Author

Glasser, Matthew D., Thomas H. Cochran, Michael DeAngelis, Marlene

1999

Hesketh, Ronald W. Johnson, Christiann Johannes Kapp, John E.

Petersen, and K.P.S. Roome

Number of Pages:

117

Full Text

Formulation of A Regulatory Framework For Municipal Borrowing in South Africa, Final Report

Abstract

Historically, South Africa’s “white” municipalities could borrow to build infrastructure, though many of them

relied on internal cash-flows to finance capital assets. Almost all consumers in these municipalities paid for

the services they received, and these municipalities had no particular problems servicing the debt they

incurred. Local government was essentially an extension of provincial government, and it was widely believed

that provincial and/or national government would intervene to support any municipality that ran into financial

trouble. Non-white municipal structures had little or no access to credit, built much less infrastructure, and

provided far fewer services.

This report is intended as a step toward a future in which capital markets will channel private funds to municipal

infrastructure projects. For this future to come to pass, municipalities must be creditworthy, which implies (1)

that they will have adequate revenue to support borrowing, (2) that they will have the management and

financial capacity and experience to make wise borrowing decisions, and (3) that there will be financial and

technical assistance for communities in need. This vision implies market allocation principles—i.e., that

municipalities attract private investment based on a projects or a community’s financial viability, not a

project’s social desirability. It further implies that the projects or the borrowers must be sufficiently attractive

to compete with other alternatives available to private investors.

The environment in which South African municipalities operate is changing. The focus of this report is on a set

of policies and rules for municipal borrowing. Although they are clearly pertinent to the effective functioning

of a municipal credit system, issues involved in securing the financial viability of municipalities are largely

beyond the scope of this report. The recommended polices are intended to be robust enough to accommodate

various outcomes as regards the current process of municipal restructuring

The policy framework described in this report envisions a South Africa in which capital markets channel private

funds to municipal infrastructure projects, and in which eligible municipal borrowers are creditworthy. The

polices recommended herein will help move South Africa in that direction and will be consistent with the future

when it arrives.