In response to the need for local authorities to have access to/receive resources that match their responsibilities, there has been a concerted effort to support the development of new local government (LG) financial tools and deepen financial innovation. Sub-national pooled financing mechanisms (SPFMs), also known as pooled bonds/finance, allow local and regional governments and other entities with similar interests and credit characteristics to access credit markets that would otherwise not have been available to them. Pooling different infrastructure projects increases the size of the transaction, making it attractive to capital market investors. It also substitutes the pooling entity’s credit rating with that of the component sub-nationals, thereby meeting the criteria for accessing private funding. SPFMs are thus perceived as creditworthy. Although SPFMs require extensive upfront technical assistance to secure private finance, they have been successful in providing longterm cost-effective finance to local authorities and have also facilitated the development of an attractive asset class for local investors. In the main, the advantages of implementing SPFMs are that they allow greater access to capital markets, lower margins on loans, lower processing costs, lower risks through diversification and financial expertise, incentives to improve creditworthiness, and transfer of knowledge. All LG entities and municipalities (irrespective of size) need long-term infrastructure financing at a reasonable cost to fulfil their constitutional mandate, which includes infrastructure service delivery. SPFMs have been identified as relevant mechanisms to be implemented in South African municipalities, both in diversifying capital financing sources and in helping to develop domestic capital markets through the provision of a new asset class for private investors. National Treasury (NT) supports South African municipalities’ interest in pooled finance at a policy level, but with limiting conditions that require zero risk transfer between entities in a pooled finance arrangement, and that municipalities only borrow when they are creditworthy. Given the developmental role of municipalities, national government should help them to improve their capacity and diversify their sources of finance.
