KCCA’s Bond – Mileage or Mirage? [opinion]

When reports came through that Kampala is mooting a grand plan to launch a municipal bond, everyone knew that it was a giant unprecedented step that Kampala Capital City Authority (KCCA) was taking. Only a few huge cities such as Johannesburg in South Africa and Lagos in Nigeria have successfully issued a municipal bond in Africa. Inevitably, questions are now being asked.

To Stephen Kaboyo, a finance services sector analyst, the issuance of municipal bonds is standard practice in many developed cities and it was just a matter of time before the poorly-funded Kampala followed suit. He says urban infrastructure financing requires large amounts of funding and long-term capital and the planned municipal debut bond is a great step and should be supported by all key stakeholders. Keith Kalyegira, the chief executive officer of the Capital Markets Authority (CMA) – the regulator of the industry – said the municipal bond was “long overdue” considering that resources are limited to develop the city. However, raising such funds through the capital markets means that you need to focus on projects that would generate and enhance revenue numbers. “That is critical,” said Kalyegira. That is where the catch is – yes the demand for funding is huge but will KCCA’s prospectus convince investors that it has the credibility and the revenue sources to pay back their money with interest?

In a 201415 ministerial policy statement issued to Parliament on Sept.3, Frank Tumwebaze, the minister responsible for Kampala City, said the authority had increased its local revenue collection by over 86% and rebuilt its asset register to a worth of Shs 422 billion from a book value of Shs 45 billion that it inherited.

In the past three years, Kampala’s revenue collection has grown by over 130% from just under Shs 28b to Shs 74b in the 20132014 financial year. The target for this financial year stands at about Shs 94 billion. KCCA’s budget is projected at Shs 268.7 billion. Peter Kauju, the KCCA publicist, says if the municipal bond–likely to be a five-year bond– is successful, the authority intends to revamp the city’s public health, education and multi-level car parking facilities – a few of the eight flagship projects under consideration – over the next couple of years. But given the other alternatives such as bank credit, is floating a municipal bond the most feasible alternative to a city with fledgling administrative structures? Some don’t think so because issuing a municipal bond is not a cake walk.

Preparing the ground

Over the past few months, KCCA has been working with the World Bank, which has the technical expertise in issuance of bonds in many developing countries. In 2012, Lagos issued a $510m municipal bond to raise funds for infrastructure projects in the bustling Nigerian commercial capital. Similar moves have been suggested by local authorities in Dar es Salam and Tanga (Tanzania), Lusaka (Zambia) and Windhoek (Namibia). According to Kampala’s physical development plan prepared with help from the World Bank, a capital injection of up to $6 billion over the next ten years is needed to help the metropolis cope with the growing infrastructural needs. The metropolis includes parts of Mukono, Wakiso, Kampala and Entebbe.

KCCA must hire consultants to review the whole city financing system, assess its yield potential and rationally determine new levels of rates, charges and fees if it is to raise the level of revenue collection. Kaboyo said a lot of preliminary work happens prior to the issuance of municipal bonds. As a first step, Kaboyo says, the city needs to determine its borrowing capacity and have a capital investment plan. Before municipal authorities get the approval to issue a bond, the issuer’s credit worthiness is evaluated by an international ratings agency such as Moody’s Investors Service or Standard amp Poors. Also to reduce investor concern about nonpayment, many municipal bonds are backed by insurance guarantees.

Kaboyo foresees a challenge for KCCA in making a good case that they are in good financial condition and that they have a reliable surplus of revenues over expenditures that can be used to make interest and principal payments (financial viability) in the short time that they have.

He adds that improving its reputation as an efficient city that has in place a system of internal and external controls that minimize corruption and portray a culture of transparency and accountability would equally be important. So preparation is paramount. However, according to Patrick Musoke, the director of strategy at KCCA, the World Bank will, by January lead a mission to do a shadow rating of the city bond. The consultants will assess the city’s legal and organizational structure, debt management strategy, public sector management systems, revenue mobilization capacity, transparency and accountability and audit opinions. But that is not all. Before the bond is issued mid-next year, the authority will have to engage with stakeholders to agree on a few legal modalities. For instance, the legal framework at the moment permits KCCA to borrow up to 10% of its total local revenue. Going by its current annual revenue stream of slightly over Shs 70 billion, it means that the authority can only borrow as little as Shs 7 billion -not even enough to set up a signature project such as the multi-million dollar parking tower it is considering to build. Preliminary estimates put the cost of that particular project at about $ 30m. That means the legal framework must also be looked into before the preparation of the bond prospectus is made. How KCCA will have all these issues sorted out in a short period of barely six months to get the approval to float a bond is what is not yet clear. Some experts say KCCA might be trying to bite off more than they can chew.

Source : The Independent

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