Presented by: City of Joburg Manager for Financial Risk Management Thokozani Makhabeni 25 May 2016 Municipal Financing Through Bond Issuance The Case of City of Johannesburg

2 Background into South African Local Government Funding Ref: SA Cities Network State of the City Finances: Basics and Innovation

3 As at 30 November 2015, the size of the municipal bond market stood at R18.63 billion. CoJ accounted for 41% of all outstanding municipal issues, followed by Ekurhuleni with 25%, Cape Town with 23% and Tshwane with 11%. Background into South African Local Government Funding COJ 02 is a credit enhancement bond which is 40% guaranteed by IFC and DBSA

4 Background into South African Local Government Funding Ref: SA Cities Network State of the City Finances: Basics and Innovation Four of South Africa’s metros have diversified their funding by entering the bond market – Cape Town, City of Joburg, Ekurhuleni and Tshwane 24 Billion is estimated to be raised in budget period BUT: A Majority of Local Authorities still find Challenges with Access to Credit from Traditional Banks as shown in the previous slide

5 Background into South African Local Government Funding Ref: SA Cities Network State of the City Finances: Basics and Innovation Metropolitan MunicipalitiesOutlookNational Scale Rating City of Cape TownStableA1.za/P1.-za(1) EkurhuleniStableA1.za/P1.-za(1) Nelson MandelaStableA1.za City of JohannesburgStableA2.za/P-1.za City of TshwaneStableA3.za/P-2.za MangaungStableA3.za/P-2.za Local Municipalities RustenburgStableA3.za MbombelaNegativeBaa1.za KwaDukuzaStableBaa2.za BergrivierStableBaa3.za/P-3.za District Municipalities Amathole DistrictStableBaa1.za uMgungundlovu DistrictStableBaa3.za/P-3.za NB: Moodys Investor Services has since upgraded its National Scale Rating of the City of Johannesburg by four notches from A2.za to Aa1. Fitch Credit Rating has also upgraded its national long-term rating and the national senior unsecured rating on outstanding bonds from AA- to AA and the affirmation of its national short-term rating at F1+ with a stable outlook

6 The Case for Innovation in Municipal Financing: Bond Issuances Today, local and regional governments are faced with a need to close the gap in financing local infrastructure investment and improve service delivery. In the wake of the current slowdown in the economic environment, traditional methods of financing local infrastructure are under threat as economies are contracting. Also, the financial system is more focused on short to medium term quantifiable risks and is not sufficiently configured to deal with long-term risks (climate change, resource depletion and ecosystems destruction). Diversification of funding sources particularly through bond issuances and other innovative financing methods can assist municipalities to render services in a sustainable manner and fast track progress towards achieving the SDGs. The advantage of these instruments is that they present an opportunity for investors and local authorities to partner together in solving the world’s development challenges which require trillions of dollars. Add to this, these instruments, particularly bonds assists in enforcing market discipline and ensure market participants subscribe to highest form of good governance.

7 The City of Johannesburg Story: Vision, Key Outcomes and Priorities To be “a World Class African City of the Future – a vibrant, equitable African city, strengthened through its diversity; a city that provides real quality of life; a city that provides sustainability for all its citizens; a resilient and adaptive society” (Joburg 2040). Improved quality of life and development-driven resilience for all. A sustainable city which protects its resources for future generations and a city that is built to last and offers a healthy, clean and safe environment. An inclusive, job-intensive, resilient and competitive economy that harnesses the potential of citizens’. A high-performing metropolitan government that proactively contributes to and builds a sustainable, socially inclusive, locally integrated and globally competitive Gauteng City Region (GCR)’ Priority 1: Financial sustainability and resilience Priority 2: Agriculture and food security Priority 3: Sustainable Human Settlements Priorities 4, 8 and 9: Economic Growth – as constituted of: SMME and entrepreneurial support Investment attraction, retention and expansion The green economy Priority 5: Engaged and active citizenry Priority 6: Resource sustainability Priority 7: Smart City Priority 10: Safer City Vision Outcomes Decade 1: Priorities

8 The City of Johannesburg Story: The Financial Development Plan Supporting the City’s vision is the 10 Year Financial Development Plan with the 2015/16 financial year marks the 4th year of the 10 year R100 billion capital investment programme rollout. The Financial Development Plan is a plan ensuring that the City rolls out infrastructure in a financially sustainable and resilient manner through prudent borrowing, generation of annual operating surplus and the creation of cash reserves to increase the level of infrastructural spending. In this plan, the City rolls out R10 Billion p.a. worth of infrastructure investment towards achieving the City’s goals and ambitions as provided in the GDS DETAILS2015/16 R /17 R /18 R 000 Loan Funding CRR and Surplus Cash Grants and Contributions Total

9 Infrastructure funding mix As the City’s 10 year R100 Billion Capital Investment Programme intensified, the Funding mix has shifted towards more “own” funding in the form of Loans and Cash  Historically, capital grants from national government and borrowing have been used to finance new infrastructure projects.  The economic downturn signalled that local governments cannot always depend on these conventional sources of funding.  The City seeks to actively diversify its funding sources by deploying funding instruments that will ensure optimal liquidity operations.

10 Selected Case Studies from the City of Joburg – Retail Bonds R157 million of Retails bonds issued by COJ and have all been redeemed The Retail Bonds had the following characteristics:  Issued 2 year JIBAR +5bps  Issued 3 year JIBAR +25 bps  Issued 5 year JIBAR +40bps  Minimum investment R1000, no maximum  Applications through SAPO and JSE broker network  Listed on the JSE  Initial IPO of 3 weeks  Tradable in the secondary market  Interest payment payable quarterly in arrears commencing December 2007 All bonds were successfully redeemed at their maturity dates

11 Selected Case Studies from the City of Joburg – Green Bond The City of Joburg issued its first ever listed Green Bond (CoJG01) on 9 June The unique features of this bond is that:  This is the first-ever listed green bond in South Africa and in the C40 Cities Network  The issuance is in alignment with the Joburg 2040 strategy for a resilient City through sourcing funding to improve and expedite its environmental solutions, and allow for the investors to demonstrate their commitment to environmental stewardship while receiving a positive financial return  The green bond has a nominal amount of R1.458 billion and 10 year tenure maturing in 9 June 2024  The bond issuance was oversubscribed by 150%  The COJG01 10 year green bond was issued at a spread of 185 basis points against the benchmark bond R2023  The coupon was 10.18% which is priced 60 basis points lower than the last bond issued in March 2011 (being COJ07)

12 Selected Case Studies from the City of Joburg – Pooled Financing Pooled Financing Institutions are established as government entities or agencies that pool a number of local projects for financing. By “pooling” multiple municipalities’ borrowing needs together, these institutions can offer larger debt issues, with better credit ratings. In South Africa, the City of Joburg hosted a conference focusing on innovative schemes for financing South African Cities. In this setting, the City of Joburg together with other stakeholders jointly expressed a strong interest to carry on discussions to develop a suitable pooled financing mechanism. Stakeholders with strong interest included:  National level: National Treasury, Gauteng Province, SALGA and SA Cities Network  Local authorities: South African Metros  Other: Institutional and private partners such as DFIs, private banks, Pension Funds, Credit Rating Agencies and JSE who demonstrated appetite participating in pooled financing transactions.

13 Selected Case Studies from the City of Joburg – Pooled Financing Against this interest backed by a resolution at the conference to implement this financing mechanism, the City of Joburg is already in a Task Team that was set to investigate options for the implementation of Pooled Financing in South Africa. Through this Task Team, a Club Deal transaction is being implemented which will see a bond issuance shared by participating municipalities in the Gauteng Province Key benefits of this transaction will include:  Cost effective debt finance  Promote a culture of sustainable debt  No explicit support from other tiers of government  This transaction will advance the SDGs and national development goals by reducing costs to end users and improving operational efficiencies in the provision of local services.

14 Affirmations of our Green & Innovative Initiatives  Johannesburg was ranked the second-most inspiring city in the world in a 2014 Good City Index study conducted by the global Good magazine.  Joburg is a first City in the C40 Cities Climate Leadership Group to issue the Green Bond.  The City received Green Bond C40 Cities award.  Joburg's greening drive got the national thumbs-up when the City was named the winner of the 2015 Arbour City Award.  Moody’s upgraded the City’s National Scale credit rating from A2.za to Aa1  Joburg Mayor was nominated an African candidate for UCLG Co-Presidency.  MMC for Finance is a Co-President of FMDV.  MMC for Health and Social Development was elected Vice President of the Network for Locally Elected Women of Africa (REFELA).

15 Q & A