Last week it was announced that Kampala Capital City Authority (KCCA) had been given a clean of health to start issuing bonds to finance some of its projects.
The South African based Global Credit Ratings (GCR) has certified KCCA’s credit worthiness following a World Bank funded audit of KCCA’s books of accounts.
At the bare minimum it means that KCCA has access to one other means of financing its operations, beyond government contributions, its own revenues, donor loans and grants.
"But beyond that it means that KCCA’s management practices have met the bare minimum required for money managers to take an interest in it. To be cleared to issue bonds, which is borrow from the public, it means you have verifiable sources of income and a management that can put whatever monies lent to good use. That’s the bare minimum investors want...
This development may have passed unnoticed by the general public but it is a heartening vote of confidence in the three-year old authority.
It means that they have been vetted on an international standard the big money men know and appreciate. This means that KCCA now has access to massive pools of money that if captured and used judiciously can transform the city beyond recognition.
Of course there is still a lot of work to do. KCCA needs to streamline its operations even further, collect all the money due to it and resolve the niggling political question surrounding the mayor’s seat.
No country ever developed without the prudent use of debt.
One of the reasons our countries, and individually, we fail to develop is because of an uninformed fear of debt and the unempowering overreliance on cash. That being said it takes a superior financial intelligence to make debt work.
The best use of debt is to increase your capacity to earn and not your capacity to spend. So for instance the investment in markets may provide additional income for KCCA or the building of roads in the suburbs will increase property rates and therefore the ground rates the authority can charge on properties as would the building of schools, hospitals and other amenities that make it pleasant to live in the city.
However splurging on a new fleet of 4WDs or on raising allowances for councillors may show no return but wold just ensure higher expenditures.
Essentially you want the activity for which the debt is committed to pay its own way.
"KCCA would do well to take a leaf from the Bank of Uganda issued treasury bills and bonds. What started off tentatively in the late 1980s, as a mechanism to damp down inflation by mopping up excess cash from the economy, is now viewed with more confidence by local an international investors and beyond its anti-inflationary role has in recent years has helped finance the budget especially when he donors threw a fit a few years ago about our corrupt practices and pulled the plug on their aid....
The government paper issues came under a lot of criticism initially when they were exclusively for managing money supply and at the cost of hundreds of billions of shillings to the tax payer but its proponents argued that was the cost of maintaining macro-economic stability. Without that stability the economy as we know it today – with all its limitations would not exist today.
One can expect that KCCA will start slowly one, because they need to build confidence in the markets and because their absorptive capacity of these funds may still be limited. But if their bond program is run well in a decade in two KCCA will be a power onto itself and hopefully will pull the rest of the country along with itself.
Other towns could follow suit.
One of the challenges of our societies is our low saving culture. This is a problem because it means compared to the money in circulation we have not enough of it aggregated into meaningful sums for use by the productive sectors of society.
In the western economies for instance as little as ten percent of all money in circulation is physical cash or just hanging around in the pillows pocket or under their mattresses. The largest percentage of the money is held in financial institutions.
In Uganda according to Bank of Uganda figures this was as high as 24 percent at the end of December 2013 is not in the formal finanacial system.
And finally KCCA is proving a truism in finance that money follows good organisation or management. We do not have access on favourable terms to the large pools of cash sloshing around the world because we do not manage our affairs in such a way as to instil confidence in possible lenders or investors.