Purpose of Initiative:
Lack of access to finance impedes the ability of local governments in the developing world to address infrastructure needs, thereby limiting water, energy, and sanitation services available to citizens. Many cities operate on a pay-as-you-go basis, and must save money from user fees or fight for limited central government funding to fix or expand basic services. Bank financing is often short term and prohibitively expensive. By contrast, in many developed countries local governments obtain financing to construct needed facilities by borrowing from their domestic capital market through the sale of municipal bonds (a long term interest-bearing instrument). Such bonds are a lower cost option than bank financing, enabling cities to make improvements and plan expansion within a limited budget.

Under a cooperative program initiated in Mexico in 2001, the U.S. Agency for International Development (USAID) and the financial advisory firm Evensen Dodge International worked with local governments in two Mexican states to increase the ability of these local governments to access capital markets. Collectively, local governments from these two states successfully borrowed the Mexican Peso equivalent of $300 million USD from Mexican domestic financial institutions for improvements to water and other basic services infrastructure, with assistance on financial issues provided by Evensen Dodge. Through this program, the credit ratings of the participating local governments improved, resulting in both lower financial transaction costs and interest rates, saving local governments an estimated $4-6 million USD.

Building on the success of the Mexican initiative, USAID?s Global Development Alliance and Evensen Dodge International formed a partnership to provide technical assistance to South African municipal, sub-national and national governments. The partnership?s goal is to help improve the ability of local South African governments to finance municipal infrastructure by accessing domestic capital markets through municipal bonds. USAID and Evensen Dodge are working with selected South African municipalities to analyze the amount of new financing that will be needed to meet their infrastructure requirements, and help identify investors interested in buying South African municipal bonds and match them with municipal borrowers. In addition, municipalities will receive assistance in improving their financial management capacity, which helps assure potential lenders that the local government will be able to repay the debt, and thus results in lower transaction costs for borrowing the money.

Partners:
Governments: South Africa, the United States of America (U.S. Agency for International Development: Global Development Alliance, Office of Development Credit, and Office of Poverty Reduction/Urban Programs Team)
Private Sector: Evensen Dodge International

Partnership Targets:

• To increase domestic capital financing for local infrastructure projects.
• To improve the ability of municipalities and provincial governments to access domestic capital markets.
• To improve municipal financial management capacity in the developing world.

• Drafting a scope of work to conduct a Diagnostic Analysis of South Africa?s national legal and regulatory framework as it pertains to the country?s municipal financing market, to identify areas where reform is required to make municipal bonds possible.

• Identifying the types of debt instruments currently available to sub-national governments in South Africa wanting to access capital markets to finance infrastructure and the responsible South African government agencies involved in their regulation

Resources:
To date, USAID and Evensen Dodge International have approximately $1 million USD to support technical assistance through this program.

U.S. Primary Points of Contacts:

U.S. Agency for International Development, Bureau of Economic Growth, Agriculture and Trade, Office of Poverty Reduction, Urban Programs Team: Alexandria Panehal (Phone: 202/712-0224, E-mail: apanehal@usaid.gov)

Evensen Dodge International: Fernando Gama, Senior Vice-President (Phone: 952/471-1196, E-mail: fgama@post.harvard.edu)