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Monday, 7 January 2013

Bondmania

The success of the $750m Eurobond is leading to various public sector bodies to consider more bond debt to finance various infrastructure. 

ZESCO has been on the road looking to acquire $2 billion debt to fund new investments. The company sent managers to the U.K. and the U.S. in a bid to raise the money from investors. South Africa's Standard Bank Group Ltd is advising the company, which has meet investors in London, Boston and New York. According to Mr Chitundu (ZESCO CEO) the company may also sell a Eurobond similar to the $750 million raised by the government in September 2012, “We are probably talking $1 billion, probably even $2 billion". 

Lusaka City Council (LCC) is pressing ahead with the $500m municipal bond proposal. It has called for the expression of interest for a book runner and legal advisor. The appointment will be made in February. When the money is raised, it will be used for construction of 3,500 high rise housing units.  In the case of LCC, 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 corruption, mismanagement and general failure by tenants to pay back debts. So we can expect, this new LCC bond to be guaranteed by Government in some way. Government will eventually bailout Lusaka City Council due to rampant fiscal irresponsibility. This issue therefore goes beyond LCC. We have touched on alternative ways of local finance here

In general, securing debt is not necessarily a bad thing  if we are spending money on important projects and we have a coherent debt management strategy in place. Unfortunately  at present there's no parliamentary oversight over Zambia's growing debt accumulation. Parliament continues to be sidelined because no clear debt management strategy exists. There should be a halt to all external debt procurement by public bodies until that is resolved - not least because Zambia has not fully capitalised on leveraging domestic sources of revenue. It seems we want to become more indebted before we see the need to plan better. Not very wise. 

1 comment:

  1. Re councils financing capital expenditure, isn't it worth utilising a pension fund investment process to generate internal investment? So the Zambia Pension service would fund the building and in return get the revenue? Money invested&subsequent profit/revenue staying in Zambia for a change.

    ReplyDelete

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