Consolata Ncube, a Municipal Finance Practitioner community member from Zimbabwe, responded:
Thank you for sharing the news about Dakar.
In my country Ministerial approval for capital funding must be obtained before any processes for raising funds are commenced. This is spelt out in the Urban Councils Act, which details the manner in which Councils should be managed.But again each country is different. I hope the issue will be sorted out amicably so that the City can access the appropriate funding.
It is unfortunate that the Dakar bond issue has become a "poltical football" in the contest between the Mayor and the President of the country. But these things happen... Let's hope that the issue is resolved soon and the bond issue can continue as planned by the city and previously approved by the Ministry of Finance. The article in Citiscope (thank you Joshua) provides a very good review of the process so far.
One thing that the article did not cover however was the recent release of the credit rating on the bond itself. While the City of Dakar has a BBB+ (CFA Regional scale) rating for its general obligation (G.O.) bonds, the bond that is to be issued (hopefully soon) was recently rated at A (CFA regional scale) by Bloomfield Investment Corp, the city's rating agency. The improvement in the creditworthiness of the bond compared to the city iteself is a result of the financial structuring that applied several credit enhancement measures, including a 50% partial risk gurantee from USAID. This creditworthiness improvement points up the importance of carefully structuring a municipal bond to obtain the best terms from the local capital market (especially if the local market is not yet familiar with municipal bonds as an investment opportunity). Kudos to the Dakar Municipal Finance Program Team and their indepent financial advisors! The report by Bloomfield on their rating of the bond makes interesting reading. I will post it on this site soon.
David Painter, great comments. While the specific rating on the bond (see link below) reflects the good structuring of the transaction, as you said, and also sets a world-class standard for bond issuances in West Africa, I'm wondering if there a risk that the higher credit rating on the bond may exacerbate this "political football" match? Unintended consequence? I know, I'm playing the devil's advocate
Post-scriptum: here's the LINK to the bond rating report that David kindly shared with our community.
So far as I know, no one has raised the improved credit rating as an issue
in the negotiations. In fact, I understand that the basis for the Ministry
of Finance last minute objection to the bond is their "concern" that if
Dakar defaulted on a payment, the the Ministry would be stuck with the
bill. A rating up grade certainly undercuts that arguement!
Again from the devil's advocate desk: David Painter, I agree the higher rating on the bond is the perfect counter-argument to the Ministry's concerns. However, if the issue is political (as opposed to financial), a rating that sets the City on a higher standard than the sovereign could fuel the animosity between the two parties (pun intended). Take-away for the devil's advocate: even when a sub-national complies with all fiscal responsibility laws and related regulations, coordination with the central government remains a key factor and should never be given for granted (even after the Ministry of Finance has approved the transaction!).
This is a reminder about the frequent challenge of transplant rejection. Even where the laws authorize municipal borrowing, the institutional and political economy can undo well-laid plans.
The institutional, legal and regulatory framework for municipal borrowing brings in many role-players and many fields of expertise. Collaboration and consensus building is essential to the success and sustainability of any reforms. The evolving institutional and legal framework of a developing country must in the long run reflect the society, history and habits of the country.
One reason that the South African experience has turned out well is that the notion of local fiscal autonomy has both historic roots and Constitutional protection. In fact the Constitution forecloses any chance that the national sphere would be legally responsible for local government debt. A second factor, is that the National Treasury wanted and continues to want, local governments to access private credit markets, because they recognize the essentiality of urban infrastructure for growth, and experience shows that national infrastructure grants have not always panned out well. Not to mention the fact that the national fiscus cannot bear the cost of all the urban infrastructure investment that is needed. A third, and perhaps most critical factor is that the entire process of developing and implementing the regulatory framework arose out of a broad collaboration between national and local government and the private sector.
I tried to attach a case study I did on the South African experience, for anyone who might be interested, but it exceeds the size limitations of this application. If you are interested, drop me an email and I will send it to you. email@example.com
Introducing a new blog series: Municipal finance for the poor
By the time you read this, something terrific – sub-sovereign municipal finance for the poor – should have happened in Dakar, Senegal, and the World Bank and its Sub-National Technical Advisory unit will be in the vanguard. It’s a tool that urban advisors should understand and recommend whenever appropriate.
For the World Bank, as for other DFIs, pro-poor impact is delivered through (1) large-scale finance provided to appropriate government borrowing entities coupled with (2) high-quality technical advice requested by those same borrowers. These go hand in hand – capital, which allows the borrower entity to take action at scale and speed, and advice so the fast capital is also smart and effective. And while many Bank borrowers are national governments, when it comes to urban upgrading and pro-poor urban initiatives, cities are often the crucible of action, because cities ‘own’ the problem of slums, which are literally right outside their doors.
Dakar, capital of Senegal, faced just such problems three years ago, and the city committed to complete a roughly $40m bond launch, the region’s first-ever issuance without the national government’s credit involved. It’s a game-changer for Dakar, for Senegal, and for Sub-Saharan Africa.
Which other cities in the global South can follow a similar path? Can cities tackle high-priority, long-lived, capital-intensive projects that form the backbone of a long-term urban strategic policy, by using private money raised through the debt capital markets? What does it take for a city to become debt-bankable, and why did it take Dakar three full years?
As a Community of Practice member, I’ve been recruited to write a series of blog posts, probably 10 to 15 in total, that both tell the story of Dakar and offer adaptable lessons for similar contexts, so that you and others associated with the Bank, especially municipal finance practitioners, can use the Dakar experience productively in your own work. I hope these posts will spark meaningful discussion within our Community of Practice, and provide insight into tools, techniques, and tips for municipalities considering similar transactions.
Currently, the posts are expected to cover these topics:
- What it takes to start: Dakar when the Municipal Finance Program.
- The desirable enabling national environment.
- The role of donors and donor support.
- The municipal-finance team: roles, responsibilities, and expertise.
- Leadership, in the city and in the donor/ DFI community.
- The spend: what proposed use of money ‘works best’?
- Creditworthiness, or how to persuade the capital markets to buy the bonds
- Rating agencies and other gatekeepers.
- Structuring a bond transaction, step by step.
- Hunting and bagging institutional investors.
- How national government influences and helps the city’s effort.
- After the first closing: is it sustainable and scalable?
- If it’s so great, where can it go wrong?
Posts are scheduled to come out every other week around the middle of the week.
Reader feedback is welcome, either in the comments below or directly to me at firstname.lastname@example.org. Thanks for reading, please share the posts, and please comment!
Dear Jeremy Gorelick, your contributions to this blog promise to be our community's biggest hit. Having a "Dakar-insider" to share insights on this most important story (as it unfolds!) is absolutely great. It will make our community compete with the Financial Times! By the way, please don't hesitate to post/link references to news items that you may run into as the story continues to unfold.
Is your city a good candidate for a bond issuance? What made Dakar a good choice in 2011?
In the fall of 2011, the City of Dakar received a $500,000 grant from an external donor to analyze the feasibility of launching the region’s first bond. Dakar was uniquely positioned amongst its peer primary cities in the region due to its (1) visionary leadership, (2) adoption of a strategy to address urban planning, and (3) past performance as a borrower from external sources.
Mayor Khalifa Sall, elected in 2009, recognized that the city needed to introduce innovative financing to deliver on important development goals or improve the quality of life of the urban poor. He was fulfilling his campaign promises:
- February 2010 – “Milk in the Schools” program launched
- April 2011 – More than USD 100,000 allocated to 17 cultural projects
- September 2011 – 150,000 uniforms distributed to the 82,000 students in the city’s primary schools
- October 2011 – Traffic lights installed at more than 60 intersections in the city
Further, municipal leadership had committed to establishing a Department of Planning and Sustainable Development; the municipal council had already approved plans to fund this key agency by the start of 2012. One of its first tasks was to write the city’s long-term strategic plan in time to be publicly announced at the triennial Africities conference, scheduled for December 2012 in Dakar.
In 2008 under the previous mayor, the City of Dakar had signed a loan with the French Development Agency (AFD) to fund a program to furnish the city with street lights along well-traveled thoroughfares. This loan was the first of its type from the French Development to a West African Capital city without a central government guarantee of repayment. It demonstrated a belief from external lenders that the City of Dakar could be viewed as a creditworthy borrower. This loan was possible without a central government guarantee because language in the constitution granted municipalities across the country the power to enter into long-term debt obligations without central government intervention.
At the start of the Dakar Municipal Finance Program in the fall of 2011, the city seemed far from being a solid candidate to pioneer a sub-Saharan Africa municipal bond. A financial forecast showed that its trends were unfavorable, as demonstrated by the ever-increasing deficit in the year-end accounting.
City of Dakar’s Financial Information (2008-2011), in millions of USD (from Bloomfield Investment’s 2012 Rating of the City of Dakar)
Moreover, the city lacked a comprehensive long-term strategic plan with clear priorities to improve the quality of life for the average citizen, let alone someone classified as “the urban poor.” On paper, the city was unable to sufficiently demonstrate to potential institutional supporters of a municipal financial transaction that it was creditworthy or had solid, well-conceived investment projects.
With the help of data compelling action plan and a convincing argument from the city’s municipal leadership, however, the municipal leadership convinced an external donor to support initial exploration that helped to form the future of the Dakar Municipal Finance Program.
Initial questions for other cities:
Before starting a bond launch preparation program, cities leaders should consider five key factors:
- The regulatory framework: Are municipalities constitutionally allowed to enter into long-term debt obligations? Do regulations encourage, or at least not discourage, municipalities from entering into long-term debt obligations, including municipal bonds?
- Municipal leadership: Does the city’s leadership demonstrate a commitment to progressive policies?
- Investment areas: What services is the municipality responsible for providing? Does the municipality intend to continue to provide these services, or will the central government take them over?
- Financial performance: Is the municipality financially strong? How does the municipality generate its revenues: taxes, tariffs, transfers, fees? Are the finances of the municipality regulated: audited by an external auditor and monitored to maintain prudent debt limits? Does the municipality exhibit good financial management: useful and verifiable accounting, internal controls, and acceptable levels of corruption?
- City borrowing: Has the municipality borrowed from the central government, development financial institutions, or commercial banks? Is the city current on all of its debts?
Question for discussion: What factors make your city a good candidate for a municipal bond issuance?
Dear Jeremy Gorelick, what a terrific first installment in your series! A couple of comments, for your/everybody's consideration:
- Just to double-check on the dates, my understanding is that the AFD loan was signed in June 2009, not 2008, Can your help confirming this date?
- For the benefit of our community members, it's worth mentioning that in 2008, the City of Dakar received technical assistance from the Public Private Infrastructure Advisory Facility (PPIAF) and its Sub-National Technical Assistance (SNTA) Program for the preparation of a Financial Management Diagnostic - Public Expenditure and Financial Accountability, PEFA methodology for the city of Dakar. This assessment is the first of its kind conducted in an African municipality. The PEFA study provides a global evaluation of the local public finances system, with a focus on the weaknesses of such a system and on the shared responsibilities with the central government regarding the administration of public funds, tax collection, accounting systems, and human resources. It also enables a city or state to identify and prioritize the areas that need to be improved and for which an action plan can be implemented. The PEFA study for the city of Dakar analyzed the comprehensiveness and transparency of its budget, the predictability and control in budget execution, and other indicators. The study recommended City officials to improve the fiscal management, allocation of adequate resources, and effective delivery of municipal services.
- You've quoted (most usefully!) the 2012 credit rating by Bloomfield. Do you happen to know the actual rating obtained by Dakar at that time? Is the full rating report available online? Our community members may be interested in reviewing the report to gain an even better understanding of Dakar's "starting point" and what insights were reflected in that rating.
- Final (and very difficult!) question, Jeremy: you made reference to the need for the municipal leadership to demonstrate committment to "progressive policies" as a key factor when preparing for a potential bond issuance. Can you help us better understand what is meant by the definition "progressive policies"?
Thank you so much and VERY MUCH looking forward to the next installment!
PS: if you (or anybody else) runs into updated articles/news-items on the ongoing bond issuance, please do share them. Cheers!
Dear Joshua (and others),
Thank you very much for your terrific observations and questions.
1) AFD's loan to the City of Dakar was signed in July 2008 (I've cross-referenced this with a different article - http://www.cooperationdecentralisee.sn/IMG/pdf/AFD_Ville_de_Dakar__3.pdf).
2) On its first public rating, conducted by Bloomfield Investment, the City of Dakar received a long-term regional rating of BBB+, with a positive outlook, and a short-term rating of A3, with a positive outlook as well. I've reviewed the rating agency's website and did not readily find the rating, but would be happy to share it via e-mail with anyone who would like to see it; just drop me a line. I'm planning on writing a later post about ratings, so I chose not to focus too heavily on them here.
3) I know that "progressive policies" may sound like a convenient buzzword without much substance behind it, as the word "progressive" is quite subjective. In the case of Dakar, Mayor Sall was honoring his pledges to reorganize several of the city's districts according to international best practices of planning and zoning, to redevelop a second urban pole to encourage the redistribution of wealth and population from a concentration in the downtown district, and to provide a better quality of life for the general population (by improving health, education and other social conditions). His interest, coupled with support from his municipal council, in pioneering new financing mechanisms was well-received domestically and internationally.
Thanks again for sharing your reactions!
Dear Jeremy, I found the credit rating of Dakar by Bloomfield, which can be shared here. For the record, it's dated September 2013. For ease of reference, I'm also copying here again the LINK to the specific bond rating report that David Painter kindly shared with our community a couple of weeks ago.
Pro-poor municipal finance: a national ‘enabling environment’
How do the central government’s activities impact the potential for a sub-sovereign issuance?
Part of an ongoing series on municipal finance as a powerful tool for pro-poor urban improvements. Previous posts have dealt with the importance of municipal finance and cities as candidates for municipal issuance.
By early 2011, the City of Dakar had committed itself to embark on a multi-year journey to become creditworthy and bankable for a sub-sovereign issuance to fund urban improvements. But of course, Dakar is a sub-sovereign city within a country, so for the bond markets to evaluate Dakar, they would need a view on the Republic of Senegal itself. Dakar and its advisors concluded the time was right, because in 2011, at the start of the Dakar Municipal Finance Program, Senegal had these capital-positive characteristics:
- 1. Unlike many of its neighbors in francophone Africa, Senegal was politically stable, having enjoyed continued peace and smooth transitions of power since independence in 1960.
- 2. Senegal’s macroeconomic environment was relatively stable; interest rates were hovering around 3.5%, and over the previous six months, inflation was a low 2.6% to 3.1%.
- 3. Domestic demand for bonds was strong, as the central government had issued sovereign bonds on the local market; since its 1996 founding this bourse, governed by the CREPMF, had steadily grown in the size and issuances.
Further, under Senegal’s constitution (as per the 1996 amendment), cities were legally authorized to issue long-term debt, and in fact the city of Dakar had twice borrowed on its own, not through the bond markets but via direct loans from development finance institutions (DFIs) and commercial banks:
Total (USD millions)
French Development Agency
Islamic Bank of Senegal
Thus the city of Dakar and its financial advisors judged the situation promising because Dakar could satisfactorily answer the key questions:
- 1) Is the central government locally bankable? Yes, via the bourse in Abidjan.
- 2) Does a marketplace exist for financial instruments (like stocks and bonds)? Is there liquidity on the secondary market? Yes to both.
- 3) Is the macroeconomic environment relatively stable? Is it politically stable? Yes to both.
- 4) Does the central government want to support municipalities to pilot municipal bonds as a mechanism for funding market-based projects? It said it did. [Up-to-date readers know that, just as the bond was about to issue, a totally unexpected dispute broke out between Senegal and Dakar over the pending issuance; we’ll address that subject later in this series – Ed.]
- 5) Are municipalities constitutionally empowered to enter into long-term debt obligations? Yes.
For readers: In counties where you work, what other questions have you found relevant for sub-sovereign city debt-issuance viability? Please comment on the post or write me directly at email@example.com.
Jeremy Gorelick, yet another great installment in your Dakar-series! The importance of the enabling environment as a precondition for successful transactions is well emphasized in your note. Here's a 1-minute audio-clip by Paul Collier, Professor of Economics & Public Policy, University of Oxford. I think you'll find it's pretty fitting to our story... The clip is extracted from a panel discussion held yesterday at the World Bank, "Harnessing Urbanization for Growth and Shared Prosperity in Africa" (see here for full seminar).
Pro-poor municipal finance: financing a program
How does a municipality fund a pioneering initiative?
An ongoing series on municipal finance as a powerful tool for pro-poor urban improvements, including these previous posts:
[Part 1: The importance of municipal finance]
[Part 2: Cities as candidates]
[Part 3: The constitutional enabling environment]
Imagine you advise the progressive mayor of a city government in an emerging country, and the mayor (a) thinks municipal finance could be a game-changer for pro-poor projects and economic development, (b) has not successfully achieved a bond launch, but (c) does know it’ll take time, city political resources, and some money to put the pieces in place. Where does the city get the pre-launch money to ready itself to tap the capital markets?
The pre-launch money is speculative, because the hurdles to bond launch appear daunting.
- Debt capital markets in emerging countries are sometimes shallow and there may be no ‘peer city’ in the region that has already done what our imagined city wants to do.
- Many cities have little or no track record of previous city-level borrowing independent of the sovereign government; many of them have budgets that depend in large part on either central government transfers or concessionary loans from development finance institutions (DFIs) that flow through the central government on their way to the city.
- Central governments are not always fully supportive of the city’s quest to become financially autonomous.
- The city’s financial recordkeeping may be less than the standard of rigor and transparency that debt capital markets investors expect.
- Funders may doubt that the city’s leadership, especially the mayor, has the political commitment to stay the course for the 2-3 years it will take to launch.
In 2011, Dakar faced all these challenges, and the mayor realized the city needed a donor (to fund most of the pre-launch costs) that could also be a guide and confidant. He also realized that though the bond launch itself was the ultimate prize, the activities before bond launch would produce outcomes that donors value: increased transparency, stronger financial control and budgeting in the city’s government, participatory budgeting and establishment of city policy priorities, strengthening and formalizing the informal economy, and including the urban poor’s voice in the dialog about the city’s future. So the mayor also made finding the donor a personal priority, and committed that some of the city’s staff would be dedicated to the project once the donor funding was secured.
Through contacts already made with the major DFIs, as well as outreach to the long-time foundations and philanthropies committed to the urban poor, the mayor was able to zero in on a handful of potential donors that could be approached, with the right preparation and evidentiary support, with a proposal for the entire long-term vision. Dakar was fortunate in that the mayor’s search brought the city to the Bill & Melinda Gates Foundation and its Urban Program within the Special Initiatives Group. That fit worked, and after an intensive six-month period of developing the grant application, the multi-year grant was approved in the summer of 2012 and the city was able to put in place an internal and external team with a mandate to pursue the goal.
For readers: Help us improve this posting series! In countries where you work:
- What new or promising initiatives have you seen that deserve greater exposure in this community of practice?
- What donors or government entities have shown commitment to tackling municipal finance?
Comment below or write me directly at firstname.lastname@example.org.
Dear Jeremy Gorelick, by far the most insightful discussion-thread I've ever followed! Over 500 views so far, and ONLY because of your contributions. Hopefully these viewers will turn active discussants, as I'm convinced there are so many of us with questions/comments on this topic.
One comment on your last posting: one resource that cities may want to consider for technical assistance is PPIAF (Public-Private Infrastructure Advisory Facility), which has a Program specifically designed to support cities (Sub-National Technical Assistance). Indeed, it's worth footnoting your previous post by saying that PPIAF supported Dakar (in parallel to the other partners/intiatives mentioned in your piece) over the past few years with various activities to strenghten Dakar's preparedness for market-based transactions.
As I mentioned already in an earlier post, PPIAF assisted Dakar in 2008 with the preparation of a Financial Management Diagnostic (Program Expenditure and Financial Accountability). This assessment was the first of its kind to be conducted in an African municipality. The study was requested by the French Development Agency to qualify Dakar for the sub-sovereign loan you referred to in your earlier postings. If others are interested, here's a paper on the methodology adopted for this Financial Management Diagnostic at the sub-national level.
Following the diagnostic work above, PPIAF also assisted Dakar analyzing the effectiveness of the revenue collection process, with particular focus on advertising revenues (e.g. bill-boards). Which allows me to share a related news I run into today (thanks to David Painter): LINK.
So, dear members of this community of practice, how about $5 ml for displaying a little advertisement on any of your bridges? Click on the picture below to find out more!
Finally, PPIAF and the World Bank assisted Dakar with the credit rating on the bond transaction we're discussing in this very blog (for good or bad reasons, it remains to be determined!). You can find the credit rating linked to my second posting on this blog.
These are just examples of services/support that another facility, in addition to the ones mentioned in Jeremy's posting, can provide to sub-national governments. How can cities make a case for securing such resources? Perhaps engaging in this community of practice could be a first step (hint hint)
Pro-poor municipal finance: assembling the experts
How did Dakar build its team?
Part of an ongoing series on municipal finance as a powerful tool for pro-poor urban improvements. Previous posts have dealt with the importance of municipal finance, cities as candidates for municipal issuance, the importance of donor support, and the constitutional enabling environment.
At the beginning of the Dakar Municipal Finance Program in 2011, the city lacked staff experienced in municipal bond issuance. As a first step towards filling this deficit, the mayor and his cabinet assembled a project management unit consisting of domestic experts familiar with municipal governance and local political issues. The inaugural team included:
- Program Director
- Program Coordinator
- Program Administrator
- Program Municipal Financial Officer
Further, and because of the highly specialized nature of bond finance, the municipality included an international expert to be the program’s Lead Technical and Financial Advisor for its inaugural transaction, anticipating that locally-trained experts would conduct future transactions. This unit, with a full-time focus on the program, worked closely with many of the city’s existing departments, including public works, finance, communications and planning. These departments seconded employees, for various amounts of time, to assist the program in specific tasks. A significant part of the Dakar Municipal Finance Program’s work focused on building the capacity of the city’s employees. These individuals will constitute a new division responsible for exploring innovative opportunities for municipal finance. The success of the program can, therefore, partially be measured in the number of additional municipal bonds and other pioneering forms of finance.
In summary, the municipal leadership:
1) Recognized the need for a dedicated full-time team with specialized expertise to manage the program
2) Identified and appointed individuals skilled in political, financial and technical issues
3) Arranged for additional support from related existing departments for discrete tasks
For readers: How have you overcome challenges associated with identifying appropriate team members? Are there other approaches that you have embraced to staff program management units? Have pioneering initiatives, similar to the Dakar Municipal Finance Program, led to increased institutional capacity within city government? Please comment on the post or write me directly at email@example.com.
I'm a new member to this community but have joined at an interesting time, given this discussion-thread. I work with USAID's guarantee office, and we have been working with the Dakar team for the last two years. We were disappointed with the last minute impulse of the Ministry of Finance to delay the bond launch. While all risk needs to be taken into account, including those raised by the MoF, last minute objections jeopardize the credibility of the well-vetted process. It is not a good message to send to potential investors. Yesterday, the Senegalese press reported another twist in this saga. The City has filed a law suit against the Government of Senegal over this blockage: http://www.seneweb.com/news/Politique/blocage-de-l-emprunt-obligataire-de-la-m_n_154186.html#commentaires
We can only guess this represents the City's frustration that the issues have not been resolved in a timely manner over the last couple of months. I imagine there will be more news coverage of this over the next couple of days.
Dear Steve Matzie, thank you for this update (and what an update it is!). Below is a quick translation of the article, courtesy of Julia Podevin, just to give non-French speakers in our community a rough sense of the latest development in this saga:
The article says that the issue (the blocking of Dakar's bond issuance) has been brought to the supreme court. The mayor of Dakar, Khalifa Sall, finds the block from the Senegalese government unacceptable. He says that members of government say it's because of technical reasons, but there aren't any valid technical arguments anymore, the mayor/city have shown that they are not valid. The mayor finds the Senegalese's government attitude very disappointing - three times in the past they had not objected, but now they are bringing up arguments that can't move forward. It is a bit embarassing/disturbing, that the government can change its mind. All the partners that were engaged in this project, whether it was USAID, the World Bank, ..., all became engaged because the government had given its "non-objection". The fact that the State can retract itself is not without consequences because there is a law from 1970 that governs a bit the decisions of the State and the ways and conditions under which they can be revoked. There have been some cases with the supreme court. That is why Khalifa Sall decided to bring the issue to the Supreme Court.
Selecting an investment project: The twin goals of development and finance
How did the City of Dakar prioritize among its initial investment projects?
Part of an ongoing series on municipal finance as a powerful tool for pro-poor urban improvements. Previous posts have dealt with the importance of municipal finance, cities as candidates for municipal issuance, the importance of donor support, the constitutional enabling environment, and the process of assembling an expert team.
In an era of budgetary pressures and increasing urbanization, central governments in the global south are shifting more and more responsibility for providing local services to local authorities. But these governments rarely fund this decentralization with enough financial resources fulfill the mandates. As a result, cities deteriorate as they grow, and local officials must scramble to find the funding for infrastructure and housing and to put in place administrative systems to support it. This worldwide phenomenon of urbanization coupled with decentralization and unsatisfactory living conditions is on full display in Africa's cities.
The World Bank and AFD estimate the urban finance gap in Africa at over 25 billion per year (see Financing Africa's Cities: The Imperative of Local Investment, co-published by the World Bank and the French Development Agency, 2012, available at http://elibrary.worldbank.org/doi/abs/10.1596/978-0-8213-9455-7). Although African financial markets are strengthening and private finance for infrastructure is expanding, most African cities have no access to these sources. Instead, they must rely on short-term development or commercial bank loans, their own budgetary resources, or budgetary transfers of the central government, often borrowed in foreign currency. Therefore, a better option to consider is to channel local currency financing to cities. A municipality's decision, though, to raise money from local sources of capital calls for a careful balance between development goals and private sector goals, especially if a charitable foundation finances a capital markets development program, as was the case for the Dakar Municipal Finance Program.
The Dakar Municipal Finance Program’s work focused on preparing the city to access funds from local sources for capital-intensive projects. With the financial support of the Bill & Melinda Gates Foundation and a team of skilled experts ready to start work, the leadership of the City of Dakar directed the Program Management Unit (PMU) to select and then analyze the feasibility of priority projects identified by the city’s recently created Department of Planning and Sustainable Development. The PMU readily rejected two kinds of projects: those attractive to the private-sector for their revenue-generation but unable to meet development goals and those attractive for development goals but unable to meet private-sector expectations. An example of the first kind was a centrally located pay parking garage and of the second was new recreational fields or refurbishments to city-owned buildings used for district council meetings.
Through a consultative process involving district leaders, non-governmental organizations, and other key stakeholders, the city ultimately identified a project that satisfied both development and private-sector goals: the construction of a marketplace for more than 4,000 street vendors. Vendor groups and other trade unions had been working closely with the city for months to select an ideal location for a new hall that would be able to offer affordable rates to street vendors.
The investment project met three leading criteria:
- Delivering a key development priority, as described in the city’s strategic plan
- Meeting private-market expectations through having a clearly defined revenue stream
- Garnering stakeholder support through collaborative decision-making
For readers: How would you go about selecting an appropriate investment project? Do you feel that other broad elements should be considered? Please comment on the post or write me directly at firstname.lastname@example.org.
Why do cities in the developing world have trouble accessing municipal bond markets?
The biggest is that quite often, they’re not allowed to. The laws or constitutions of many countries bar cities from incurring long-term debt — a condition that forces most major financial decisions to be funneled through central governments. Whether that’s true in Dakar’s case or not is essentially what this week’s bond disagreement is all about.
Fiscal handcuffs affect cities in other ways. Revenue collection in many developing countries is centralized, leaving cities to wait on remittances from their national governments. The timing and amount of those remittances can vary depending on the economic situation or politics of the moment. So cities often can’t control, let alone predict, their own revenues from year to year. That makes them a bad bet for potential bond investors, who want to see evidence of stable revenue streams — and a reasonable likelihood of seeing their investment repaid with interest.
City leaders also bear responsibility, owing to spotty financial management. Long-term planning of the sort investors find reassuring can be hard to find in developing cities. “Most cities that I’ve come across in the region lack long-term strategic plans,” says Jeremy Gorelick, who advised Dakar’s finance program and now works for the U. S.-based Affordable Housing Institute as the managing director of capital markets. “Or the strategic plans will often change from one municipal administration to the next. That’s an issue that needs to be overcome.”
Lessons for other cities
Perhaps the most important move Dakar made was done in private. In 2012, the city paid the bond-ratings firm Moody’s to give the city a confidential credit rating. That gave city officials a full and independent assessment of their progress in tightening their financial management. It also gave them a roadmap of what things they still needed to improve — and some time to do it.
One adjustment Dakar made was to set up a separate fund earmarked to paying the debt service. That was intended to assure investors that the city won’t have to scrape money out of the budget to pay back the bonds. Another boost came when the U. S. Agency for International Development offered to back the bond with a 50 percent credit guarantee. This means that in the unlikely event that Dakar would default on the bond, U. S. taxpayers would pay back investors half of their investment.
In September, 2013, Dakar finally sought a public credit rating from Bloomfield Investment. The credit advisory firm gave a rating of BBB+, a middle-tier ranking that qualifies as “investment grade.”
Dakar is aiming to launch its bond on the Bourse Régionale des Valeurs Mobilières. That’s a regional securities market based in Abidjan, the capital of the Ivory Coast and the financial and regulatory hub for the 14 francophone countries of West and Central Africa. The countries share a common currency and a common securities regulator. All of that has been seen as an advantage for Dakar — and any other potential issuer from the region — because pension funds, banks and other potential bond buyers can come from anywhere in the region without facing currency risks.
“It broadens the market,” says Gorelick. “And in terms of sustainability and replicability, a lot of these other countries would presumably be able to mimic what was done in Dakar in a far more straight foward fashion than if there was a totally different currency, totally different regulatory body and totally different investor base.”
Creditworthiness, or how to persuade the capital markets to buy bonds
Part of an ongoing series on municipal finance as a powerful tool for pro-poor urban improvements. Previous posts have dealt with the importance of municipal finance, cities as candidates for municipal issuance, the importance of donor support, the constitutional enabling environment, the assemblage of an expert team, and selecting an investment project.
Once a municipality’s leadership has selected and validated an investment project, the city’s financial advisors will often test the investor appetite/demand for a bond issuance. Well-developed capital markets are an important pre-condition to the success of a locally-denominated municipal bond. Ideally, a country will have a good mix of traditional institutional investors (like banks, financial institutions pension funds, and mutual funds), high-net worth retail investors, and corporations looking to diversify their savings. These investors, or suppliers of capital, typically will seek the maximum possible return at the lowest possible risk, and creditworthiness is typically the best gauge of risk.
Creditworthiness is a measure of the likelihood that a borrower will default on its debt obligations. Much like in the case of individual borrowers, cities are rated based on quantitative assessments of risk, like its history of repayment of other debt, strategic vision, past performance and financial projections. This creditworthiness is gauged by credit ratings agencies (the topic of the next blog post).
For cities that have never issued bonds, it is always informative to look at the performance of the sovereign in its placement of bonds. Last July, Senegal issued a $500 million 10-year bond, priced at a yield of 6.25%; it was eight times oversubscribed, attracting a total of $4 billion in orders. At the same time, in Cote d’Ivoire (a country which is also part of the West African Economic and Monetary Union), the country attracted $5 billion worth of orders on its 10-year $750 million bond.
(Above graphic from ODI's briefing, "Sovereign Bonds in sub-Saharan Africa" published in April 2014, and found online at http://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/8883.pdf)
In the City of Dakar, at the start of the Dakar Municipal Finance Programme, we (the assembled team) looked at potential investment projects (see previous post), performed an internal review of the city’s finances, and looked at revenue streams that would be sufficient to support the municipality’s debt. This internal assessment was conducted with the rigor of a traditional credit rating, and prepared the city for its subsequent ratings from international and regional agencies. Developing cities in emerging markets might also benefit from activities like the World Bank’s Creditworthiness Academy, which contributors like Joshua Gallo can better explain. Once we had a clearer sense of the financing needs, we identified potential institutional investors and had informal conversations to confirm their interest in purchasing municipal debt.
For readers: What is the capital markets environment like in your country? Has the government independently, or in conjunction with external donors, recently launched any initiatives to support the development of more robust capital markets? Do you think that this might be a stumbling block to bond issuance in your country? Please comment on the post or write me directly at email@example.com.
Special note: I have also started to write a blog series for the diaspora investor network, Homestrings. While this also focuses on municipal finance, it is far more focused on investor prerogatives, without emphasizing the pre-transaction work. To follow this series, visit https://www.homestrings.com/news-and-analysis/2015/june/16/interview-municipal-finance-in-dakar-and-the-global-south/#.VYApnPlViko and https://www.homestrings.com/news-and-analysis/2015/june/04/whats-all-the-fuss-about-municipal-bonds-an-exploration-of-why-investors-are-starting-to-notice-sub-sovereign-debt-in-emerging-markets/#.VYArMPlViko.
Measurements of creditworthiness: the influence of credit ratings agencies
Part of an ongoing series on municipal finance as a powerful tool for pro-poor urban improvements. Previous posts have dealt with the importance of municipal finance, the role of cities as candidates for municipal issuance, the importance of donor support, the constitutional enabling environment, the assemblage of an expert team, the selection of an investment project, and basic principles of creditworthiness.
If creditworthiness is an indicator of the likelihood that a borrower will default on its debt obligations, credit ratings agencies can be called the rulers against which different borrowers can be measured. These agencies provide individual and institutional investors with objective analyses and independent assessments of governments that issue debt obligations.
The three largest global ratings agencies are Standard and Poor’s, Moody’s and Fitch; there are an increasing number of local ratings agencies active in emerging markets due to demand from issuers, investors and regulators seeking more locally-relevant information. In Africa, there are currently four active ratings agencies.
Credit Ratings Agency Name
Agusto and Co.
Global Credit Ratings Company (GCR)
West African Ratings Agency
As previously mentioned in this series, the city of Dakar selected Bloomfield, a credit ratings agency based in Abidjan, to perform municipal ratings. In addition to the market’s recognition that an issuer rating is a signal of a pending issuance, local regulations also necessitated an objective analysis. Due to a lack of consistency in the market and a lack of transparency for investors, the governing board of the local exchange (the CREPMF) drafted a bill requiring any issue brought to the local market would require a credit rating in November of 2009. After two years of deliberation, the law was enacted in November 2011; this legislation requires that all offerings of bonds (other than sovereign bonds) and equity must be rated by an accredited credit rating agency. It further stipulates the process through which a credit rating agency receives an accreditation, including that:
- the agency must be headquartered in one of the eight countries that uses the CFA as its primary currency; and
- the board of directors of the ratings agency must be, at a minimum, thirty percent (30%) independent of the agency’s regular business; and
- the agency must have an independent panel of auditors as part of its external control group; and
- this panel of auditors must report to both the board of directors and to the CREMPF; and
- the ratings agency’s license to issue a credit rating report may be revoked for malfeasance; and
- the ratings agency must pay a fee of 5,000,000 CFA (approximately USD 10,000) to initially register for its accreditation; and
- the ratings agency must pay the same fee of 5,000,000 CFA each year as its annual licensing fee
The city’s rating by Bloomfield played an important role in objectively demonstrating market readiness to investors. The city’s first rating, dating from September 2013, was a BBB+ long term/A3 short term (local currency). This translates, on the Moody’s scale, to a rating between a B and a Ba.
For readers: Has your city been rated? Was it rated by a local or international ratings agency? Did you find it to be a useful process? Were you pleased with the results? Please comment on the post or write me directly at firstname.lastname@example.org.
Special note: I have also started to write a blog series for the diaspora investor network, Homestrings. While this also focuses on municipal finance, it is far more focused on investor prerogatives, without emphasizing the pre-transaction work. To follow this series, visit https://www.homestrings.com/news-and-analysis/2015/june/16/interview-municipal-finance-in-dakar-and-the-global-south/#.VYApnPlViko and https://www.homestrings.com/news-and-analysis/2015/june/04/whats-all-the-fuss-about-municipal-bonds-an-exploration-of-why-investors-are-starting-to-notice-sub-sovereign-debt-in-emerging-markets/#.VYArMPlViko. I will be presenting a webinar in the coming month for diaspora investors on municipal bonds.
 CREMPF stands for the Conseil Regional de l’Epargne Publique et des Marches Financiers. Its powers are similar to those of the Securities and Exchange Commission in the United States. The exchange that the CREMPF governs is located in Abidjan, Cote d’Ivoire; this exchange handles all issues denominated in the franc CFA.
I would like to say that in Jordan most municipalities are not rated. I think this is one of the points of weakness in terms of Municipal Financial Management. Really, this is not only the responsibility of the municipalities but also the central government. In addition to, there must be awareness among Mayors about the importance of rating and creditworthiness to bring the municipalities to the correct track if we want to make municipalities have the ability to deal with debts and could serve them in the proper financial way. However, I strongly believe that rating and creditworthiness are crucial for municipalities to bring them back to the right track.
Structuring a transaction: what’s the right instrument?
Part of an ongoing series on municipal finance as a powerful tool for pro-poor urban improvements. Previous posts have dealt with the importance of municipal finance, the role of cities as candidates for municipal issuance, the importance of donor support, the constitutional enabling environment, the assemblage of an expert team, the selection of an investment project, basic principles of creditworthiness, and measurements of creditworthiness.
Although this blog series is all about municipal bonds, I’m fresh from the UN’s Financing for Development conference (held last week in Addis), and think that it’s important to clarify that cities can and should consider the wide variety of weapons available in a financial arsenal before setting on bonds as the sole way to “win the financial war.” When considering the long-term capital needs of a municipality, a mayor and the associated municipal council and advisors should be honest in considering:
1) The enabling environment in the country: constitutional authority, financial stability, existing market, experience of peer cities
2) Municipal capacity: constitutional responsibility, predictability of regular revenue streams, ability to manage and maintain regular debt service payments, presence of alternate more apolitical “special-purpose vehicles” to issue debt on behalf of municipality
3) Investors and the marketplace: investor appetite, ability to sell internationally in cases of insufficient domestic interest, typical longevity of debt (loans or bonds)
4) Priority investment projects: match between investor appetite and city interest on specific projects, revenue-generating capacity of projects, likelihood of long-term need for/competition to priority projects, likelihood of on-time delivery of proposed project, need for funds in a single instance or over a staggered period of time
Based on the above, a municipality may choose to pursue a concessionary development loan, a market-rate commercial loan, a bond, or some other instrument; it may also opt to either in its own name or through the use of a special-purpose vehicle.
In 2011, based on its past financial credit history and the potential to structure a capital-intensive project that would benefit from a lump-sum amount of money in a single transaction, the City of Dakar successfully applied for funding from the Bill & Melinda Gates Foundation. During the ensuing years, the project management unit made a case that the four categories above created a scenario through which a bond issuance would be the most appropriate mechanism to meet the city’s financial needs.
Question: How would you honestly rate your city in each of the categories above – enabling environment, municipal capacity, investors, and priority investment projects (1 = weak, 5 = strong)? What one action would you recommend to improve the weakest area? Please respond with: your city, your assessment of your city's performance on enabling environment (1-5), municipal capacity (1-5), investors and the marketplace (1-5), priority investment projects (1-5) and suggestions for improvement.
Please comment on the post or write me directly at email@example.com.
Also, for anyone interested in a somewhat recent article on the situation in Dakar, please read : http://www.financialafrik.com/2015/05/21/senegal-lemprunt-obligataire-de-dakar-atterrit-a-lacour-supreme/
“Dakar Bond lands at the Supreme Court”
The article summarizes the activities since the (almost) launch in mid-February through the end of May, including comments from the Ministry of Finance and the Mayor of Dakar. It ends with an editorial comment: “Who will absorb the loss and damage [related to the expenditures associated with the aborted launch]? It is clear, the autonomy of African cities and advanced decentralization is still theoretical.”
Sénégal: l’emprunt obligataire de Dakar atterrit à laCour Suprême
Le processus d’un emprunt obligataire de 20 milliards de FCFA (41 millions de dollars) entamé le 16 fèvrier dernier suite à une autorisation du conseil municipal de Dakar vient d’atterrir devant la justice. Le maire, Khalifa Sall, considéré comme un probable adversaire du président Macky Sall aux prochaines présidentielles, sollicite l’avis de la Cour Suprême à titre conservatoire.
Pour rappel, l’emprunt avait été interrompu sine die avant son lancement qui devait intervenir le 19 fèvrier. Le ministre des Finances, Amadou Bâ, avait alors expliqué n’avoir pas été mis au courant du projet que, pourtant, ses propres services ont validé à travers un accord de non objection signé en juin 2014.
«Quand on a eu le visa, on attendait à avoir les supports de communication. Et c’est au moment où on était dans l’attente que le ministre des Finances m’a dit qu’il n’était pas informé de notre emprunt. Je lui ai dit que j’étais surpris que vous me disiez cela, monsieur le ministre, parce que vos services ont joué leur partition. Si on n’avait pas eu l’avis de non objection du ministère des Finances, on n’aurait pas pu avancer sur cet emprunt » expliquait le maire en marge d’un conseil municipal consacré au sujet.
Pas assez à l’aise dans les manœuvres politiques, le ministre des Finances ne pouvait plaider l’ignorance trop longtemps. «Chaque fois qu’il pose un problème et qu’on y répond en lui donnant les documents, sa position change», rappelle le même Khalifa Sall qui se verra par la suite confronté aux conséquences du nouveau découpage de la ville de Dakar.
En effet, un décret pris par le président Macky Sall, le 30 juin 2014, soit bien après l’entame du processus de l’emprunt, a consacré quelques communes de Dakar ville de plein exercice.
Par la suite, les Finances diront que l’association intercommunale de Dakar (SPID) n’était pas habileté à réaliser des emprunts à la place du percepteur. «La seule chose que le ministre oublie, c’est que la SPID est une association inter communale, une société anonyme avec une personnalité juridique claire à qui les communes ont délégué leur pouvoir d’agir dans l’acquisition et la collecte des recettes.», rétorque le maire.
Le gendarme perd son sifflet
Le ministère finira par mettre l’accent sur l’endettement de la ville de Dakar et la soutenabilite de la dette. Rappelons que la même mairie est notée BBB+ par l’agence Bloomfield, agréée par le Conseil régional de l’épargne publique et des marchés financiers (Crepmf). Cette note Investment grade dispense la ville de Dakar de l’obligation de la garantie.
Saisi à son tour pour arbitrer, le gendarme du marché financier de l’UEMOA (CREMPF) déclarera d’autorité, le 5 mars dernier, avoir sursis au lancement de l’emprunt, ce qui selon les avis, va au delà de l’instruction 36 qui ne lui permet pas d’interrompre ou d’annuler. Le CREMPF rendra un avis mitigé appelant la ville de Dakar à se rapprocher des services du ministère des Finances. Un rapprochement qui était déjà fait selon les déclarations du maire de Dakar.
Et quand le ministre explique ses réserves par le devoir de prudence nécessaire avant l’émission d’une garantie de 10 milliards de FCFA qui viendrait appuyer l’emprunt, le maire dégaine: «Nous n’avons pas demandé, nous ne souhaitons pas et nous ne voulons pas d’une garantie de l’Etat dans le cadre de cet emprunt».
Rappelons que l’USAID garantissait le prêt à hauteur de 50%. Somme toute, une couverture superflue pour un émetteur Investment grade qui s’était engagé non seulement à loger l’argent provenant de l’emprunt dans un compte séquestre selon le voeu du percepteur mais aussi à se doter d’un compte de réserve pour rembourser l’emprunt libellé sur 7 ans.
En attendant, le maire dit déjà avoir dépensé 3 milliards de FCFA sur cet emprunt. Qui va encaisser les pertes et les dommages ? C’est clair, l’autonomie des villes africaines et la décentralisation avancée est encore théorique.
The legal issues resolving the bond launch in Dakar are far from resolved, and the local press continues to write about the contradictions inherent in the central government's policies relative to the municipality (particularly in reference to the recently-enacted Act III). A recent newspaper article shares that concern - http://www.dakaractu.com/De-l-acte-III-au-financement-innovant-des-collectivites-locales-guerre-de-tranchees-guerre-de-sous_a96040.html. In summary, comments from various local politicians feel that continued government interference will lead to considerable challenges to the implementation of comprehensive decentralization, which continues to reinforce the need for an appropriate and fully-enabling environment for sustainable municipal finance to be achieved.
I'll be in attendance (and speaking on at least one panel, if not more).
I'm currently in Dakar and confirmed that we are getting some great
response as far as RSVPs to the event. If anyone wants to download the
brochure (all that I opened was a screenshot), please feel free to visit
http://amb-forum.com/ to download more information. Would love to welcome
everyone to Dakar at the end of next month!
On Mon, Mar 21, 2016 at 3:39 PM, Joshua Gallo <
Dear Joshua GalloI am Eng. Iyad Hammad from Yatta Municipality ( Palestine), I want to participate in the 1ST African Municipal Bonds Forum,(in Dakar), Please if you can send me some details about this forum especially covering the cost of accommodation,transportation, etc. And what is needed to prepare for this forumWith Regard
Dear Eng. Iyad Hammad, so glad this posting was of interest to you! How are things in Yatta? Please note the event in Dakar is not organized by the World Bank, so I don't have direct information on it. However, if you click on the picture in my posting above, you'll land on the homepage for the event, with all information on agenda/enrollment/accomodations/etc. And please let us know if you end up attending the Forum, so we know we have our own correspondent there (together with Jeremy Gorelick)!
Here's the address: http://amb-forum.com
Dear JoshuaAt the first Yatta City its ok , and every thing running in the best way. We in Yatta City and Municipality invite you and the world bank to visit us soon if you can.i discussed the municipal administration about the Forum, theytold me that its difficult to attend the forum at the municipality's expense now ,and any activity not fonded , but I hope to be involved in any activity carried out by the World Bank inthe future, including the planning , financial planning, Projects management ,...etc.I hope you to inviteme in any activity which is financed bythe World Bank in the future.with best regardSALAM
Dear Iyad Hammad, salam! Rest assured we'll communicate any training opportunity on our community of practice. You may want to check out this page (LINK) where I list a few online learning courses, including on the topics listed in your email. These courses are offered multiple times per year, so hopefully you'll find something suitable. Cheers, Joshua
Excellent! See below links/dates for relevant courses:
Street Addressing (starts on April 6): Street Addressing and Management of Cities (Facilitated) | World Bank Group
Urban Planning - Integrated Transport (starts April 5): https://olc.worldbank.org/content/integrated-urban-transport-planning-facilitated
Urban Planning - Land Use (start today!): https://olc.worldbank.org/content/sustainable-urban-land-use-planning-facilitated
Important information through the Dakar Forum, we need to develop (administration and credit capability) at the municipality:
Draft Programme - Day 2 Training Sessions The training is intended for Municipal officials and will ensure that participants will return with concrete results. It will also provide a review of the structure and workings of the domestic and International Primary Municipal Markets for Debt and looks at structuring the most appropriate financing for a particular borrower and how such an offering should be syndicated and documented. In particular: TYPES OF MUNICIPAL DEBT Identify the different types and purposes of short and long term debt. Differentiate between Revenue and General Obligation Bonds Describe advantages of municipal debt; Enumerate risks in investing in municipal debt. ANALYSING A MUNICIPAL ISSUER Establish a framework to analyse key factors impacting a municipality such as – Economics, Demographic changes, Labor activity, Business trends, Political risk, and Pension obligations; Financial Analysis of Municipal Debt; Discuss process of obtaining municipal financials; Evaluate municipality’s accounting methodologies and reporting process; Describe a municipality’s contingent obligations. IDENTIFYING WARNING SIGNALS Develop a framework to identify warning signals; Enumerate potential red flags negatively influencing municipalities; Discuss probability of default in the public sector; Identify how the public sector has been hedging their risks after issuing debt. Case Study: Dakar’s Bond issue