Municipal Finance Series by Professor Jeremy Gorelick – Part 2 of 4: Avoiding Mistakes in Municipal Finance

In sourcing municipal investment. What are the most common mistakes made by utilities and municipalities?

First, is a failure to incorporate master planning. That is, between different parts of the city, different divisions of the city, or different departments. These must be cohesive and comprehensive investment decisions. An example is investing into transport infrastructure. An example is to improve and pave roads without considering what goes underneath the roads. There must be consideration for other facilities under the roads, like underground power, water, sanitation pipes, fiber optic cables, and phone lines. If the sequencing of construction is wrong, due to pressures for improving the roads, future problems will arise. Road might need to be torn up two years later– the inefficiencies and costs are obvious. In this case, the cost for the road improvements ends up being a lost cost. Not just a sunk cost, but also a cost that is not recoverable. And, those roads will need repair as well as the underground infrastructure. So, failure to incorporate comprehensive master planning is one of the major mistakes.

Second is a failure to communicate between the finance side and the technical side of a utility. Finance might think that if they raised the money they need and not care how it’s used as long as it goes towards new supply projects. That is, to generate extra revenue for debt service needs.

Meanwhile, the technical side often doesn’t appear concerned about where the money comes from. For example, whether it’s grant money, or repayable finance. As long as there is money to deliver on their projects, from where it comes is irrelevant.

I see only few cases where there is the linkage between the financial side and the technical side. As I indicated earlier, in South Africa, regular conversations between both sides is constitutionally mandated. But, even so, in only a few instances does that regularly happen.

The third challenge from a financial perspective is the failure to think about the lifecycle costs of projects. Focusing mostly on capital investment (upfront cost) and just anticipating that generated revenue will be enough to service the debt, will bring problems. The challenge is that it’s not a case of building the project and then adding a small placeholder for operational maintenance. Maintenance cannot be an afterthought or neglected all together. When this happens, infrastructure is not well maintained. This results in major extra investments throughout the project lifecycle. It’s important to allocate or budget the funds required – from the very beginning.

With adequate consideration given for the three challenges we would see more sustainable infrastructure. Not only from the financial point of view but from a technical and services point of view as well.


Can you highlight a failed municipal finance effort and why it did not work out?

A failed effort is one where the city looks for money but comes up empty, unable to raise the full amount of money initially sought. An example that comes to mind is the City of Dakar Senegal’s efforts to launch a municipal bond. They did all the right things. Including attracting the Bill and Melinda Gates Foundation. The Foundation provided technical help and $5.5M of financial support to get the work done.

The project did the necessary work. It built consensus and got national government buy-in. The team designed a project that would generate enough revenue for investors. And it attracted others due to the fact that a major foundation was supportive. The project involved improving quality of life for the urban poor. There was significant due diligence to pick the right location, to negotiate the price for the acquisition of the land. Adequate architectural drawings were provided. These were necessary to produce a financial analysis and feasibility study to engage investors.

Domestic institutional investors and investors in euro-denominated transactions and instruments were engaged. Keep in mind that the Senegalese currency is pegged to the Euro. The project development team prepared an “investor book.” The Book was oversubscribed relative to the amount of money sought. Additionally they went through the process to establish a credit rating. And, they maintained an investment-grade credit rating through the entire period leading up to the transaction.

The only downfall of the transaction was when the national government, at the last minute (literally less than 48 hours before the bond was due to go live) changed its mind and pulled back its approval that it had previously granted for the transaction. Hence, it’s a “failed” effort because it didn’t actually go forward.

This ruined the appetite of European investors. Investors, despite being leery of African cities as issuers in capital markets, felt that the returns on the project looked good and that the currency risk was effectively eradicated. But, in the end it was a failed attempt that could very well have a long-term impact on attracting international financiers to Africa. It wasn’t a complete loss to those involved in this Dakar effort. Capacity was built and credit worthiness established. But, those are not tangible “benefits” in terms of the delivery of urban infrastructure. Others were also watching, such as the city of Abidjan in the Ivory Coast – where the district of Plateau commissioned and received a credit rating – lower than Dakar. They wanted to improve their credit rating because they wanted to attract the same interest in financing that Dakar was able to do. But then, when it became clear that the Dakar transaction would not go forward, Abidjan realized that maybe bonds are just too far outside of the realm of possibility.

Let’s continue to look at the opportunities that come with borrowing from banks and the challenges that banks don’t look long-term enough. Banks offer rates based on what the cost of money is for them, as opposed to institutional investors that buy bonds and expect to see a regular return over a longer period of time. So the motivation for investors in bonds vs. lenders for bank loans is totally misaligned between each other – which is fine. But, it’s also misaligned in so far as the use of the proceeds. So if you want to do a three-year project, then a bank loan sounds great. But if you want to do a 30-year infrastructure, then you’re looking at either DFI money or you’re looking at bond issuances with capital markets.


Professor Jeremy Gorelick

Professor Gorelick has been working in development finance for the past 17 years, first on Wall Street and later for charitable foundations, bilateral aid agencies, multilateral aid agencies and development finance institutions.  He has been responsible for leading a wide variety of transactions, totaling over US $1.3 billion. His primary area of interest is assisting sub-national governments to source financing for urban infrastructure projects.  He is currently supporting several bilateral and multilateral organizations – DFID, IFC, AFD – in their efforts to mobilize finance for large-scale development projects.  Previously, he was the Senior Infrastructure Finance Advisor for the USAID-financed WASH-FIN program designed to help utilities and municipalities across Africa and Asia raise money for water and sanitation projects.  Prof. Gorelick served as the Lead Technical and Financial Advisor for the City of Dakar’s Municipal Finance Program to launch a USD 40 million municipal bond.