Cities' DIY route to capital raising: municipalities in Africa are increasingly looking to local and international capital markets to fund infrastructure projects.

Author:Thomas, David
Position:Sector Focus: Urban Infrastructure

A 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, Cote d'Ivoire and Zambia--suggesting 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.


To continue reading