utilized by a variety of towns (particularly those in the Americas).

To put it in perspective, cities in sub-Saharan Africa have raked in less than one percent of what is the US sum since. There are only a few local governments have succeeded in releasing municipal bonds, with the majority located within South Africa. There is a pressing demand for infrastructure investment across the region. According to current estimates, the funding gap is $41.6 billion. 41.6 billion. Municipal bonds, which were originally designed to fund infrastructure projects in urban areas, could contribute significantly to filling the gap. Why aren’t African city governments using municipal bonds in order to get funds to finance capital projects?

A few experts from around the world point out the lack of local capacity and capability to write municipal bonds. Others contend that the projects aren’t structured in a way that guarantees an adequate return for investors. Another group claims that municipal leaders do not have the motivation or capability to utilize more transparent financial instruments.

The majority of these opinions originate from the assumption that the public servants and investors in sub-Saharan African countries aren’t subject to international financial best practices or do not want to follow these guidelines. Certain of these assumptions are incorrect and offensive.

My essay looked into this issue and concluded that there was a second major contributory factor that is frequently neglected. It is the insufficiency of the rules governing the roles and powers of local authorities in raising funds and the ability of the central government to modify the rules based on political preferences.

This can create a shaky environment. Potential issuers can’t be sure that their preparations will eventually result in an agreement. They can’t be certain that their work won’t be reversed at the very final moment by the government.

Is a bridge too far for Dakar?

In my essay, I suggest that financial incompetence and inexperience aren’t as much of an issue as some suggest.

Consider, for instance, cities like Dakar (Senegal) or Kampala (Uganda). Both recognized the necessity of reducing their dependence on development assistance as well as commercial banks. They also acknowledged that to get investments from institutional investors such as insurers and pension fund companies, they’d need to prove their creditworthiness.

Creditworthiness refers to having the capacity and willingness to capability to take out loans. To obtain a good credit score, Kampala and Dakar needed to demonstrate that they could successfully raise and manage money from a variety of different local sources, ranging from parking fines and licensing fees.

A year of dedication to the project has produced positive results. Independent rating agencies evaluated the state of the financial systems. Both cities were awarded high-quality investment-grade credit ratings, which means that potential investors can be fairly confident in the ability to recover their funds.

Indeed, when the cities were able to secure the credit rating, a number of local investors expressed their interest in buying municipal bonds.

However, the political tensions between both the national and local levels resulted in Dakar’s bond offering being removed at the last moment. In the instance of Kampala, the federal regulations have placed a cap on Kampala’s debt capacity at an extremely low amount. This implies that the city is unable to take on enough debt for bond issuance to be worthwhile.

What’s the root of the problem?

If the issue does not stem from creditworthiness, technical competence, or financial market readiness, there has to be a third factor that is preventing municipal bond issues.

My research puts the inability of bond issues not to the municipal authorities or investors who might be interested, however, but to the limiting behavior of the national government.

As they delegate a large amount of responsibility to cities, they restrict their capacity to raise money. This is usually due to an insecurity on the part of the sovereign leadership to let cities be involved in the management of the purse strings of their respective cities. This could result in less dependence on the federal government.

A closer examination of several cities illustrates that only high-centralized countries like Cameroon or decentralized ones – such as South Africa – have been successful in releasing bonds. The reasoning behind the efficacy of the bond issues in decentralized economies is well-known within the African context as well as across the globe. However, the argument for the success of countries on opposite ends in the range is not as well understood; however, it is equally relevant.

Cities in countries that are heavily centralized do not have the autonomy to make decisions. Instead, they are seen as integral participants in an administrative structure that is controlled by the capital. Any financial obligation incurred by a city within this political system is seen as being backed by the Central government.

South Africa provides a good illustration of how legislation that allows can assist municipalities in raising funds. In 2004, the country passed an act – the Municipal Finance Management Act which clearly outlines what financial actions cities can and cannot carry out. Cities are not permitted to borrow for operating expenses, and instead, they can only be able to borrow money for long-term investments.

It is now more secure for pension funds, insurers, and others to loan money to municipal governments. They understand that municipalities are not able to issue bonds unless they are completely in compliance with current regulations, which are not affected by different kinds of interpretation or modifications in the political will.

In contrast, the municipalities of Dakar and Kampala have had to contend with ambiguous or unresolved relations with their national governments. They have also spent many years working to improve their methods of collecting and managing revenue to obtain investment-grade credit ratings. However, the limitations for municipal bond issues are imposed by a system that is not under the city’s control.

Clarity is key

Further, African governments should define the regulatory and legal conditions at the sub-national level. These should clarify the amount cities can borrow and under what conditions. Only then can African city cities have the ability to make use of bonds to fund the infrastructure that their citizens urgently require.

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