INTERVIEW WITH ADJUNCT PROFESSOR JEREMY GORELICK
Jeremy Gorelick is an adjunct professor in the International Development program at SAIS. He has served as the lead technical and financial advisor for the Dakar Municipal Finance Program since 2011, and is currently the Managing Director of Capital Markets at the Affordable Housing Institute.
The Senegalese city of Dakar made headlines this year due to its efforts to launch the region’s first municipal bond. Adjunct Professor Jeremy Gorelick shares his thoughts on why this transaction is important, and how it can help to shape the future growth and development of cities across the Global South.
Q: Why is municipal finance important?
In an era of increasing decentralization, sovereign governments in the Global South 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. Some 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, co-published by the World Bank and the French Development Agency). 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, only Johannesburg, Cape Town, and Douala have issued municipal bonds not backed by the central government.
Q: What did the Dakar Municipal Finance Program aim to achieve?
In 2011, the mayor of Dakar, Khalifa Sall, recognized that the city’s liquid funds for investment projects would be unable to meet the long-term needs identified in Dakar's strategic plan. With the financial assistance of the Bill & Melinda Gates Foundation, the municipal council assembled a program team of experienced local and international experts to launch an ambitious program to prepare the city to launch a municipal bond. The team was charged with several broad objectives: enhancing the city’s creditworthiness to make it an attractive issuer in the eyes of investors; selecting an appropriate revenue-generating investment project that also improved the quality of life of the urban poor (as mandated by the Gates Foundation); and navigating the regulatory process of pioneering a transaction in the still-developing West African financial system.
Q: Why Dakar?
The city of Dakar was, amongst its peers, a logical choice. The mayor, a well-respected politician, had the power to galvanize both his council and the general public to support the initiative. The city itself already had experience with long-term debt obligations through a concessionary loan from the French Development Agency to install public street lighting along the city’s heavily trafficked pedestrian thoroughfares and a commercial loan from the Islamic Bank of Senegal to install traffic lights at sixty of the city’s busiest intersections. Further, the city’s strategic initiatives were clearly stated in a recently written conceptual briefing, and the mayor was delivering on many of the promises made during his 2009 electoral campaign. Finally, the municipal council had made a concerted effort to cut costs wherever possible and had engaged the World Bank’s Public Expenditure and Financial Accountability team to systematically analyze the city’s strengths and weaknesses. All of these advances were borne out in the rating conducted in 2013 by Bloomfield Investment Services, an Ivorian ratings agency that assessed the city as an investment-grade issuer on a local scale (this rating was maintained in a subsequent re-appraisal in 2014).
Q: How is the money raised through the bond issuance intended to be used?
One of the most challenging elements of the Dakar Municipal Finance Program was to select an investment project meeting the goals of both investor expectations and public desires. After reviewing a number of opportunities, the city ultimately selected to revitalize a blighted area of its central business district. Municipal authorities planned to use bond proceeds to acquire land with the intention of constructing a multi-story shopping center to house street vendors and other displaced traders who had been relocated due to destructive fires in some of the city’s older marketplaces. This center is designed to support over 4,000 vendors in stalls, kiosks and boutiques of various sizes at subsidized rental rates.
Q: What are the details of the transaction?
The transaction itself is fairly straightforward and would be identified as vanilla in financial circles. The city will repay investors semiannually a nominal interest rate of 6.6 percent for the bond’s lifetime of seven years with repayment of the principal (amortization) limited to its final five years. The principal is partially secured with a 50 percent credit guarantee from the Development Credit Authority of the United States Agency for International Development.
The issuance of a municipal bond best suited Dakar’s needs because the city would be able to access funds in a lump sum rather than incrementally (as is often the case in traditional loans). Senegal, as a member of the eight-country West African Economic and Monetary Union, offers a broader pool of investors sharing a single currency than that found in many other parts of sub-Saharan Africa. Any issuance in CFA franc is regulated by the regional council based in Abidjan, Cote d’Ivoire, which means that the transaction would be eligible for sale without restriction or additional registration in all of the union’s eight countries.
Q: Issuing a bond is time- and resource-intensive. Are there any positive externalities that make the process worthwhile?
While the ultimate goal of a typical bond issuance is to raise sufficient funds in the debt capital markets to deliver a project, there are also several spillover benefits, particularly for first-time issuers. To demonstrate their financial sophistication, cities often increase their transparency in developing budgets, enhance their abilities to make long-term financial projections, and introduce participatory budgeting. Further, investors expect cities to propose economically sustainable, revenue-generating projects; this often applies an otherwise unseen rigor to the project selection process. Finally, developing cities that pioneer financial innovations may profit from international recognition, leading to intangible benefits.
Q: Why does a bond launch in Dakar matter in the Global South?
Initiatives like the Dakar Municipal Bond are welcome, not just for the benefits they bring the city’s residents, but also for their potential to shape the efforts of other cities. Dakar’s experience will provide valuable insights into the enabling conditions that allow cities to have direct access to commercial finance. Only with such changes will municipalities and urban utilities be able to cope with the increased demands of urbanization.