Municipal project bankability critical to attracting finance

22nd April 2016

By: Donna Slater

Features Deputy Editor and Chief Photographer

  

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Financial lending to public-sector entities like municipalities for investment in infrastructure projects requires lenders to investigate and determine the future bankability of such projects and calculate the risk associated with municipalities being able to repay the loans.

Development Bank of South Africa (DBSA) infrastructure finance GM Tshepo Ntsimane said at the Infrastructure Dialogues’ Financing Government’s Capital Programme last month that a trend of economic challenges arose when rapid urbanisation occured.

This scenario is evident in South Africa, with a vast influx of people from rural areas moving to urban areas. Most of them are unemployed and cannot afford to pay the rates and taxes imposed by metropolitan municipalities.

Ntsimane

suggested that, in this regard, municipalities seek ways in which to increase their own revenue.

However, nonexistent municipal revenue, or limited revenue because those being billed for rates and taxes do not have an income, would hamper such efforts.

There is also the risk of increasing debt when investing in infrastructure that does not generate revenue, which is sometimes unavoidable.

Further, small businesses calling for a reduction in rates and taxes to promote investment in them and ensure their sustainability militates against the need for municipalities to generate revenue.

“The DBSA, as a credit lender, needs to inves-tigate all these things,” he said, adding that the bank needed to determine the extent to which a municipality could raise its own revenue to repay the borrowed capital.

Ntsimane said it was noteworthy that, during the City of Johannesburg’s (CoJ’s) results present-ation earlier this year, the CoJ stated that 31% of its infrastructure projects were financed through its own revenue.

“How is it possible that only five years ago, the CoJ was able to fund only 5% of its infrastructure projects, but it can now increase revenue funding to 31% of projects?” he asked.

In this regard, Ntsimane noted that the collec-tion of rates and taxes became crucially important for municipalities to secure revenue and ensure debts were paid.

However, he noted that municipalities did not all deal with the same challenges. For example, the City of Tshwane had less revenue to spend on infrastructure because the number of unemployed people in the metro increased as a result of its having merged with the Metsweding district municipality and the local municipalities of Kungwini and Nokeng Tsa Taemane in 2011.

Therefore, from a development perspective, the DBSA could not adopt a similar approach to that of a commercial lender, Ntsimane said, and added that it was imperative that municipal loans not be granted without the prospect of their being repaid.

“The DBSA has more than 30 years’ experi- ence in lending money to municipalities . . . over which time it has developed a municipal loan book of R23-billion to R24-billion, out of a R65-billion loan book,” he said.

In terms of the DBSA’s municipal loan book, 70% to 80% comprised metropolitan municipalities, but irrespective of whether it was a metropolitan municipality or a secondary city, fewer than 5% of loans granted by the DBSA were underperforming, noted Ntsimane.

He attributed the success of the bulk of its loans being repaid to the DBSA’s creditworthiness and creditworthiness determinations on municipal borrowers.

Further, municipalities could not approach government for a bail-out, which made them aware that it was in their best interest to ensure they improved their financial management, Nstimane said.

When the DBSA investigates a municipality’s credit worthiness, it considers governance issues and its institutional challenges.

Meanwhile, he noted that a key responsibility of the DBSA – at the request of the National Treasury – was to increase private-sector lending, especially in large metropolitan municipalities because, according to the National Treasury, “metropolitan municipalities are not exploiting their economic base”.

Many large metropolitan municipalities had limited borrowing capacity (on average 30% to 40%), Nstimane said, with future investments for such municipalities subsequently being limited if they relied on their balance sheet.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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