CASE STUDIES: EIGHT COUNTRIES PAIRED WITH THEIR FINANCING TOOLS
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primary health care, and public transportation. Large municipalities criticize the provincial governments for the unpredictability of transfer amounts and disbursement schedules. The lack of transparency in apportionment also comes under attack.
Debt Financing South African municipalities have a tradition of borrowing that dates back to the apartheid regime, when white municipalities borrowed from commercial banks and, in some cases, issued bonds. Nonetheless, the central government provided implied guarantees; risk analysis and management mechanisms were limited. By contrast, at the end of apartheid the new constitution explicitly stated that the central government did not guarantee local government borrowing. As a result, lenders and investors withdrew from municipal credit activities. The regulations of the 2004 Municipal Finance Management Act (MFMA) aimed to reassure investors by addressing uncertainties arising from municipal reforms. Indeed, a climate of uncertainty had arisen concerning municipalities’ new administrative boundaries, the end of the state guarantee on subsovereign loans, and the legal vacuum around local government debt conditions. Increased risk and higher transaction costs had led private investors to withdraw. The MFMA established clear and encouraging rules; it supervised localities’ borrowing conditions while prompting them to improve management, transparency, and expertise. From that point onward, the municipal credit market recovered slowly but steadily. However, it has retained its focus on the six metropolitan municipalities, chiefly Johannesburg, eThekwini, and Cape Town. Under MFMA, municipal borrowing may go only to capital expenditures, and the maximum loan duration may not exceed the life of the infrastructure. Municipalities have used debt most frequently to finance water systems, electricity, and roads. The municipal credit market has remained below its potential. Laws have proved conducive to borrowing, but in practice, small and medium-size municipalities have had low debt-absorption capacities, hindering credit market development. Key stakeholders have offered highly developed forms of credit—a state-owned development bank, a private specialized financial institution, commercial banks, and capital markets. Development Bank of Southern Africa The state-owned Development Bank of Southern Africa (DBSA) dominates the municipal credit market; at the end of the 2000s, it held nearly 50 percent of outstanding loans. DBSA was created in 1983 to improve infrastructure networks in the former black homelands and townships; it began serving local governments in the 1990s. A traditional development bank, DBSA benefits from its status as a public body, refinancing itself with favorable terms from donors and the market. Consequently,