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Wednesday, 18 April 2012

Local Funding

By Chola Mukanga

Deputy Finance Minister Miles Sampa has recently been championing municipal bonds. In the one media report he was it was reported that Mr Sampa has “implored local authorities to put their houses in order and start raising finances from Lusaka Stock Exchange instead of endlessly looking up to central government for operations finance... decentralisation could be accelerated if the local authorities started raising finances from the local bourse. The councils… can actually raise their own funds through municipal bonds like it is done in other countries”.

Unfortunately, this is another old idea that has never been thought through. The idea was first mooted by MMD administration in 2004. It quickly died quickly due to difficulties in securing assets and income streams from the local authorities. The MMD administration had in fact released K7 billion to selected councils that had set aside land for the construction of houses, with little known about how many even materialised. The bottom line – no bonds were issued!

The problem here is that we are seeing the PF administration now engaging in “policy making in the dark”, which characterised the failed MMD administration. Surely before Mr Sampa suggests such initiatives, he ought to check what has happened in the past. If something does not exist, the first question, you ask is “why not?” Most importantly, Mr Sampa needs to check whether the local councils have the necessary assets and future streams of income to avoid the whole thing falling apart again.

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.

So where should the government be looking for local authority funding? 

The first place to start  is development an adequate legislative framework for "developer contributions".  The simple answer to local authority funding, particularly for housing construction finance is the “direct foreign investment” coming into the country . Why not get the firms who are pouring millions into mines and tourism and other sector to actually be tied to spending some of it on housing? 

The call here is for a generic model that links new investment in areas to housing provision.  The model that is needed is similar to the framework that the UK has adopted under Section 106 of the Town and Planning Country Act (1995). This UK legislation basically makes it a condition that any new investment in any local area of the UK should be conditional on providing some minimum level of investment in schools, housing, transport and other things, if the Local Authority deems necessary. What you can basically say is that if a firm X invests in Mpulungu, the people in Mpulungu can require that firm X to deliver not just investment but some houses and schools as well. But there has to be legislation to back them up!

The advantage of such a system is that not only does it relieve pressure on local resources (meeting the "internalisation of externality" condition), but also helps tackle local poverty by linking the investment to the local needs such as housing. In addition, as well as helping us with funding our housing shortage needs, this system has an added advantage that it makes foreign investment in some areas publicly acceptable. Governments wants foreign direct investment, the people simply want good houses and better schools. And of course from an economic perspective such a framework also helps to raise the costs of reneging by the new investor by making it that much costly for him/her to cut and run, like others have done in the past! So we find that in this it’s a win-win for everyone, and most importantly it directly helps relieve the housing problem.

The second approach is development of innovative mechanisms. One such idea is the tax-increment financing  (TIF). The idea is to draw a boundary round an area, borrow to pay for basic infrastructure and repay the loan from the increase in property-tax revenues inside the redeveloped zone as private firms start building. The stumbling block is obviously where the local authorities "borrow" money from. If such an idea was developed in Zambia, it would certainly require Government lend these funds, although clever councils in urban areas might well be able to afford it. There are other such similar innovative ideas.

Chola Mukanga is an economist and founder of the Zambian Economist which provides independent economic perspectives on Zambia's progress towards meaningful development for her people

Copyright: Zambian Economist, 2013

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  1. I read this article with interest as my background includes local government finance. I just wanted to add that in fact section 21(1) of the Rating Act does already provide for the kind of 'property tax' you refer to, its called a special levy in the Act or a betterment levy in the language of local government finance.
    Unfortunately we have never used this levy much, if at all, in Zambia as all levies have to be approved by Lusaka, and that, is a complex process.

    Meanwhile Lusaka is keen on pushing ideas like local government commercial enterprises (in the 70s and 80s) and Municipal Bonds (now) without the required research to establish their feasibility and viability in order to get round the vertical fiscal gaps created by the mismatch between the fiscal means (resources) and fiscal responsibilities (expenditure) of Central and Local Government.

    1. Thanks for that. Will take a look. Do you know why it has never been used?

  2. LCC currently has no human capacty to take on this kind of financial resonsibility. You need new blood. LCC employees have become so complacent and they have even forgotten why they wake up to go to work other than their own personal agendas. This is also the unfortunate position in NEARLY all the other municialities in the country. People have become greatly skilled at writing funding proposals but will totaly ignore the IMPLEMENTATION of the "monitoring and evaluation" part of the project, and no one takes them to account. There are a lot of ways that the LCC can engange in to raise funds but they always want easy money which they mismanage. You know if you have not worked for something, you dont value it much. Right now even for a constractor getting a job from them is personal suicide. They can not simply comprehend the financial burden on the contractor, along with many others expecting to be paid from such a contractor's council project when they maliciously & deliberately fail to pay for they services that they have received as a council. Bottom line is, they do not have the human capacity to handle finances until you have a responsible operational team and the change the culture of its employees at all levels. People need to pround for themselves about the level of service the give even before an outsider comes in.

  3. The main reason municipal bonds have not worked before is that the ability of Local Authorities in Zambia to repay monies borrowed has always been in question. These are feasible now by such ring fencing mechanisms as revenue assignment where already existing revenue streams, say rates from major property owners, or from the special levy or the tax-increment financing (TIF)as you call it, is assigned to and directly paid to the lender for the duration of the debt.
    The trick is then to have the capacities in Local Authorities to structure, market, negotiate and manage such financing proposals.

    1. Mr. Mwendachabe, you bring out viable solutions and given a fertile institutions, this would surely help a great deal. However, most of the institutional failures we have are not really as a result of non-funding but mostly a lack of care and personal responsibility. They simply have no commitment to seeing growth and quality,"ni fya boma". You need a radical leader who will not be scared to bring in audit processes that his team will RESPECTIFULLY abide by and be accountable for. I would like to suggest the minister, with the authority vested in him pushes for out-sourced consultants on a trial basis to manage the process and perhaps create a group of public stakeholders as part of supervisory team. Not necessarily in this order but something to strengthen the supervisory process, make it transparent. Maybe we may even see some voluntary retirements and usher in more enthusiastic officers. While you are at it, please consider putting in place a comprehensive maintenance plan for long term property value


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