Untapped finance for African cities: Municipal bonds

As African cities face a chronic shortfall in urban financing, municipal bonds are increasingly seen as a way to plug the finance gap. Municipalities are encouraged to tap capital markets. New governance platforms, like the African Municipal Bonds Forum, have recently emerged to increase knowledge on municipal bonds and promote their use in African cities.

Municipal bonds enable local governments to raise money to fund public projects, paying bondholders interest for the loan. In Africa, this market is fairly new and still confined to only a few cities. Johannesburg issued Africa’s first municipal bond in 2004, Lagos sold $533 million worth of 7-year debt in 2013 and other cities like Dakar, Dar Es Salaam and Windhoek are now looking to enter the bond market.

According to a report published by the Mo Ibrahim foundation, only $1 billion is currently mobilised by African local authorities for city development, far short of the $45 billion provided by national treasuries and the $10 billion mobilized from donors. This amounts to a funding gap of 40 percent, since an estimated $90 billion per year is required to meet the needs of Africa’s growing urban population, according to the report.

A need for greater financial autonomy

To tackle the pressing needs of urban development municipalities cannot rely on these “inadequate handouts” anymore. As pointed out by the African Municipal bonds forum, whose first edition was held in Dakar in 2016, this financial deficit can be mainly “attributed to the lack of information between potential investors and prospective issuers and the absence of local governments in the market.”

Funding Africa’s urbanisation via municipal bonds is crucial in order to diversify municipalities’ revenue streams and increase their financial autonomy, both from central government and international donors.

In Dakar, for instance, the State has routinely withheld funding from municipalities, according to the Africa Research Institute, especially those in opposition parties. This dependency on transfers from central government impedes local governments’ capacity to raise revenue. In Dakar, again, allowances received to fund the functions transferred by decentralisation only amount to around 1% of the city’s budget (ibid).

Municipalities cannot generally predict and control their own revenues “from year to year.” This instability does not fuel the “appetite” to invest in African municipalities.

The barriers to investment

The core barrier to investment lies in legal and regulatory frameworks, as many municipalities are actually not allowed to incur long-term debt, which forces them to depend on revenue channelled from central government.

Even in the case of Senegal, which is decentralized, the central government managed to block Dakar’s first municipal bond from going to market. It cited concerns over whether or not national government could be held responsible for Dakar’s new debts.

The dispute between the central government and the municipality, officially because of concerns over the city’s level of indebtedness, appears however more like a political confrontation between Macky Sall — Senegal’s president — and Khalifa Sall — Dakar’s mayor. The latter is a rival for the next presidential election.

The second main barrier is perhaps investors’ lack of enthusiasm for municipal bonds issued by African cities. Indeed, municipalities’ unstable revenue streams are seen as risky for bond investors. “Few municipalities are able to establish creditworthiness based on cash flow, debt profile and credit history to allay investor concerns about repayment of the loan,” according to the Africa Research Institute. Similarly, few municipalities can demonstrate long-term planning views and a development strategy that can reassure investors.

In order to issue a bond, municipalities thus need to be credit rated and have sufficient borrowing capacity to issue bonds of high enough value to be worthwhile.

Dakar’s innovative approach

Dakar, despite its low revenue streams and lack of support from central government, demonstrated a pro-active and innovative approach to designing and almost issuing its first municipal bond.

Under the impulse of Mayor Khalifa Sall, the city first underwent a Public Expenditure and Financial Accountability (PEFA) review of its financial management system. This gave the impetus to improvements, by making audits and evaluations public. Many commercial loans, from the Agence Francaise de Développement for instance, were secured and reforms engaged.

The municipality incrementally emancipated itself from central government trusteeship. Then it looked at cheaper alternatives to commercial borrowing. Municipal bonds hence appeared as an alternative.

Sall dedicated a small team to the issue, namely the Dakar Municipal Finance Programme (DMFP). The municipality then managed to obtain a rating from Moody’s. The city also secured a partial guarantee of the bond (50%) from USAID, to further enhance the transaction’s reliability.

The loan was set at US $40 million at an annual interest of 6.6% to be repaid after seven years, according to the Africa Research Institute.

Shortly before the bond’s scheduled launch in February 2015, the national government said the bond issue could not proceed.

Dakar’s experience underlines that it takes time to issue municipal bonds. There is a long path from the decision of financing through bonds to the conclusion of successful financial transactions.

As the second African Municipal Bond forum will be held in October 2017 in Johannesburg, potential issuers of municipal bonds need to explore the conditions of replicability of this experience to other African cities, and identify the pitfalls that made a city like Dakar eventually fail.

African cities’ growing need for a diversified financial capital, coupled with their lack of experience in this matter, could also be supported by a global platform provided to African cities issuing municipal bonds.


Hugo Halimi is an intern with urbanafrica.net. He is a recent graduate from the London School of Economics and Sciences Po in Urban Policy and Planning. He also has a background in African studies from Sciences Po and previously worked as a project manager in a slum-upgrading organization in Kenya. He is particularly interested in local government systems and land tenure issues in informal settlements.

Photo: Pixabay.

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