Municipal bonds could end districts’ funding woes

District municipal councils have for long been hard-pressed to secure enough funding from the government for different development activities. But this problem could soon be over after the Capital Markets Authority unveiled plans to start issuing municipal bonds in collaboration with the districts to help them raise development funds, writes Business Times District municipalities rely heavily on fixed funding from the central government, meaning that they are limited on how much money they can access or spend on profit-making ventures.This, however, could change once the Capital Market Authority (CMA) completes drafting guidelines on how districts can raise alternative funds through the issuance of municipal bonds.
The CMA has given districts hope of realising their development goals by drafting guidelines to enable issuance of municipal bonds. The New Times / File photo
The CMA has given districts hope of realising their development goals by drafting guidelines to enable issuance of municipal bonds. The New Times / File photo

District municipal councils have for long been hard-pressed to secure enough funding from the government for different development activities. But this problem could soon be over after the Capital Markets Authority unveiled plans to start issuing municipal bonds in collaboration with the districts to help them raise development funds, writes Business Times

District municipalities rely heavily on fixed funding from the central government, meaning that they are limited on how much money they can access or spend on profit-making ventures.

This, however, could change once the Capital Market Authority (CMA) completes drafting guidelines on how districts can raise alternative funds through the issuance of municipal bonds.

The municipal bond, which is like the Eurobond that was issued by government in April, will become a tool through which districts can borrow funds from individuals or private firms, repayable with interest after a couple of years.

The new CMA guidelines are expected to come into force next month. After which, a window will be opened for districts to source for funds to inject in different projects without waiting for government funding.

According to the Capital Market Authority officials only local district authorities, the Kigali City Council Authority, or other authorities legally entrusted by the government to control a municipal entity, can issue municipal bonds.

“The funds raised from municipal bonds will be used mainly for infrastructure projects like water supply, sewerage, waste management, housing, roads, bridges and flyovers,” Charles Furaha, the CMA legal and corporate manager, said in an interview.

“Before the actual issuance of the bonds, the issuers must first complete an investment plan for the project, indicating phasing and a financing plan, as well as complete pre-qualification of bidders for the proposed project.”

City of Kigali authorities had in 2008 started a process to issue a municipal bond of Rwf40b. However, they pulled out prematurely blaming liquidity constrains in the local banking sector and the global financial crisis.

The situation is different now and all factors, including a legal framework, exist to issue such a bond, according Alphonse Nizeyimana, the City of Kigali vice-mayor in charge of finance and economic development.

“This will help us to accomplish projects aimed at developing the city and availing timely services to citizens. Instead of waiting for many years to get funding from the central government and taxes, we can raise money from bonds, undertaken projects and then repay the money later,” Nizeyimana said.

He added that the municipal bond will be a better option of getting funds compared to bank loans which usually have high interest rates.

Andrew Kipruto, a broker, told Business Times that the initiative was good as it would diversify the market.

Are districts ready?

Nizeyimana is wary that most districts do not have enough land to pursue mega business ventures in real estate development yet, CMA requires them to be having land for projects before they issue bonds.

“It is important that a district secures land to develop before they can issue a bond. Otherwise, they might issue it and find that none of the people wants to sell. So it is important that for the municipal bond to work well, districts first get land on which to invest,” Nizeyimana said.

The mayor believes that most district authorities have viable business ventures, saying repayment will not be a problem.

However, another great challenge remains; none of the districts have a credit rating, which is one of the fundamental requirements for bond issuance.

According to Furaha, districts will not be required to obtain an investment grade rating, meaning that they will be restricted to only sourcing funds from local investors and not international investors who require the rating.

“It is advisable for the districts to obtain an investment grade rating from a reputable credit rating agency before the issuance of the municipal bonds. However, we know the costs involved, yet we do not have a local company that provides the service,” Furaha said.

“We have been working together with the Ministry of Local Government, and we highlighted this challenge. Those who can afford an investment grade rating can go ahead and secure it.

“Not having one should not stop a district from preparing to issue a municipal bond,” Furaha said.

He, however, added that such districts should understand that they would be dealing with only local investors “because without a credit rating, they cannot attract international investors”.

CMA will be expected to ensure that the funds raised by the districts are utilised in accordance with the timetable for use of the bond proceeds and only for the projects for which permission has been granted.

The coupon rate, also known as the interest rate, and the date of maturity of the bond will be determined through negotiations between the districts and the investors.

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