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Municipal Fund

Municipal Fund. Global Finance for Local Needs. Presentation to IMFO Conference Cape Town August 16, 2005. Agenda. The International Finance Corporation (IFC) The Municipal Fund – A new initiative Cost Effective Methods to fund Sustainable Local Communities Financial Products

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Municipal Fund

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  1. Municipal Fund Global Finance for Local Needs Presentation to IMFO Conference Cape Town August 16, 2005

  2. Agenda • The International Finance Corporation (IFC) • The Municipal Fund – A new initiative • Cost Effective Methods to fund Sustainable Local Communities • Financial Products • Technical Assistance

  3. IFC and the World Bank Group Multilateral Investment Guarantee Agency, 1988 International Finance Corporation, 1956 International Bank for Reconstruction and Development, 1945 International Development Association, 1960

  4. The Municipal Fund The Municipal Fund The Municipal Fund, a joint World Bank/IFC initiative, seeks to provide direct loans and help catalyze commercial financing at the sub-sovereign level for important development projects without a sovereign guarantee.

  5. Challenges faced by Local Communities • Large capital investments needed for universal infrastructure service delivery • Significant investments needed for backlog of deferred maintenance • Limited capacity to increase user charges • Limited available debt capacity • Need for institutional capacity building

  6. ESSENTIAL ELEMENTS FOR SUSTAINABILITY INSTITUTIONAL/MANAGEMENT FINANCIAL ENVIRONMENT Sovereign risk Service delivery Contingent liabilities Local environment Budgeting practices Debt structure Regulatory framework Management competence Trends Coverages Willingness to pay

  7. Partnership for Sustainable Finance for local communities • Financial Products • Technical Assistance Products

  8. Financial Products for Municipalities • Long term Rand loans • Pooled loans/bonds for smaller municipalities • Partial Credit Guarantees for bonds • Partial Credit Guarantees for loans from local banks • Partial Credit Guarantees to unlock zero coupon bonds

  9. TA Products for Municipalities • Technical Assistance – Carbon credits • SMMEs • Output Based Aid • Business Simplification • Public-Private Partnerships (PPPs) • Housing Finance

  10. City of JohannesburgBond Issue Purpose • To finance capital expenditure plans of the City • To retire some existing, high-cost debt Structure • Bond issue by the City, backed by its aggregate revenues (general obligation) • Two tranches: • April 2004: 6-year bullet bond without enhancement. ZAR 1,000 million (US$150 million equivalent) • June 2004: 12-year enhanced bond with 3-year amortization. ZAR 1,000 million (US$150 million equivalent)

  11. City of JohannesburgResults Benefits of Partial Credit Guarantee for bondholders • Increased recovery given default • Decreased probability of default Results for the City • Enhanced bond rated AA-.za (Fitch), a three notch upgrade from COJ’s stand-alone rating of A-.za. • Issue oversubscribed 2.3 times with tightening spread (164 bps) showing strong market endorsement of both the issuer and the enhanced structure • Longer tenor improves the City’s debt service profile • Diversified sources of finance for the City • City could issue unenhanced long term bonds at lower spreads within less than a year Market development in South Africa • New asset class – creates a benchmark for long-tenor municipal debt • Brought in new investors into the market • Potential replication in other cities – possibilities for pooling

  12. Pooled Loan/Bonds INVESTORS Guarantee by IFC or Other Banks of DSRA or the Bonds directly Bonds POOLING VEHICLE OR FINANCIAL INTERMEDIARY Loans Muni A Muni B Muni C

  13. Buffalo City – Escrow Release to unlock cash • Loans made several years ago when the City was not as credit worthy • Lenders required security in the form of escrowed zero coupon bonds • These bonds raised the effective cost of borrowing due to “negative carry” • Bonds replaced with an IFC partial guarantee • Bonds sold to release cash for the Municipality for infrastructure investments • Net Benefit to City in terms of cash release without additional borrowing

  14. Escrow Release Mechanism Proceed from the sale of the zero coupon bonds X years Up front Guarantee Premium & Expenses Redemption of the zero coupon bond

  15. Buffalo City: Unlocking potential through Technical Assistance • Carbon Credits • Energy Efficiency Measures • Methane gas capture in landfills • Small and Medium Enterprises -Technical and Advisory services • Output Based Aid – supporting delivery of basic services to the poor

  16. Thank you Contact Person: Mr. Solomon Quaynor International Finance Corporation Johannesburg 27-11-7313068 squaynor@ifc.org

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