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Wednesday, 6 January 2010

Municipal Bonds

The Government Assurance report has an interesting piece on a 2004 Ministerial promise of constructing houses through municipal bonds :

On 29th July, 2004, the Hon Minister made the following assurance on the floor of the House: “Mr Speaker, I would like to state that this administration is trying to construct houses by raising finances through Municipal Bonds. Our programme is to use “Special Purpose Vehicles’ meaning that we will create some form of organs that, indeed will be used for purposes of Municipal Bonds.”

In his update, the Permanent Secretary reported that the programme to construct houses in councils through Municipal Bonds could not kick off as originally envisaged due to difficulties in securing assets and income streams from the local authorities. In addition, the Government had released a total sum of K7 billion to selected councils that had set aside land for the construction of houses to enable them construct ten houses in their respective districts. In the meantime, the Government was reviewing the National Housing Bonds Trust with a view to making it effective.

Committee’s Observations and Recommendations :

Your Committee observe with concern that the construction of houses through Municipal Bonds is taking longer than necessary to be implemented. Your Committee urge the Government to speed up the implementation of the project particularly to the selected councils which have received the funds for the purpose. A progress report is awaited on the matter.
This is a good glimpse of policy making in the dark. Surely before a government announces a policy, it ought to check whether the local authorities had the necessary assets and future streams of income to avoid the whole thing falling apart. A municipal bond when bought is equivalent to offering a loan to the local council that promises to pay back at maturity and pays interests at set amounts annual / semi-annual. In truth to call these "bonds" is simply a matter of custom, these really are "debentures" (unsecured promises to pay). The local councils cannot pledge public assets as security but can pledge certain revenues. That is where the problem starts with our councils. Future revenue is not guaranteed for many reasons including central government failure to pay back debt. So we can expect, if such bonds where initiated, significant bailouts and rampant fiscal irresponsibility. Before we start considering municipal bonds, surely we need to get councils running properly, a critical part of that is that central government has to start meeting its obligations.

As an aside, we have previously touched on the issue of alternative funding mechanisms for councils here.

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