AFD and INCA Portfolio Managers sign agreement to finance public services in intermediate cities

In the context of increasing tension in the municipal fiscal environment, where challenges for investment in infrastructures and services delivery rely on municipalities, the project aims to fill a market gap, enabling secondary municipalities with good credit quality to access financial resources. In response to the National Treasury’s expectations towards development banks to fulfill their subsidiary mandate and have a leverage effect on private finance, the project will catalyze the participation of local private investors absent from the secondary municipalities’ financing segment.

The project aims at acting on both the supply and demand sides to facilitate secondary municipalities’ access to financing to fulfil their investment needs, and to support them to build their strategic long-term investment plans.   

On the supply side, AFD is giving a market signal by providing a loan of R500 million (about €30 million) to the SPV. In addition, investors, including AFD, benefit from a guarantee on first losses, financed by SECO, covering 5% of the amounts committed. The objective of IPM, manager of the IMDF, is to raise nearly R1500 million (€85 million) in the first funding period.

On the demand side, the project supports the technical assistance fund INCA Capacity Building Fund (ICBF, created in 1998). The fund will be recapitalised by a grant from SECO of around €2 million and supplemented by the comparative financial advantage of the AFD loan. This fund will finance IPM's recognised expertise in municipal public finance analysis and long-term financial strategy, in order to provide technical assistance and strengthen the capacities of these municipalities.

Main outcomes

The project has two main objectives: (i) to improve the supply of urban infrastructure in intermediate cities through a responsible investment policy, with priority given to essential urban services, and (ii) to contribute to the diversification of the municipal finance sector by creating a new window and mobilising long-term financing from institutional investors.

The fund will bridge the gap between municipalities (with their need for external funding) and pension funds, and/or institutional investors looking for investments that will deliver long-term annuity income.

What contribution can this initiative make to bring about positive change?

The initiative will contribute to generate a leverage effect on the financial markets, and allow the mobilisation of private sector funding to fill the gap for investment needs in secondary municipalities. The grant component for providing technical assistance will lead to the betterment of financial modelling planning and decision making focusing on long term sustainable investments.

 “The partnership between SECO, IPM and AFD is a critical step to addressing the concerns about the financing of public services in intermediate cities. As part of our AFD strategy, we will continue to contribute to reducing inequality, through  our continued support for urban development in South Africa”. AFD Regional Director, Bruno Deprince.

“This event signals the start of a collaboration between SECO, AFD, INCA Portfolio Managers and the respective local investors in the area of infrastructure development. The INCA programme is an ideal opportunity to use grant funding to mobilise institutional investment finance and to support municipalities and investors alike to better understand the municipal infrastructure environment and to better plan for infrastructure investments”. SECO Deputy Head, Gerhard Pienaar.  

For more information:

Agence Française de Développement (AFD)
Zoé Ramondou
ramondouz@fd.fr

IPM
Joanne Whiting
joanne.whiting@inca.co.za

SECO
Gerhard Pienaar
gerhardus-jacobus.pienaar@eda.admin.ch

Press contact:
Erica Penfold
penfolde@afd.fr