In a historic move, the Johannesburg City Council will today issue a seven-year short-term municipal bond, with which it aims to raise some R1-billion.
The issuing of the bond, the first under South Africa’s democratic government, has been described as the ‘dawning of a new era in the raising of funds’.
It is understood that government has been mulling over a bond issue since the late 1990s, but various mechanisms had to be put in place before such a transaction could be launched.
Johannesburg city treasurer Jason Ngobeni told Engineering News Online yesterday that it is anticipated that this bond will be followed by a long-term (ten to twelve years) bond which will be issued in a few weeks.
This is also expected to raise about R1-billion.
A bond is a borrowing instrument that enables the borrower to access funding from a broad number of lenders.
"The way this bond was structured was based on the appetite of our investors. We tested this and, as it is the first time we are doing this, we found that investors are interested in a short-term bond first to test our credit rating," Ngobeni pointed out.
Effectively, the Johannesburg City Council has thus decided to use the short-term bond to increase the life of infrastructure.
"While the first bond will be used to tackle the mismatch of the life of infrastructure, our main objective is to issue a long-term bond," he said, adding funds from this would be used for infrastructure development.
Despite seven current sources of funding
– five commercial banks, the Development Bank of Southern Africa and Inca – the Johannesburg City Council has recognised the need to diversify its sources of income.The move is also expected to prevent the council from hitting its credit ceiling, as it is currently borrowing money faster than it can repay it. In addition, the bond issue will offer the council funding at more competitive rates and increase its capital spending.
Local government is also seeking to introduce direct public participation in raising funds
– a move which is expected to increase discipline in municipal spending and fundraising.Announcing the proposed bond issue last week, the Johannesburg City Council said it would use the funds to address an R8-billion capital expenditure backlog, as well as to restructure some of its debt.
The capex backlog resulted from Johannesburg’s financial crisis in 1997/8, Ngobeni said.
In regard to tackling this, the council is planning to look at three main areas: electricity, water and roads.
"About 30% of funds raised will go to electricity, as there is some infrastructure that is in need of refurbishment, being between 30 and 50 years old. This will not only allow the network to carry the required load, but it will also lower maintenance costs," Ngobeni explained.
The council is also seeking to tackle the issue of water infrastructure, which will be allocated about 25% of the funds raised through the bond.
"At the moment, we are losing about 37% of the water that we buy, through leakages in Soweto and improper billing," Ngobeni added.
The council is also planning to allocate some capital for the tarring of certain dirt roads and fixing robots
– an area that has been described as a multimillion-rand problem.Although Ngobeni commented that the council was apprehensive about the bond issue, it has recognised this as the ‘right way to go’.
In order to facilitate secondary trading of the bond, the council has set up an internal treasury, headed by Ngobeni, and will set up a bond trading room in the Braamfontein area.
The bond will be traded on the Bond Exchange of South Africa, and trading will open at 9am today, closing at noon.
A meeting is scheduled for tomorrow for the council to approve the transaction, while money is expected to flow into its account on April 13.
Engineering News 2004/04/06
Publisher: Engineering News
Source: Engineering News
