Transcript Document

II World Forum of Local Economic
Development
Geoffrey Makhubo
MMC: Finance
Agenda
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Overview of the City of Johannesburg
Challenges and Responses
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Financing Local Government
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Key consideration
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Conclusions
Questions
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OVERVIEW OF THE CITY OF
JOHANNESBURG
Overview of the City
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Key Facts
Land Area
The City Stretches over 1,664km2
Population
4.6 million people
Households
1,3milliom
% of Provincial
Population
38.3%
% of National
Population
8.7%
% of National GDP
Contribution of about 16%
Contribution to
National employment
The City contributes approximately 15% of
employment
Key Sectors
Finance, Business Services and
Construction
The City has set its sights on becoming a World-Class African city in which all residents can enjoy the
fruits of economic growth and job creation and lead prosperous and healthy lives
Key stats
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• Population of Joburg - 4.6 million
• Population of Gauteng – 12million
• SA population 53million
• Joburg % of provincial population – 38%
• Joburg % of national population – 8.7%
• CoJ has least Not Economically Active (NEC) at 26.5% in 2011
• CoJ has highest proportion of the employed working age
population (52.6% in 2011)
• Gauteng most populated province with over 12million people,
followed by KZN with over 10million people as per Stats SA
(2012)
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CHALLENGES & RESPONSES
Challenges for Local Economic Development
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 Population growth rate of 35% from 2001 to 2011
 Youth bulge accompanied by youth unemployment at 31.5%
 Spatial divide stemming from apartheid spatial planning
 Structural change of the Joburg economy, previously a mining and
now dominated by services industry
 Currently mining contributes 2.5% to economic activity
 Shift from primary industries to secondary industries has resulted in
huge demand for new infrastructure
 Ageing and Aged infrastructure
Responses………….`
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 Stitch the City to correct spatial divisions through “Corridors of
Freedom”
 Build a united city
 Invest in social infrastructure and renew old infrastructure
 Built resilient infrastructure to withstand the effects of climate
change
 Invest in Economic Infrastructure
 Creating employment through SMMEs
 Exploring Partnerships
Medium Term Capital : 2013 - 2016
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Capital Expenditure - R 000
11 488 301
11 034 462
12000 000
7 595 073
8000 000
4 547 859
4000 000
0
2012/13
2013/14
2014/15
2015/16
 COJ will roll out $11 billion infrastructure over the next 10 years
 Total capex roll out by 2016 will amount to $3.3 billion
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CAPEX Financing - next 3 years
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5%
25%
28%
COJ - Loans
COJ - Cash
Grants
Other
42%
Revenue make-up: 2013/2014
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FINANCING LOCAL
GOVERNEMNT
BACKGROUND
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•
2003:
Research trip undertaken to Mexico
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2003:
The idea was re-visited
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April 2004:
COJ01 issued (Redeemed April 2010)
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September 2004:
COJ02 issued
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April 2005:
COJ03 issued ( Redeemed April 2013) plus Launch of
Domestic Medium Term Programme (DMTN)
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June 2006:
COJ04 issued and established a Debt Redemption
Fund (Sinking Fund)
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September 2007:
Jozibond (Retail Bond) issued
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June 2008:
COJ05 issued
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December 2008:
COJ06 issued
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March 2011:
COJ07 issued
Creating and Enabling Local Financing Environment
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• South Africa has a well established deep debt capital market
• Institutional investors dominate the market
• Enabling legislative environment made it possible for municipalities
to access these markets
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Strong legal & governance framework
Underlying the municipal debt market is the strength of the existing
governance:
Constitution of RSA (1996)
Municipal Structures Act (1998)
Municipal Systems Act (2000)
Municipal Finance Management Act (2003)
Securities Services Act
Very important to note:
A strong legal framework provides comfort for investors due to the:
•Depth of legal system
•Enforceability of agreements
•Comprehensively regulated financial markets
•Municipalities required to comply strictly to legal framework
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Diversifying Capital Financing
3 years ago
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Current
Funding Sources
8%
16%
14%
0%
Banks
20%
0%
Bonds
61%
62%
Structured Loans
DBSA
Local Registered Stock Loans
Municipal Bonds
Jozi Bonds(retail)
Other
DFI
19%
City’s main lending sources : bonds / banks / DFIs
City exploring other forms of funding as it increases capex
spending over the next 10 yrs.
Diversification into Retail Bond Market (JOZI Bonds)
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The City’s Vision and Objectives
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Develop a retail savings product in partnership with the City’s residents which is available to
all LSMs with a no-cost option
 The City has successfully set up a robust, sustainable,
sophisticated yet user-friendly platform for investment in all three
tradable instruments by any person wishing to invest $100
through two distribution arms (SAPO and stockbrokers) at little
or no cost to investors.
 No cost to investors purchasing JOZIBONDS through SAPO if
held to maturity.
 The product offered the City an opportunity to partner with
communities in funding local infrastructure
 Through pursuing engaged and active citizenry, communities
were able to be part of developing their own City by investing in
retail bonds

Export Credit Agency (ECA)Financing for BRT
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Export Credit Agency (ECA)Financing for BRT……
Date
Milestone
2008
Council agrees to appoint HSBC as
transaction advisor for ECA funding
HSBC secured BNDES commitment
Buses are ordered from Scania and Marco
Polo in Brazil after open tender process
2009
143 buses arrive
Service starts August
City takes out guarantee before BDNES deal
finalised
26 December 2010
ECA funding finalised with BNDES
3.2% interest, $42 million XXX
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PPPs seem viable: Landfill Gas Project
 Initiated in 2007
 Contract signed with EnerG Systems Joburg over 20 years
to implement the project at no cost to the City
 Feasibility study was completed on 6 sites
 5 were found to have enough gas to generate electricity:
• Robinson Deep
• Marie Louise
• Goudkoppies
• Linbro Park
• Ennerdale
 Project costs estimated to be R250 million
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KEY CONSIDERATIONS
PRE-CONDITIONS FOR A SUCCESSFUL
BOND ISSUANCE
 Sound legal framework
 Sound public policies
 Credit rating
 Ability to manage the bond issue: payment of coupons and final settlements
 Good long-term strategy & planning e.g. economic development strategy and long
term capital development plans
 Sound and stable leadership & management
• Politicians & officials
• Know your problems, have a plan to deal with them, and show some progress
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 Financial Sustainability
Parties involved in bond issuance
Issuer
Municipality / Legal entity
Council
Resolves that municipality may incur long-term debt
Arranger
Arranges the programme on behalf of the issuer
Advisor
Advises issuer on issuance requirements and regulations
Agent
Performs administrative functions relating to the note
(issuing and paying)
Dealer
Sells/ places the note in the market. The issuer decides how many dealers
(banks) they want to have on the programme
Sponsoring Member For BESA and JSE, it is usually the arranger
Lawyers
For the issuer – review documentation and issue comfort opinion
For the arranger and dealers – draft documentation and issue comfort
opinion
Auditor
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Issuer’s auditor checks financial disclosure and confirms compliance
(statutory requirements)
Considerations Pre-Issuance
Appetite
 How much appetite is there in the market
Structure: Vanilla vs. Enhanced
Tenure: What range?
Issue size
Disparity in market pricing
 Leveraging on pricing of bank loans
Timing (When to come to the market):
 Inflation outlook
 Interest rate outlook
 Investors searching for yields
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CONCLUSION
Strategic results achieved

Initiated the municipal bond market

Established yield curve for COJ

Established reputation and track record in the market

Diversified funding sources
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The City has numerous new investors:
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Private sector institutional lenders (asset managers, mutual funds, pension funds)
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Retail investors

Reduced the average cost of borrowing on a weighted basis
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Restructured existing debt profile
• interest savings of over R20 m per annum
• Profile shifted outwards
• Repaid expense debt
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
Release of escrow investments that were linked to loans

Positioned ourselves for higher CAPEX going forward
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Questions & Answers
Thank You
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