Govt turns to municipal bonds for cheap funds for MMDAs

Falling tax revenue, yawning budget deficit and the fiscal squeeze at the local level are forcing the government to turn again to municipal bonds after abandoning the plan for almost a decade.

The move is expected to provide cheap funds from the capital market to meet the ever-mounting infrastructure obligations of Metropolitan, Municipal and District Assemblies.

This would enable the ministry to source funds for the district assemblies for development projects without depending too much on the national budget.

Finance Minister, Mr Seth Terkper, told the Graphic Business in an interview that the government would revive the municipal bond concept initiated some years back under the previous government.

Municipal Finance Authority Bill

A proposed Municipal Finance Authority (MFA) Bill was consequently laid in Parliament in 2008 to complement the Municipal Finance and Management Initiative (MFMI) of Government at the time.

It is estimated that the country’s huge infrastructure deficit requires sustained spending of at least US$2 billion per annum over the next 10 years to address the shortfall.

“What we are doing now is to develop the regulatory framework, which we hope to complete by the end of this year,” he said.

Regulatory framework

Creating a strong regulatory framework that will prevent Metropolitan, Municipal and District Assemblies (MMDAs) from engaging in multiple borrowing and incurring unsustainable debts -- which would ultimately be passed on to the central government -- is among the important challenges being addressed.

“Once the regulatory framework is in place, we will allow municipal authorities to borrow on their own balance sheet so that the pressure on the public purse is reduced,” Mr Terkper added.

The bonds will be anchored on revenues from the assemblies to enable consistent repayment and financing of the debt, he said.
“There is work in progress and we will be coming out with quality proposals from Cabinet.

The work will be ready in due course. We are working in collaboration with the Ministry of Local Government,” he said.

“The issue of financing urban infrastructure services by mobilising domestic capital more effectively had been on the drawing board over the years and we intend to pursue that option.”

He explained that the reason for not rushing out to sell municipal bonds is to make sure that proceeds will be directed toward productive projects. He said Ghana sought to learn from countries such as the USA where some states, including California, have run into problems regarding the repayment of issued municipal debt.

Bond Market Committee

The government had in the past established the National Bond Market Committee (NBMC) to review the draft Local Government Finance Bill, otherwise known as the Municipal Finance Bill, to address various challenges that have stalled its passage into law.

The review seeks to facilitate the ability of MMDAs to identify and invest in revenue-generating projects using the bonds they will sell.

The bill, when passed into law, will facilitate investment in municipal bonds and credits by individuals, companies and capital market entities such as mutual funds and pension funds.

It will also facilitate credit enhancement assistance and help establish credit assessment and rating systems for local governments.

The increasing demand on the central government's scarce resources has necessitated the need for MMDAs to consider alternate sources of funds for infrastructure projects.

The deficit covers all the main infrastructure areas -- such as roads, energy, water, aviation, housing and ICT. In the housing sector, for instance, government estimates that the country needs to build about a million more units to bridge the demand-supply gap.

There are currently six metropolitan, 40 municipalities and 124 district assemblies within the 10 regions of the country.

If they are authorised to raise private funds for infrastructure projects, it will entice to their areas investors who critically consider the availability of certain amenities before deciding where to locate their businesses. — GB