Thirty-seven out of 54 African countries are still more than 50% rural, but Africa is urbanising quickly.
The continent is expected to be majority urban by 2037, and by 2050, the continent will host nearly a quarter of the global urban population.
It means that finding money to run cities is an increasingly important issue in public policy. An estimated $90 billion per year is required in order to meet the needs of burgeoning urban populations, according to recent data from the Mo Ibrahim Foundation.
At present, about $45billion is earmarked annually for city development in Africa by national treasuries, and a further $10billion mobilised from donors and $1 billion from local authorities.
In effect, local authorities in Africa are only able to mobilise a little more than 1% of what is needed to run cities on the continent.
In many countries, cities are legally barred from incurring long-term debt, or dealing directly with donors, which means financing must be chanelled through central governments.
Larger municipalities are able to mobilise more funds on their own. In Mozambique, transfers from the national government account for 70% of rural local government incomes, but less than 40% of large cities.
More often than not, dependency on transfers from the national government means that cities often can’t control, let alone predict, their own revenues from year to year.
But there are some cities that are resorting to some innovative financing instruments, such as municipal bonds, that allow the mobilisation of finance from capital markets.
In order to issue a bond, cities must be credit rated and have sufficient borrowing capacity to issue bonds of high enough value to be worthwhile; solvent and well-rated cities can get funding at better rates.
Since 2004, Johannesburg has launched four municipal bonds, channeling the money into clearing its capital expenditure backlog, estimated at $600 million. The city plans to raise another $500 million in the next three years.
Lagos sold $533 million worth of 7-year debt in 2013, and Dakar, Dar es Salaam, Kampala and Windhoek are looking to enter the bond market in the near future.
Dakar has been rated BBB+, and was in the final stages of issuing a 7-year bond set to carry an interest rate of 6.6%, and expected to raise at least $40 million.
That’s much more than the city could raise from commercial banks, a maximum of $17 million, with many conditions associated with the loans.
But the launch has been delayed by an on-going dispute between the municipality, which claims to have the legal authority under Senegal law to go to the bond market on its own, and the central government, which claims liabilities of the city are borne by the state through its budget.
Land and property can also serve as important ways of mobilising domestic revenue. The challenge is that most African cities run on informality, limiting resource collection from land and property.
But property-related taxes constitute as much as 4% of national GDP in the developed world, by contrast, in a country like Rwanda, they amounted to 0.02% of GDP in the 2013/14 financial year.
The UN’s Economic Commission for Africa (UNECA) in a March 2015 report on innovative financing for the transformation in Africa, highlighted that the potential to raise more money through domestic taxes is still high.
Several countries are still below the 15% threshold considered necessary for low-income countries.
It is below 10% in Central African Republic, Congo, Ethiopia, Liberia, Nigeria and Sudan. The unexploited tax potential appears particularly sizeable in countries such as Angola, Ghana, Kenya, Nigeria, South Africa and Tanzania.
The solution lies in expanding the tax base, improving tax administration and tapping relatively underutilised sources of taxation, such as land, rather than raising the existing rates, UNECA recommends.