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African Municipal Finance Blog Series - Part 1

Feb 08, 2016
At the annual African Union for Housing Finance conference in Durban, Making Finance Work for Africa spoke with Professor Jeremy Gorelick following his talk, "Positioning Cities for Housing-Related Capital Flows".
Based on his professional and academic experiences in supporting sub-sovereign entities to access funds for capital-intensive projects, Prof. Gorelick has been invited to write a series of blog posts about municipal finance across Africa.
The series will discuss substantive current events in the field and feature interviews with politicians, practitioners and other stakeholders.
In an era of increasing decentralization, sovereign governments across Africa are constitutionally shifting more responsibilities to cities than ever before. Along with these new mandates, though, municipal leaders are forced to be more creative in finding money to cover rapidly rising costs associated with such traditionally-central government programs as social housing, underground infrastructure, and solid waste management. Most cities continue to rely on transfers from central governments, while some have additionally opened dialogues with multilateral development finance institutions, like the African Development Bank, or bilateral development finance institutions, like the French Development Agency or the United States Agency for International Development.
Still more have looked for assistance from grant-making bodies like the Rockefeller Foundation or the Bill & Melinda Gates Foundation.
Other cities, like Dakar, have turned to the debt capital markets for assistance through the issuance of municipal bonds.
The municipal finance gap in Africa is over USD 25 billion per year, in contrast to the current investment capacity of African local governments-approximately USD 10 billion over ten years (according to a 2012 report, Financing Africa's Cities: The Imperative of Local Investment). Despite this pressing need, most African local governments have limited access to capital markets and private sector finance for their infrastructure projects. Essential and impartial supporting capacity - such as rating agencies
- are in short supply. In addition to Dakar's attempt, only cities in South Africa (including
Johannesburg, Cape Town, Tshwane
and Ekurhuleni)
have issued municipal bonds not backed by the central government. This can be attributed, in part, to the enabling environment created by South African government's Municipal Finance Management Act.
Contrast this with the realization that one-third of the world's urban population resides in developing countries, and this portion is growing rapidly. While only about one-tenth of the world's largest urban areas are in least developed countries, thirty of the thirty-five most rapidly growing large cities worldwide are located there.
In other words, the world's fastest-expanding urban agglomerations are now in the Global South.
The magnitude of the urban demographic shift is staggering. Rural-to-urban migration, combined with the effects of urban population growth, could add another 2.5 billion to the world's urban population by 2050. The growth of cities and towns from urbanization makes functional and fiscal decentralization more viable and more necessary, and in many countries local autonomy is growing. Increasing the capacity of local officials can not only improve urban resilience and quality of life, it empowers cities and towns to contribute in important ways to national, social and economic development goals. While the responsibilities delegated to local governments by law vary considerably from one country to the next, cities often have constitutional mandates to provide: (i) local basic services and infrastructure, including water, sanitation, public transportation, public lighting, and solid waste management, among others; (ii) resilience building, and climate mitigation and adaptation, including energy efficiency, flood management, and public building retrofitting, among others; and (iii) local social services and infrastructure, including health, education, and childcare facilities, among others. In the past, most cities would not have had the autonomy, information technology, or knowledge of trends in the urban sector worldwide to embark on significant development projects or to prepare multi-year investment plans. But with the increasing interconnectedness of cities around the world and the growing competition among them, this has changed. Even so, while needs and aspirations may grow, the financial options available to cities across Africa have not kept pace with the growth and increasing complexity of the cities themselves. Cities are stuck in a vicious cycle of limited resources leading to a constrained response, while the population of the city and the demand for services continue to grow. Ironically, many local government capital investments have high economic and social returns, and therefore should be prioritized. For instance, transportation signals that reduce congestion free people's time for more productive purposes. Investments in drainage that reduce flooding in commercial areas reduce trading days lost to post-flood recovery. In these cases, domestic private capital should be available to finance municipal investments that cannot be financed through grants. Mobilizing resources to finance investments and improve services at the municipal level is one of the most challenging aspects of local development, especially if the goal is to provide resources on market-like conditions in a sustainable manner, for instance from loans or bonds.
Even when government transfers are predictable and generous (which is the exception), they are rarely adequate to finance major infrastructure improvements in growing cities. The capital investment financing that is available to local governments is often provided by national agencies whose own access to capital is highly constrained. Winning funding allocations from national budgets requires local governments to compete with line ministries and other priorities of the government in power. As a result of these conditions, cities are realizing the importance of diversifying their resource base to meet tremendous population growth coupled with an increased list of constitutional responsibilities.
Along with providing a crystallization of the current state of municipal finance across Africa, a critical purpose of this blog series will be to highlight best practices and provide a roadmap for municipal leaders eager to leave a positive legacy on their respective cities. _________________________________________________________________ About the Author Since 2011, Professor Jeremy Gorelick
has served as the Lead Technical and Financial Advisor for the City of Dakar's Dakar Municipal Finance Program.
He has previously worked in structuring public debt obligations at BNP Paribas and Dresdner Kleinwort Wasserstein, and has taught classes on finance, international development and business analytics at the Johns Hopkins University since 2010. For more information on Professor Gorelick, contact him at LinkedIn.
Upcoming events:
African Municipal Bond Forum - Dakar, Senegal

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