Innovative Municipal Financing: Developing Local Bond Markets to Support Infrastructure Development
Fact Sheet
U.S. Agency for International Development
Washington, DC
April 26, 2006
Purpose of Initiative:
Limited access to finance impedes the ability of many local governments in the developing world to address infrastructure needs, thereby limiting water, energy and sanitation services available to citizens. Many cities instead operate on a pay-as-you-go basis and must save money from taxes and other city income or fight for limited central government funding to maintain or expand basic services. Bank financing is often short-term and prohibitively expensive. By contrast, in many developed countries, local governments obtain financing to construct needed facilities by borrowing from domestic capital markets through the sale of municipal bonds (a long-term interest-bearing instrument). Such bonds are a lower cost option than bank financing, enabling cities to make improvements and plan expansion within a limited budget.
To address this challenge, the US Agency for International Development (USAID) is helping to improve the ability of sub-national governments in Mexico and South Africa, for a start, to finance municipal infrastructure by accessing domestic capital markets through municipal bonds. In South Africa for example, the partnership is working with selected local municipalities to analyze the amount of new financing that will be needed to meet their infrastructure requirements and helping to identify investors interested in buying South African municipal bonds and matching them with municipal borrowers. In addition, municipalities are receiving assistance in improving their financial management capacity, which helps assure potential lenders that the local government will be able to repay the debt which results in lower transaction costs for borrowing.
The partnership's technical assistance package includes the entire scope of financial advisory services needed to develop a regional and/or domestic capital market capable of financing sub-national infrastructure projects. The assistance is designed to be provided through up to five different modules based on the needs of the locality/country. Each of the five modules is self-standing and can be implemented alone. The financing models that could emerge from this program have been used successfully in the United States to finance such projects as airports, criminal justice centers, economic development, education, health care, housing, pollution control, public power, solid waste, student loans, tax increments, transportation, and water & sewer utilities.
Partners:
Governments : Federal and state governments of Mexico, South Africa, and the United States of America (U.S. Agency for International Development: Office of Global Development Alliances, USAID/Mexico, USAID/South Africa and Office of Poverty Reduction/Urban Programs Team).
Private Sector: Evensen Dodge International
Partnership Targets:
- To increase domestic capital financing for local infrastructure projects.
- To improve the ability of municipalities and provincial governments to access funding through domestic capital markets.
- To improve municipal financial management capacity in select countries of the developing world.
Progress Towards Targets:
Progress in South Africa includes:
- Drafting a scope of work to conduct a diagnostic analysis of South Africa's national legal and regulatory framework as it pertains to the country's municipal financing market in order to identify areas where reform is required to make municipal bonds possible, thereby improving the ability of municipalities and provincial governments to access funding through domestic capital markets.
- Identifying the types of debt instruments currently available to sub-national governments in South Africa wanting to access capital markets to finance infrastructure and the responsible South African government agencies involved in their regulation, again to facilitate borrowing by sub national governments.
- Assisting the Municipality of Tshwane to present its borrowing plans to the Municipal Council for official approval, an arduous process that was finally achieved in April 2005 when the implementing partner signed a memorandum of understanding with the Municipality of Tshwane in which both parties agree to work towards accessing financing for infrastructure projects.
- The implementing partner prepared different debt scenarios and financing structures to suit Tshwane's financing needs. The implementing partner met with rating agencies and potential investors interested in acquiring Tshwane's bonds. These steps also helped to improve the Municipality's financial management capacity.
- In December 2005, the partnership assisted the City of Tshwane in issuing the local currency equivalent of a USD100 million Request for Proposals for long-term funding. This funding will come from the domestic capital market and will be used to refinance other debt under more favorable conditions, thereby making more funds available for infrastructure improvements.
- In February 2006, six proposals were received from South African financial institutions in response to the City of Tshwane's Request for Proposals for the USD100 million bond issuance.
Progress in Mexico includes:
- Collectively, local governments from these two states, Michoacán and Quintana Roo, successfully borrowed from Mexican domestic financial institutions for improvements to water and other basic services infrastructure. In addition, the credit ratings of the participating local governments improved resulting in both lower financial transaction costs and interest rates, saving local governments an estimated USD4-6 million.
Next Steps:
- The City of Tshwane is currently reviewing the six proposals and should make an award by the end of 2006. This transaction will allow the City of Tshwane to refinance old debt under more favorable terms, thereby freeing up funds that could go towards infrastructure development and satisfying lenders and investors concerns of hedging their risk exposure when lending to municipalities. The Tshwane model may also be replicated in other South African cities, thereby increasing funding for infrastructure development throughout South Africa.
- In Mexico, a partial credit guarantee program for approximately 300 local governments to access financing from the domestic capital markets is being developed. The partnership is also helping the Mexican State of Zacatecas establish Mexico's first bond bank focused on developing pooled-financing transactions to benefit over 50 sub national organizations by making funding available for infrastructure projects.
Resources:
To date, USAID and Evensen Dodge International have together contributed approximately $1 million USD in financial and technical assistance through this program.
U.S. Primary Points of Contacts:
U.S. Agency for International Development, Bureau of Economic Growth, Agriculture and Trade, Office of Poverty Reduction, Urban Programs Team: Mike Keshishian (Phone: 202/712-4725, E-mail: mkeshishian@usaid.gov)
Evensen Dodge International: Fernando Gama, Senior Vice-President (Phone: 952/471-1196, E-mail: fgama@post.harvard.edu)
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