Municipal bond could be viable option for KCCA

Given the escalating levels of foreign debt, currently standing at a record 50 percent of GDP, and which many analysts say is now tending towards unsustainable levels, I think it is high time that major cities like KCCA considered municipal bonds as an alternative source of financing for their capital projects. 

Simply put, a municipal bond is a debt security issued by a city or local government to finance capital public projects such as roads, utilities, housing, railway transport facilities, among others.  

By buying a municipal bond, citizens would in effect be lending money to the city authority in exchange for regular interest payments and the repayment of the original investment when the bond matures after say 20 years.

Worldwide, many modern cities have developed state-of-the-art infrastructure using cash from municipal bonds, which became popular because of their attractive tax benefits and of course the relatively lower risk of default.

Unlike treasury bonds, which are issued by the Central Bank, municipal bonds are typically issued through the securities exchange and are regulated by the capital markets authorities.

Because of their low risk and steady interest income, municipal bonds are attractive to entities that hold long-term liabilities including banks, pension funds, provident funds, unit trusts, insurance companies, and Saccos, among others.

I will give an example of how it could work.  We all know that Kampala suffers from chronic traffic congestion due to lack of an effective and efficient mass transit system. 

To deal with this problem, KCCA in collaboration with the Uganda Railways Corporation, could consider setting up a simple train service to transport people from the city centre to some of the main suburbs such as Kyengera, Mukono, Gayaza and Wakiso.

Supposing the feasibility studies show that the cost would be say $250 million, KCCA could issue a 20-year municipal bond to borrow the money from citizens at an attractive tax-free interest rate of say 12 percent, which would be easily paid from the money collected from the passengers using the train service.

That could be supplemented with cash from the city’s normal revenue collections (currently amounting to a record Shs100 billion per year), grants from development partners, and the annual subvention from the central government, if necessary.

In essence, issuing a municipal bond would be hitting two or three birds with one stone – locally acquiring capital in one go to make the city better while also providing a vital service to the community and making our beloved city more livable.

In this era of shrinking foreign sources of development finance and diminishing grants from the central government, KCCA has no choice but to be innovative with its financing mix.

Thankfully, the legal framework, including the KCCA Act and the Capital Markets Act, already cater for the issuance of municipal bonds. 

The implementation framework is what is now lacking and that can be discussed between the relevant authorities, including KCCA, the Ministry of Local Government, that of Finance, Planning and Economic Development, and that of Works and Transport; the Capital Markets Authority and the Uganda Securities Exchange. 

Given the prevailing muddle in this our beloved city of Kampala, I strongly believe that a KCCA Municipal Bond is long overdue. 

Peter Nyanzi, journalist