AREAS FINANCE

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 NEW CAG GROUP is helping to improve the ability of sub-national governments in Argentina and Africa, for a start, to finance municipal infrastructure by accessing domestic capital markets through municipal bonds. In 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, SBA loans, tax increments, transportation, and water & sewer utilities.

Partners:

Governments : Federal and state governments of Argentina, Cameroon-Africa, and the United States of America

 Private Sector: Formula Group and NEW CAG GROUP.

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 Africa includes:

Drafting a scope of work to conduct a diagnostic analysis of Cameroon'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 Africa wanting to access capital markets to finance infrastructure and the responsible African government agencies involved in their regulation, again to facilitate borrowing by sub national governments. 

Assisting the Municipality in Cameroon to present its borrowing plans to the Municipal Council for official approval, an arduous process that was finally achieved in April 2009 when the implementing partner signed a memorandum of understanding with the Municipality 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 municipality's financing needs. The implementing partner met with rating agencies and potential investors interested in acquiring municipality bonds. These steps also helped to improve the Municipality's financial management capacity. 

In December 2009, the partnership assisted the City issuing the local currency equivalent of a USD10 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 2011, six proposals were received from African financial institutions in response to the City council's Request for Proposals for the USD10 million-bond issuance.

Progress in Argentina includes:

Collectively, local governments from these two states, successfully borrowed from U.S. 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 USD 4-6 million.

Next Steps:

The City in Argentina is currently reviewing the six proposals and should make an award by the end of July 2011. This transaction will allow the City 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 City model may also be replicated in other South African cities, thereby increasing funding for infrastructure development throughout Africa. 

In Argentina, a partial credit guarantee program for approximately 30 local governments to access financing from the domestic capital markets is being developed. The partnership is also helping the Argentinean State establish first bond bank focused on developing pooled-financing transactions to benefit over 5 sub national organizations by making funding available for infrastructure projects.

Resources: To date, Formula Group and NEW CAG GROUP International have together contributed $1 million USD worth of advisement, consultancy and technical assistance throughout this program.