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Let’s think of creating Local Government Finance Company for LGAs

THE ‘Daily News’ 29th November 2019 front page headline reads “councils tightened on loans”.

This stimulated my judgments and stifled my thought to write few lines on local government (LGAs) and their role to unlock economic potentials in their jurisdictions.

I do believe if LGAs through their Local Government Loans Board (LGLB) can have in place a good control and be reinforced, it can support councils to create assets, provide solutions and help them to clout drivers of economic and social development that the country need.

It isn’t my intention to interrogate or challenge the Minister of State in the President’s Office, Regional Administration and Local Government Authorities on advice and proviso on stopping municipals and districts councils to stomach the government’s stop order to seek loans from commercial banks and other financial institutions, but an attempt to shed light on why it might be necessary for LGAs to institute good governance and make a case that would enable them to execute revenue generating projects sustainably at lower cost, at lower maintenance but with possibility of higher return.

Excessive and extravagant infrastructure asset creation in my view isn’t what council need to target.

Much as the Ministry of Finance and Planning or Treasury is the only government office conferred with responsibility for assessing readiness, capability for council or municipal to approach financial institutions for a loan, it is important to bear in mind that LGAs in Tanzania just like in other countries in the region have huge untapped economic potential that when applicably leveraged to create wealth and economic opportunities for all, can yield a huge multiplier effect to entire economy.

If am asked, I would argue, this requires a reasonable good businesses case, planning for a sizable infrastructure asset that will be of low cost, easy to maintain and above all take into account the level of development overtime.

Constructing a fancy modern market structures or extravagant modern bus terminal within councils or district level, unless can be supported by strong economic activities in my opinion shouldn’t unnecessary place councils in the competition marathon.

In my opinion, government, one will always be bold and has a right to be strict on council’s conduct in closing deals with banks or any financial institutions because if project fails, the last resort will each time fall back to the government rescue.

Execution of local governments’ investment infrastructure project(s) can be realised if the project is reasonable, easy to maintain and its return can easily be justified within reasonable timeframe. Experience has shown that even the best plans risk ending up unexploited if they are not accompanied by financial and regulatory strategies for execution in a manner that will be viewed as fit.

Thus, strategic public investments for bus terminal, markets and the like at LGAs must go hand in hand with strategic funding mechanisms and supporting governance systems. I am of the opinion that President John Magufuli remarks while in Kahama recently was right on how councils should approach the financial institutions for loans through sanctioning from treasury.

President Magufuli’s concern, if I may be permitted to read his mind is that the rationalization and risks associated to councils borrowing from whatever source have to be well understood, well evaluated and documented in terms of their potential impact.

Implication, before seeking for a credit, it is important to have in place a debt management strategy and a written debt strategy that will ensure loan taken wouldn’t be a burden for the tax payers.

Many of us might be overtaken by time but my understanding of the treasury roles among others, is to make sure that the local government maintains at all times an adequate level of indebtedness which first would not prejudice its financial stability and two, would enable it to implement the investment objectives.

The panorama of improving municipal credit worthiness in Tanzania and increasing council’s ability to create wealth and economic opportunities will be successful if local government loan board is strengthened. Loan board needs to be reinforced because local governments elsewhere increasingly play key roles in the deliver y of basic public services and in the provision of public infrastructure necessary for business development.

These roles of local governments are developing against a backdrop of multiple challenges in the global arena including growing backlogs of infrastructure demands, all of which are likely to aggravate the financial difficulties faced by local governments.

In order to fulfil their mandate in a fiscally responsible manner, councils must have significant sources of own tax revenues as well as non-tax revenues collected from user charges and fees. Capability of own revenues is the key to deliver necessary goods and services, as well as to better accountability of local officials to their constituents.

Own revenues need to complement intergovernmental fiscal transfers to address differences in expenditure needs and fiscal capacity to support the implementation of central government programmes, that is the main objective of any government to save its people especially disadvantaged ones.

Execution of local governments’ investment projects, thus will depend on their ability to raise the necessary funds from a combination of own resources and external financing. Debt financing permits municipalities to carry out more infrastructure projects in a shorter time period as compared to the financing from own funds that practically may take year cycle to collect.

Nevertheless, the risks associated to borrowing have to be well understood and documented and permit to borrow has to be sanctioned by treasury in terms of their potential impact on not only local budget in the future, but national whole budget.

There are some important distinctions between various debt instruments utilized in financing of LGAs capital investment projects, especially on ventures that could attract public private partnerships. Among the most standard are bank loans and municipal bonds.

Variations of these instruments are widely known and utilized in other countries. Looking at infrastructure needed to unlock untapped potentials at local level that could generate employment and sources of taxes to the government fiscals, one notice that the amount of resources desirable for capital projects is often too large to be raised from regular recurrent sources.

Contrasting most recurrent expenditures, capital infrastructure is lumpy in nature: all the spending must be done before there are any benefits, so that you could not simply decide to build half a bridge and receive half the paybacks.

If financed from recurrent revenues, taxpayers would be asked to bear the full cost of a capital project upfront, while the benefits from capital projects are spread out over a multiyear era. Thus borrowing under the supervision of LGLB would bring back the match over time between the costs and benefits of capital infrastructure.

LGLB have to see this argument both for social types of infrastructure school buildings, clinics, etc. as well as revenue generating types of infrastructure like markets, roads, sewages, gas storage facilities, and so on. There is a need to cast a wider role for LGA borrowing in Tanzania than is currently available by abiding by government directives and presenting to the Ministry of Finance and treasury convincing plans.

Devoid of uncertain, currently, the LGLB own role is very narrow that make the board as too much a part of the central government. The board’s capitalisation is inadequate both the amount as well as the manner probably is time to strengthens it to help government deliver what is expected from them.

Maybe, there is a need now to reconsider turning LGLB into a Local Government Finance Company (LGFC). Even though there might be no need to rush a more gradual transformation of the LGLB into an LGFC would be appropriate in the future of LGAs in Tanzania given the prominence of other on-going reforms in the field of local government finance and value for money at all government levels.

TODAY is a critical day both for Zanzibar ...

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Author: Dr Hilderbrand Shayo

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