After successfully issuing three municipal bonds, with a fourth on the horizon, Johannesburg hosted a conference to share its knowledge with other South African municipalities.

Johannesburg's treasurer, Jason Ngobeni

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HE three municipal bonds issued by the City of Johannesburg have met with such success that the Metro is now striving to help other municipalities that wish to take the same route to raise capital.

This was the key reason behind a municipal bond conference organised by the City and the Institute of Municipal Finance Officers, held in Sandton on Wednesday, 5 April.

Among those who attended were representatives from municipalities that are part of South African Cities Network, banks, other financial institutions, provincial government and development agencies.

"We are here to discuss the issue of participating in bonds," said Mankodi Moitse, Joburg's chief financial officer. "Joburg is currently the only [municipality issuing municipal bonds], but we would like other municipalities to follow and also use bonds as an alternate means of raising finance."

She said the bond market was a way to reduce borrowing costs, increase the investor base and a means to raise large sums of money that would not be obtainable through a single financial institution.

Members of the Institute of Municipal Finance Officers

Guest speakers from the banking, asset management and government sectors gave a better understanding of using municipal bonds as a means of raising finance.

Jason Ngobeni, the City treasurer, spoke of the reasons why Joburg decided to enter the bond market; these included diversifying sources of funding, reduced weighted costs of borrowing, free locked cash for further capital expenditure and to establish a credit curve and history in capital markets.

He said the idea of issuing municipal bonds was first explored in 2001, though those plans were shelved because of a lack of capacity and expertise within the municipality.

According to Andrew Canter of Futuregrowth Asset Management, the financial services group, bonds were an ideal way of seeking finance. The South African savings pool, including pension and other retirement funds, and asset managers' funds, amounted to some R2,2-trillion.

"Money is not the problem. The issue is investors getting favourable returns on their investment," Canter said.

Limitations
However, there were limitations to entering the bond market. Firstly, the issuer must want to borrow a minimum of R500-million, must have good credit ratings and be very transparent with their information.

Canter said potential issuers would have to demonstrate a high level of business and financial management, while also illustrating what sort of social effect the money raised would have.

Johannesburg has three bonds listed on the Bond Exchange of South Africa, CoJ 01, an un-enhanced R1-billion bond maturing in six years; CoJ 02, a partially guaranteed R1-billion bond maturing in 12 years; and CoJ 03, a R700-million bond maturing in eight years.

While the first two were issued as stand-alone bonds, the CoJ 03 was issued as part of the City's R6-billion Domestic Medium Term Note Programme, which was launched on 26 April 2005.

Under the programme, the City can issue further bonds without having to provide new documentation each time.

"The success of CoJ 01 and CoJ 02 had attracted investor appetite and it was much easier to gain investors when issuing the third bond," said Quinton Zunga, a lead manager with Absa, the banking group.

The third bond was over-subscribed nearly four times, with investors bidding a total of R2,6-billion on the R700-million bond. The City has a Sinking Fund with Regiments Capital, which is a ring-fenced pool of funds to pay its liabilities when they are due.

Capital expenditure
Most of the finances raised through the three bonds have gone towards funding the City's capital expenditure programme, mainly rolling out infrastructure in previously neglected areas.

Ngobeni puts the cost of resolving the City's infrastructure disparities at about R8-billion, while the capital expenditure budget is projected to increase to almost R4-billion a year by 2010.

Moitse also talked of the importance of using the infrastructure spending ahead of the 2010 Soccer World Cup as a stimulus for further growth and improvement in service delivery.

Johannesburg was also looking at public-private partnerships to account for up to 35 percent of capital expenditure spending by 2010. It was planned that it will engage in its first such partnership in 2007. It was important to ensure that the effect of these infrastructure developments would still be felt after the world cup had come and gone.

An ever-expanding stream of domestic and foreign immigrants to the city also means there is a need constantly to upgrade roads, water and electricity systems and other social services, all of which need capital.

"There has been a consumption boom and this has to be followed by an investment boom," said Christopher Hart, treasury economist at Absa. "2004 was also the first time since 1971 when the economic growth rate was higher than that of inflation."

The negative side to this would be in the form of increased congestion, increased energy demands leading to blackouts should generation be insufficient, and increased water consumption.

"Through Asgisa [Accelerated and Shared Growth Initiative for South Africa] the national government wants the economy to grow at 6 percent. The major centres in the country will have to bear the burden of these plans for higher growth," Hart explained.

The bond market
In total, there are about 500 debt instruments listed on the Bond Exchange, representing a total value of R637-billion. According to Garth Greuble, from the exchange, bonds issued by the national government dominate.

He said it was advisable to list on the exchange since many investors demanded it, it would set standards when it came to documentation, encourage transparency and that the spread of investors would grow.

Issuing municipal bonds is not new – the first official municipal bond was issued by the City of New York in 1812. The municipal bond market in the United States alone is valued at about $2-trillion.

Municipal bonds in Europe are mainly concentrated on local and regional government issues from Germany (holding about 60 percent of issued municipal bonds in Europe), Italy and France.

"The global municipal bond market has grown phenomenally over the past 30 years. Expectations are that future growth will be driven by the need for capital in developing countries to finance infrastructure developments," said Absa's Michael Mutiga.

During its feasibility study, the Johannesburg team visited Monterrey, a state capital in Mexico with over a million inhabitants, and a municipal bond issuer in the Americas.

It has also been successful in issuing retail municipal bonds, which are sold to individual investors for smaller sums of money rather than huge portions that are sold to institutional investors. At heart, the bond encourages residents to invest in their city.

"If they [Monterrey] could convince their residents to invest a billion dollars in their city, I see no reason why we cannot eventually do the same and raise a billion rand from the residents of Johannesburg," Ngobeni said.

In his State of the City address on 3 April, Executive Mayor Amos Masondo announced that Johannesburg would be issuing a people's bond, a retail bond aimed at Joburg's residents.

In an attempt to get residents to invest in the city while saving at the same time, the bond will come in smaller denominations, ranging from R500 to R1 000.

At the conference, Ngobeni also announced that the City would appoint a lead manager within the "next few weeks" to issue Joburg's fourth bond.

"We have achieved what we wanted to do – we can go straight to the market and raise funds. Also, we now have 16 new investors instead of only relying on the big four banks and development agencies."

Ngobeni added that initially as a new investor, the City paid a heavy price, but it was later rewarded by the market for its performance. The City had to pay a higher premium on the first bond than on the following two.

Challenges faced by Joburg before it issued the bond included obtaining a credit rating, dealing with its billing chaos, computing the capital expenditure backlog, giving management the required expertise and trying to deal with disclaimers from the auditor-general regarding its financial statements.

He said markets accepted that municipalities were faced with numerous challenges, but they did not stop lending to them for that reason.

"Joburg has learned the lessons and we would like to share and possibly assist prospective issuers from our fellow municipalities," he concluded.