In order to finance its ongoing activities across the operating and capital expenditure spectrum, the City of Harare taps several sources of finance. This installment of Financial View discusses some of the key sources and cites appropriate examples in recent memory.
The rate account is the principal source of revenue for the city’s expenditure needs. The top five contributors to revenue generation (for 2014) are water charges, property tax, refuse collection, housing (rentals, leases and markets) as well as health fees in that order. While revenue from rates is assured because a certain number of ratepayers make payments every month, the City does not collect the maximum amount it can possibly collect. This is due to many other factors such as perceived affordability of the rates, the prevailing liquidity situation and ratepayers’ perception of the adequacy of service delivery.
Commercial Bank Lending
The City’s inability to collect all its dues from ratepayers on a monthly basis means that it is faced by a funding gap and sometimes has to resort to bank lending in the form of overdraft or term facilities, depending on whether it intends to finance operational expenditure or capital expenditure. A good example is the US$15 million loan facility from BancABC that was used to finance the purchase of 27 refuse compactors and 4 skip trucks as well as road equipment. The City had to meet the bank’s strict commercial lending criteria in order to qualify for this facility.
Municipalities often need affordable funding of a long-term nature in order to embark on infrastructural development projects. For this type of financing, City treasurers usually have to enlist the services of the corporate finance units of commercial and investment banks to help them tap the capital markets through the issuance of Municipal Bonds. Municipal Bonds or ‘munis’ are debt securities issued by municipalities to finance their capital expenditure needs. Bonds enable municipalities to borrow from multiple public investors, whose take-up of the bonds depends on several factors such as market liquidity conditions, the municipalities’ ability to generate revenue/cash flows and general risk/credit rating issues. Development Financial Institutions (DFIs)
Funding from Development
Financial Institutions (DFIs) and Export Credit Agencies (ECAs) are typically of a long-term nature and ear-marked to finance capital projects. A good example is the US$144 million China Export-Import Bank (Eximbank) loan facility which the City of Harare is using to rehabilitate Morton Jaffray and Prince Edward treatment works, Firle and Crowborough sewage treatment works; for procurement and installation of clean water pumps at Warren Control, Alexandra, Letombo as well as for the supply of ICT systems.
Grants are discretionary in nature and therefore mainly dependent on city leadership’s external stakeholder management skills. As a result, whether a city gets this sort of financing or not depends on the efforts made by the council leadership to engage donors and related parties. Over the years, the City of Harare has managed to mobilise US$25 million worth of support from the Bill and Melinda Gates Foundation, for instance. The City also gets support from bilateral partners with which it has twinning arrangements.
The City’s first resort for revenue is of course ratepayers, who provide the cheapest form of financing. This is however rarely adequate for the City’s burgeoning needs, forcing it to resort to other sources of financing such as commercial bank lending, the bond markets, as well as Development Finance Institutions. These sources of finance however do not come cheap and the City has to be careful not to overload itself with debt, the cost of which will ultimately be borne by ratepayers.
Graphic: Graham van de Ruit