Business

Dar es Salaam draw up plans to issue municipal bonds soon

LOCAL government authorities are in a position to secure funds for executing various social and economic development projects such as construction of roads, bridges, water supply, schools and power generation once the initiative to issue municipal bonds becomes effective.

Investors who buy municipal bonds are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually and the returns to the original investment, or 'principal.' The bonds issuance will increase local governments' transparency in funding infrastructure development projects and social welfare programmes.

The move to establish the new debt instrument comes after a study that observed sizeable local authorities prepared to raise funds by way of debt instruments. When considering safety of capital invested, municipal bond mutual funds are second only to those in government securities like treasury bills and bonds. Likewise, investing in these bonds may offer a tax-free income stream to investors.

The Kigamboni satellite project and four municipal councils including Dar es Salaam, Arusha, Mbeya and Mwanza have already
been earmarked to qualify for the debt facility due to their financial muscles as well as multiple revenue sources necessary for payback. Tabling budget estimates in Dodoma early this month, the Minister for Lands, Housing and Human Settlements Development, Prof Anna Tibaijuka, said the government will start using municipal bonds to raise funds for the Kigamboni new city project which is estimated to cost a total of 11.6tri/- in three phases.

The first phase of the project will span the years 2012-2022 while the second will start in 2022-2027, with the third phase set to start in 2027-2032. "We will be using modern techniques specifically municipal bonds to raise over 605bn/- outside the budget to implement the first phase of the long awaited project within a time frame," Prof Tibaijuka said.

She said over 60bn/- has been set aside in this financial year to implement the first phase of the unit project. The new city master plan seeks to provide sufficient infrastructure such as residential, commercial, trade and business, industrial, educational and tourism facilities.

Commenting on the new debt facility to be used in the country, the Dar es Salaam Stock Exchange (DSE) Chief Executive Director, Mr Gabriel Kitua, said the initiation of the municipal bonds for the four councils will be a challenge for others to improve financial statements before adopting the facility.

He said for example, the regulatory framework for the initiation of the municipal bonds will be completed in four months time to enable local government authorities to raise relatively cheap funds to undertake various projects necessary for social and economic development. The municipal councils will be obliged to pay first for the bonds in their revenue collections, Mr Kitua insisted to minimise the risk of defaulting.

The government through the assistance of the World Bank (WB) has identified a consultant in the two-phase municipal bonds study to assist in the preparation of the legal and institutional framework for issuance of the debt security. The first phase of the project strived to establish the feasibility and required policy changes for a thriving municipal bonds market in Tanzania. The second phase pursued to develop the legal and operational framework for the municipal bonds markets in the country.

In March 2009 the consultant was recruited to perform the first part of the municipal bonds study the main objective of the study being to review the current and recommend a future appropriate legal, institutional and policy framework to establish viable municipal bond markets.