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KAMPALA. — Cities around the world have been financing their long-term investment needs through municipal bonds for centuries. The first recorded transaction occurred in Genoa in 1150. More recently, in the US, over $111 billion were issued in November and December last year for infrastructure, pension obli­gations and other critical needs across the country.

A bond is a debt security issued by a public agency to raise money, often for infrastructure projects. Sovereign bonds are widely used by national governments, and municipal bonds are used by many cities (particularly in the Americas).

For comparison, cities in sub-Saharan Africa have raised less than 1 percent of the US amount since 2004. Only a handful of local governments have successfully issued municipal bonds, almost all of them in South Africa. Yet there is a desperate need for infrastructure investment throughout the region. Current estimates place the financing gap at $ 41,6 billion. Municipal bonds, originated for urban infrastructure, will go a long way to addressing this gap.

Why aren’t African cities using municipal bonds to raise money for capital projects?
Some international experts point to a lack of local capacity and technical ability to prepare a municipal bond. Others argue that projects are not structured in ways that ensure a sufficient return to prospec­tive investors. Still another group insists that municipal leaders lack the interest or ability to use more transparent financing instruments.

All of these views stem from a belief that civil servants and investors in sub-Saharan Africa are not exposed to global financial best practices, or are unwilling to comply with them. Some of these assumptions are both wrong and offensive.

My paper considered this question and came to a conclusion that there is another key contributing factor that is often over­looked. This is the weakness in regulations governing the roles and powers of cities’ authorities to raise finance and the abil­ity of central governments to adjust these based on political whims.

This creates an uncertain environment. Prospective issuers cannot be confident that their preparatory work will ultimately lead to a transaction. And they can’t be sure that their efforts can be undone at the last minute by a government.

A bridge too far for Dakar?
In my paper I argue that poor financial skills and ignorance is less of a problem than many suggest.

Take, for example, the cities of Dakar (Senegal) and Kampala (Uganda). Both recognized the need to reduce their reli­ance on development assistance or com­mercial banks. They also recognised that, to attract investment from institutional investors like pension funds and insurance companies, they would have to demon­strate their creditworthiness.

Creditworthiness can be understood as both the willingness and the ability to borrow. To achieve a satisfactory credit rat­ing, Kampala and Dakar needed to prove that they could reliably raise and man­age money from a range of local sources, including from property taxes, parking fines and license fees.

Months of dedicated work yielded pos­itive results. Independent ratings agencies assessed the health of the cities’ finance systems. Both cities received invest­ment-grade credit ratings, meaning that prospective investors could be reasonably confident of recovering their money.

Indeed, after the cities secured these credit ratings, several local investors indi­cated their desire to purchase municipal bonds.

But political conflicts between the local and national levels led to Dakar’s bond issuance being cancelled at the last min­ute. And in the case of Kampala, national regulation has capped the city’s borrowing at a prohibitively low amount. This limit means that the city cannot borrow enough money to make bond issuance worthwhile.

What’s the real problem?
If the issue doesn’t stem from creditwor­thiness, technical proficiency, or financial market readiness, there must be another factor limiting municipal bond issuance.

My paper attributes the lack of bond issuance not to the municipality or poten­tial investors, but to limiting behaviour of national governments.

While they devolve substantial respon­sibilities to cities, they limit their ability to raise funds. This is often driven by a fear on the part of sovereign leadership to allow cities to have a hand in holding their own purse strings.

This power can ultimately lead to less dependence on the national government. — The Conversation.