Financing Sustainable Cities: How We're Helping Africa's Cities Raise Their Credit Ratings
October 24, 2013
- Only a small percentage of the 500 largest cities in developing countries are deemed creditworthy – about 4 percent in international financial markets and 20 percent in local markets.
- A new World Bank initiative is helping African cities tackle these financing challenges to catalyze investments in sustainable development.
- Every dollar invested in the creditworthiness of a developing country city through the City Creditworthiness Program has the potential to leverage more than US $100 in private sector financing for low-carbon and climate-resilient infrastructure.
The greatest challenge that Malawi’s fast-growing capital city, Lilongwe, faces right now is its lack of sustainable infrastructure, says Yassin Mwachande, the city’s chief commercial officer. “If we can fix that, it will be the gateway to a better city. I need to see a light at the end of the tunnel,” he says. “If we in Lilongwe learn from other cities how they became creditworthy and sourced financing for their projects, then I can design the solution for my city.”
Like Lilongwe, many of the world’s municipal governments are struggling to keep up with the infrastructure and service needs of their growing cities. And many cities in the developing world, like Lilongwe, cannot access capital markets to source the necessary financing for sustainable infrastructure.
The World Bank estimates that over $700 billion a year is needed to finance urban infrastructure in low- and middle-income countries. As cities grow, municipal governments need to broaden and deepen sources of financing, moving beyond traditional public funding to access much larger private pools of savings, particularly in domestic capital markets.
For most cities, achieving this access at scale and at reasonable cost will require sustained and disciplined attention to policies and practices underpinning their creditworthiness. An analysis by World Bank staff found that only a small percentage of the 500 largest cities in developing countries are deemed creditworthy – about 4 percent in international financial markets and 20 percent in local markets.
To help the developing world’s cities plan and access financing for low-carbon and resilient development, World Bank President Jim Yong Kim launched the Low-Carbon, Livable Cities Initiative.
In October, the World Bank and its partners convened the first City Creditworthiness Training Program for African Cities. Yassin Mwachande and 54 fellow senior municipal administrators from 10 African countries gathered in Nairobi for a five-day creditworthiness training event, which will be followed by longer-term comprehensive capacity and institution building.
This initiative has the potential to leverage private investment that will finance the infrastructure necessary to help cities meet the demands of citizens for basic services, and build resilience to the effects of the changing climate.
Steps on the path to creditworthiness
There is a direct connection between improving financial management – such as local government municipal revenue collection – and the raising of private capital for infrastructure.
“For Harare, our major problem is collecting taxes and fees. We have a greater amount of mandatory expenses than what we can collect,” said Assumpta Gwatiringa, senior accountant for the City of Harare, Zimbabwe. She is not alone. Close to 80 percent of the municipalities represented at the Creditworthiness Program report that their city consistently runs an operating deficit.
Building on the results of an in-depth self-assessment of their cities’ finances, participants at this first edition of the Creditworthiness Program developed a multi-year action plan to address challenges to achieving or enhancing their creditworthiness.
“We have many big problems in Maputo,” said Gracia Teresa Manguele, the head of revenue of the Maputo Municipality in Mozambique. “Chief among them are a critical lack of planning in our spending, the size of the informal economy, and the need to register properties for tax purposes,” she said. Only about 3,000 of Maputo’s over 200,000 properties are currently registered.
Each action plan is tailored to a city’s specific context and challenges, providing technical assistance on issues such as revenue and debt management, improved expenditure control and asset maintenance, capital investment planning, as well as transaction planning, structuring, and execution.
These are some of the crucial steps cities need to take to set themselves on the path to creditworthiness. The City Creditworthiness Program will help with the identification, collection, and management of “own source” revenues, as well as with strengthening the administration’s financial management policies and practices. The program can also assist entities “ring-fencing” revenue sources to structure debt transactions for investment projects. Finally, it will support coordination with central governments – essential to improve legal and regulatory frameworks that empower city administrations to collect revenues and issue debt responsibly.
“Most African cities are invisible to investors looking for opportunities in sub-sovereign capital markets,” said James Close, program manager of the World Bank-supported Public-Private Infrastructure Advisory Facility (PPIAF). “This initiative has the potential to leverage private investment that will finance the infrastructure necessary to help cities meet the demands of citizens for basic services, and build resilience to the effects of the changing climate.”
An international partnership for subnational development
“Creditworthiness is a vital step in ensuring cities can finance the infrastructure they need to reduce their carbon emissions and become more resilient to the effects of climate change, particularly extreme weather events like the ones seen in Buenos Aires, Jakarta, Johannesburg, and New York over recent months,” said James Alexander, director of C40's Finance and Economic Development Initiative. “C40 hopes to continue to work in partnership with the World Bank to share the knowledge and transformative potential of the credit worthiness program with our network of global megacities."
The Nairobi Creditworthiness Training Program was organized as part of the World Bank’s Low-Carbon, Livable Cities Initiative and was sponsored by the Public-Private Infrastructure Advisory Facility’s (PPIAF) Sub-National Technical Assistance (SNTA) Program, the French Development Agency (AFD), and the Municipal Institute of Learning of eThekwini (Durban, South Africa). Additional trainings are planned in Korea, Colombia, and later India.