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Is pooled funding the answer for municipalities?

2018-10-12 09:07

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Rabelani Dagada

Earlier this year, executive mayors and members of mayoral committee of finance in various South African metropolitan municipalities presented multi-billion-rand budgets for each of the cities. A common thread in those budgets were commitments to fight poverty through effective delivery of social and infrastructure services. 

Cities espoused their intentions despite the prevailing and challenging macro-economic environment. They committed their budget to focus on the poor and making their metros global cities which are competitive investment destinations. 

We all know that good intentions are easier said than done, but if our metros were to achieve these, they will make unwavering head waves in closing the gap in socio-economic development. This is despite the national and provincial treasuries having pronounced to reduce some of the grants which are meant to redress the plight of our people. 

In my mind, one of the enablers for economic development in our cities will come from the rehabilitation of metros’ infrastructure such as water and sanitation, electricity and transportation. Already, our cities have made commitments to boost their infrastructure development programmes. 

It is also my contention that cities’ capital budgets are inadequate and thus it is almost impossible to close the infrastructure gap. In Johannesburg alone, the infrastructure backlog is hovering towards R200bn. Cities should look into alternative funding mechanisms to assess how best to finance the infrastructure gaps in the metros. One such financing mechanism is pooled financing. 

Pooled financing is a financing mechanism wherein our metros can jointly access public and private capital markets at advantageous borrowing terms. The ultimate structure of implementing pooled financing is usually through the creation of an investor friendly agency which carries the interests of both the cities and investors, as well as regulators and policy makers. 

The main advantage of this financing mechanism is that it can provide ease of access to capital markets for municipalities, offer lower borrowing costs, reduce market risk through diversification and enable greater quality of projects and creditworthiness. In addition, pooled financing has the ability to reduce the financial burden for national government, increase transparency, provide access to financial experts who assists in transaction structuring, and creating a new hard credit culture for local authorities. 

In other countries, pooled financing has seen challenges such as lack of cooperation between local authorities and national governments, and policy makers. This is usually driven by differing schools of thoughts on product structuring and risk management. 

Relative to other countries, South African municipalities, provincial and national government are relatively cooperative despite differences in leadership approaches and political parties. In addition to this, the National Treasury has been a strong partner in reaching policy consensus as to whether pooled financing can be done in the country. This can be seen in the current draft proposal issued by National Treasury on Municipal Borrowing Policy which proposes that pooled financing can be implemented without any partner in local authority assuming credit risk of the other metro.

South Africa also has a very strong capital market system, well recognised all over the world. Testament to this is the outcomes in the Global Competitiveness Report 2017–2018 which shows that South Africa’s capital markets ranked 11th against 138 countries, thus showing the quality of industrialised local capital markets. 

Key drivers for this score was the sound regulatory environment for the country’s securities exchange (JSE), soundness of banks, financial services being able to meet business needs, ease of access to loans and affordability of financial services. This shows signs that South Africa is ready for the introduction of pooled financing, especially considering the favourable borrowing terms it brings for the metros. This will help fast track service delivery and infrastructure development, putting the interests of the poor first. 

One of the prefectures of pooled financing is that it must be explored by local authorities with similar credit profiles, and financial system. Fortunately, in SA all local authorities subscribe to the Municipal Financial Management Act which provides guidelines on how local authorities should manage their finances. This governing regulatory environment in municipal finances will allow for potential partners amongst the metros to engage successfully in the implementation of pooled financing. Moreover, partnering local authorities indeed ought to have similar credit profiles to make pooled financing feasible for South Africa and most importantly to investors. 

Among the projects that should be explored is affordable housing, and investing in eradication of electricity and water infrastructure backlogs. To also enable our cities to become a pro-poor and globally competitive investment destination, they should invest in transport sector and improving efficiencies in the telecommunications landscape in their jurisdiction. 

In fact, a national dialogue to engage on existing infrastructure gaps is needed. According to the G20 Global Infrastructure Outlook Report, South Africa has a total of $152bn investment gap. I believe that with an investment gap of this size, this is the right time to find ways to introduce pooled financing and even other alternative financing mechanisms into the country. This is a shared challenge by the local authorities, provincial and national governments, to which action is required.  

To make pooled financing work in SA, the current cooperative regulatory and institutional framework which our country is well acclaimed of, will remain the backbone for successful implementation of this funding structure. In addition, with the coming Borrowing Policy allowing for the implementation of pooled financing, local authorities and investors will have the formal platform against which to engage on the journey going forward. 

It will also take strong political will from potential metros with keen interest to explore pooled financing. Mayors should be at the forefront of the discussions on whether pooled financing should be implemented in the country. They will have to approach their municipal councils to propose for the implementation of this financing mechanism. Likewise, stakeholders such provincial and national governments would need to demonstrate this political will. I am more than confident that given the plight of the poor in South Africa and the vast infrastructure development gaps, cooperation to look into this kind of financing will be there.   

Lastly, like in any country investors are a strong partner to development. South Africa is fortunate to have a strong capital market system and I believe that with investors holding record high cash levels, a strong and mutually beneficial partnership can be forged. 

- Dr Dagada (@Rabelani_Dagada) is a founder of GrandPoint Capital and heads up The Financeburg Group.

Disclaimer: News24 encourages freedom of speech and the expression of diverse views. The views of columnists published on News24 are therefore their own and do not necessarily represent the views of News24.

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