Chapter 6: Creditworthiness

John Probyn
John Probyn is a Program Specialist with the World Bank City Creditworthiness Initiative.
Joshua Gallo
Joshua Gallo is a senior Municipal Finance Specialist and leads the World Bank’s City Creditworthiness Initiative.

Prologue – Kampala, Uganda Achieves Investment Grade Credit Rating

On May 7, 2015 there was much to celebrate in the offices of the Kampala Capital City Authority (KCCA). After years of tough reform and hard choices the city had completed the first municipal credit rating in Uganda’s history. With an ‘A’ rating on the national scale from the South African agency Global Credit Ratings, Kampala had achieved investment grade status. They were now certified as an attractive prospect for private investors.

Along with the rating came a rush of international attention and plaudits: “How one African City is Flipping the Script on Urban Development” enthused one headline in NextCity, “Why Kampala holds the Single Biggest Opportunity for Growth in Uganda” exclaimed another in The Conversation. Bloomberg and Reuters reported that Kampala was now considering issuing the first sub-sovereign bond in Uganda with a potential value of UGX$500 billion.1

With such praise and opportunity it was easy to forget how recently it was that the city had been mired in the most difficult circumstances. In 2010 – just five years prior to the release of the rating – the city had been choked by bitter political acrimony and crippling budget deficits. Inefficiency and graft pervaded the administration. City finance officers had to deal with a byzantine 151 separate accounts and only one in five staff even had a computer. Revenue collection was woefully inadequate and much of that which was collected somehow never made it into the city’s coffers.

Yet in a few short years the rating report from Global Credit Ratings would highlight KCCA’s substantial increase in internally generated revenues (own-source) and dramatically improved staff-cost efficiencies.

How had Kampala achieved such a quick and dramatic turnaround?

  • 1. See L. Taylor “How One City is Flipping the Script on Urban Development,” NextCity (2016); “Why Kampala holds the Single Biggest Opportunity for Growth in Uganda” The Conversation (2015); E. Biryabarema “Uganda’s Kampala city to issue first bond by June 2015” (2015);

Introduction: city creditworthiness – unlocking private investment for cities

This  chapter  is  about  city  creditworthiness, a cross-cutting concept that applies to many of the aspects of city financial management mentioned in other chapters of this book.

With rapidly growing populations, backlogs of infrastructure projects and scarce public funds to finance them, cities must look to abundant sources of private capital to finance their development needs.

However, in order to attract investment from private sources, cities need to first be seen as attractive investment opportunities. They need to manage finances, plan development and engage citizens using methods that emphasize financial & environmental sustainability and transparency.

Unfortunately however, few cities in developing countries can currently be considered creditworthy. Recent estimates show that less than 20% of the largest 500 cities in developing countries are deemed creditworthy in their local context, severely constricting their capacity to finance investments in public infrastructure.2

This chapter examines the role creditworthiness can play for cities in developing countries, first by defining the term, then by examining why demonstrating creditworthiness is important, followed by how it is demonstrated to the financial community.

  • 2. “City Creditworthiness Initiative: A Partnership to Deliver Municipal Finance” the World Bank (2015)

What is City Creditworthiness?

Strictly defined, creditworthiness is a risk assessment made for potential investors to estimate the ability and willingness of an entity to repay its financial obligations. This estimation is used mostly by sources of commercial investment capital to assess the likelihood that a city will not pay (i.e. default) as per agreed terms of an investment arrangement.

The overall creditworthiness of a city is deter-mined by many contributing factors that are used by commercial investors to make an assessment. These factors will be examined in greater detail later in the chapter, under the discussion of rating agency criteria.

A relative standard

The Creditworthiness Continuum
Figure A

Creditworthiness is not an absolute, binary state between creditworthy and not creditworthy. Between the most and least creditworthy states (i.e. least to highest default risk), there are many possible stages of creditworthiness for a given city. In this sense there is a creditworthiness continuum. Where the city lies on this continuum will rely on how the investor community assesses the balance of contributing factors to overall creditworthiness.

For example, Own Source Revenues (OSRs) are one of the most important factors that can affect municipal creditworthiness. A city with high yielding and diversified sources of OSRs has a greater ability to maintain predictable schedule of payments of its debt obligations, regardless if one revenue source were to be suddenly interrupted. The relative creditworthiness of a city in the area of OSRs will be determined by how likely it is that such revenues will be curtailed, or dedicated elsewhere, such that there will be a default on the financial obligations of the city. All factors that reduce the risk of a sudden cut or diversion of the use of revenues away from debt service will therefore improve creditworthiness – all other things being equal.

Yet there are many other factors that drive the quality of a city’s creditworthiness. Similarly to OSRs, for each of these factors, there is a line of progression between the worst and the best state from a creditworthiness viewpoint. The balance of all of these factors and how they relate to a possible default risk is what determines the creditworthiness position of a municipality.

The importance of city creditworthiness

Access to finance

As has been discussed throughout this handbook, cities across the world are facing critical shortages in sources of capital for investment in infrastructure. Many analyses by multilateral, bilateral, NGO and private organizations have clearly identified a significant gap between the level of demand for urban infrastructure services, the level of financing required, and what can be offered by donor organizations and central governments.3

In a rapidly urbanizing world, the only logical conclusion is that cities must attract private capital for their investment needs, or fail to meet the demands of their growing citizenry.

Large projects in areas such as energy, transportation, water and sanitation and housing require significant upfront costs and have lifetimes that span long periods, sometimes decades. The ideal financing structure for such projects similarly requires payback periods that match the life of such investments.

Commercial investors that may potentially provide debt and equity for will require robust risk assessments of a city’s ability and willingness to pay over these long terms. Without a positive assessment of that risk, the needed capital will not be forthcoming. Therefore municipal ‘creditworthiness’ from a demand-side perspective is one of the necessary ingredients to unlocking the capital and filling the infrastructure-financing gap.

Improved terms of financing

In finance, the interest rate on a loan or expected rate of return for an equity investment is an expression of the perceived risk of a particular investment. The higher the assessed possibility of default of a project or municipality, the higher the interest rate that will be charged on the capital provided.

Creditworthiness is a progressive, relative state. At each point along the creditworthiness continuum, commercial investors will take an opinion on the assessed risk and price their instruments accordingly. The higher the risk of default, the higher the interest charged on the debt instrument or the required rate of return for the equity investor. For large projects, a superior creditworthiness assessment can bridge the gap to project viability, and/or save millions of dollars in interest payments over the term of the deal.

Long-term financial sustainability& cities far removed from commercial transactions

In many respects, long-term financial sustainability and creditworthiness are closely synonymous. When a city is creditworthy, it has achieved excel-lent budgetary and liquidity management and in particular surplus operating cash flows that can service financial obligations. In addition to these financial considerations, a creditworthy city also has developed an excellent & integrated long range planning capacity and operates in a trans-parent manner that engages the citizenry in its projects and reduces political risks. These are all critical elements of long-term financial sustain - ability.

In striving to achieve creditworthiness, a city therefore also will enact initiatives that will contribute to long-term financial sustainability. This is an important point, in particular for cities in lower income countries that find themselves far removed from the possibility of accessing commercial based financing for capital investments: by incorporating the objectives of creditworthiness into its financial strategy, a city will be moving toward the goal of financial sustainability. While the financing may be far off, the city will be better prepared when the day comes that a larger project needs to be financed through commercial capital.

However, creditworthiness is not just a nice byproduct of financial sustainability, or visa versa. The two are inextricably linked. Creditworthiness is the status that will enable the city to access the financing that will allow it to invest and provide services, which in turn will enhance growth and revenue prospects that are essential to achieving financial sustainability.

A delicate balance: creditworthiness & shared urban prosperity for urban residents

In order to better understand the importance of creditworthiness as it relates to other key development objectives, it is helpful to think about the hierarchy of goals of any city administration.

  • 3. “Bridging Global Infrastructure Gaps” McKinsey Global Institute (2016); “Why we Need to Close the Infrastructure Gap in Sub-Saharan Africa” The World Bank (2017)
A basic hierarchy of urban development objectives
A basic hierarchy of urban development objectives

As the diagram above describes, the highest objective of any city is to provide shared prosperity to all of its citizens. Here ‘shared prosperity’ is an expansive concept that includes providing the residents of a city with the security and opportunity to build the lives of their choosing. Any city that consistently fails to deliver on this basic promise will eventually wither as citizens leave for more salubrious environs.

Many factors could be identified that feed into shared prosperity, however two critical drivers are economic growth and political stability. These are naturally self-reinforcing factors: well-man-aged economic growth can bolster resident satis-faction, and likewise political stability gives the private sector a predictable environment that encourages investment and growth.

What in turn drives urban political stability and economic growth? Among the many possible ingredients, the financial sustainability of the administration stands out as a necessary condition for growth and stability. Without it the core services of a city such as transportation, policing, schools etc. are at risk. And without these services running at satisfactory levels, economic growth and political stability will be negatively impacted.

These three elements - economic growth, political stability and financial sustainability - hang in a delicate balance of self-reinforcing co-dependency. As a necessary condition of achieving access to finance and therefore long-term financial sustain - ability, without creditworthiness, the political and economic spheres of a city will lurch from one crisis to another, leaving the objective of shared prosperity ultimately beyond reach.

How a city can demonstrate creditworthiness to the financial community

Credit ratings: the metric of creditworthiness

The accepted metric for the ability and willingness to repay debt is a credit rating. These are assigned by a rating agency (the three largest being Fitch, Moody’s and Standard & Poors with close to 95% of the market) and are characterized by a letter score denoting the degree of creditworthiness, with AAA (or Aaa, see Table 1 below)4 being the highest rating and denoting extremely low risk of financial default. In developing regions, there are local rating agencies that operate in addition to the big three, and these local agencies contribute significantly to the development of the rating market.

  • 4. “S&P Global Ratings Definitions” Standard & Poors (2016)
Credit rating system for the big 3 agencies
Credit rating system for the big 3 agencies

The scope of a municipal General Obligation (GO) rating

The following are the key elements of a sub-sovereign general obligation rating according to Standard & Poors:

Sample of Rating Agency Criteria
Sample of Rating Agency Criteria

Credit ratings: criteria under the direct mandate of a city vs. national and other stakeholders

Rating agencies often categorize their criteria as being either ‘institutional framework’ or under the ‘individual credit profile’ of a city (as seen in Figure 2 above)5. Institutional framework includes all those factors that constitute transparent, accountable and predictable government at both the local and national level. Individual credit profile constitutes the set of factors – economic, managerial and of performance – that relate to the local authority’s financial capacity to pay its debt obligations.

However, the factors that determine creditworthiness can also be divided into endogenous and exogenous subsets. Endogenous factors would be those that are under the direct mandate of a local government, whereas exogenous factors are those to which there is often limited scope for direct action by the municipality. In essence, exogenous factors are those often termed “enabling environment”.

Some examples of exogenous factors affecting municipal creditworthiness:

Economic: national & international economic growth inhibiting factors, such as interest rates; commodity prices; changing demands of international economy; environmentally induced shocks to the economy; wars & other destabilizing events

Institutional & regulatory frameworks: unreliable intergovernmental transfers; inadequate decentralization to cities of core revenue generating functions; inadequate balance of oversight from the national government

Access to finance enabling environment: Unclear regulations governing municipal debt and Public-Private Partnerships; overzealous restrictions on local government borrowing; poorly developed capital and credit markets - while a city can be creditworthy, its access to finance relies on the capacity of the local capital and credit markets to provide the right appetite and debt & equity investment options.

Reviewing the partial list above, it is clear that exogenous factors are some of the thorniest issues relating to city creditworthiness. The problems are varied in nature, as is the potential for a local authority to influence them to its benefit. Perhaps the key factor in assessing the city’s ability to act on these areas is time. For example, in the short term, there is little that can be done about something as arbitrary as commodity prices. However the policy-maker on a long-term schedule could see the risk of an urban economy overly dependent on commodity production and initiate diversification strategies to lessen the impact of future shocks.

Many of the exogenous factors that fall more closely within the mandate of a local government – in particular nationally controlled regulatory issues and procedures – require the creative, dedicated use of political persuasion and advocacy. Often-times regulatory issues are common for many municipalities within a country. In addition there could be other types of subnational entity with similar interests. This affords the ability for groups of organizations to coalesce around a given issue and propose solutions as a class of entities.

Shadow vs. public credit ratings

The ultimate goal of a rating is to demonstrate creditworthiness to the marketplace. Inherently then, the credit rating is a document for publication. However, it is often the case that a city is unsure of its creditworthiness position and therefore reticent to make a detailed analysis public.

In such cases, a shadow credit rating can be performed by an agency. These have the same methodology and rigor as a public rating with the benefit that it will remain undisclosed until the city is ready. Shadow ratings are beneficial as an early stage analysis to see what are the areas of strength and weakness in a city’s creditworthiness status and also provide a basis for a reform program if necessary.

‘Investment grade’ ratings

While a city’s creditworthiness is a position on a continuum of possible states, markets and rating agencies also often define the point when a city has reached ‘investment grade’. Usually it is the case when an entity or instrument is rated at ‘BBB’ or higher.

This is an important inflection point: ‘investment grade’ is the point at which many institutional investors – such as pension funds and insurance companies – can legally invest. These institutions are legally prohibited from investing in any debt that is rated lower than this threshold, for example BB or lower, as this debt is considered ‘speculative’ (i.e. medium to high probability of default).

Credit enhancement: General Obligation (GO) vs. structured or revenue based transactions& guarantees

Credit ratings for municipalities generally fall under two categories: General Obligation or Structured Transactions/Securitizations.

General Obligation: GO ratings are based on the full faith and credit of the city. A GO rating reflects the ability and willingness to pay once all of the assets, liabilities and revenue & expenditure streams of the entire city have been taken into account. The long-term GO rating can be considered the truest metric of creditworthiness of a city as it analyzes the full balance sheet of a city’s administrative capacity, finances and socioeconomic profile.

Because of the full perspective of the GO rating, it is often the case that a city receives a lower rating than would be desirable, resulting in higher costs of financing from the marketplace. In such cases it is possible for a city to improve the creditworthiness of a particular transaction, and therefore achieve cheaper terms of financing for a specific debt instrument.

One method to achieve this is to dedicate (as a legal arrangement of the transaction) a depend-able stream of revenues to the financing of debt payments. In such instances, the creditworthiness of the transaction’s structure can actually exceed that of the host city’s GO pledge. In effect, the rating is based on the expected adequacy of the revenue stream itself and the strength of the legal regime that directs it toward the financing of the debt.

Guarantees & credit enhancements: In addition to a structured approach, guarantees from the central government and/or international donor partners can improve the creditworthiness of a particular transaction for a city. In such cases, whole or partial default risk can be assigned to the partner. This allows a city to take advantage of the superior balance sheet quality of the creditworthy partner, which in turn gives greater comfort to the investors.

For example, if a AAA rated entity (GO) agrees to guarantee 50% of the obligation of a BBB- rated city, investors will take the quality of the guarantor’s pledge and upgrade the creditworthiness assessment accordingly. The debt will be rated above BBB- with consequent improved terms for financing. The exact measure of benefit will depend on the quality and robustness of the guarantee (i.e. how creditworthy is the guarantor and how likely is it that they will actually honor the arrangement?).

Central governments or donors can provide such guarantees. However, central governments often are constricted in their ability to take on new financial obligations and donors usually charge a fee for such services, which will need to be assessed in terms of the overall economics of the proposed investment.

The scale of a rating: National vs. International

Credit ratings can be assessed on either of two rating scales: global or national. A global scale rating is benchmarked against international comparators and is appropriate for assessing the risk of default on hard currency debts, whereas a national scale rating is always benchmarked against the risk that the sovereign government might default on its local currency debt.

On the national scale, sovereigns are normally rated AAA, assuming they have the ability to print money and therefore have unlimited ability (if not willingness) to repay local currency obligations. The default risk of all other entities entering into local currency debt within a country will therefore be compared to the sovereign’s AAA national scale rating. Of course, this means that national scale ratings are not appropriate for comparing credit-worthiness across international borders.

On the global scale, normally a municipality cannot exceed the rating of its sovereign. If a municipality is located in a country with a sovereign rated BBB on the global scale, then it is generally impossible for the city to be rated higher than BBB on the global scale (unless substantial measures to mitigate country risk have been implemented). This is because, as an entity subject to the sovereign’s authority, a municipality is also therefore subject to the same country level risks that constrain the sovereign’s ability and willingness to pay.

Why local authorities should first focus on National Scale ratings

As a rule, municipalities will want to first acquire a national scale rating for several reasons:

  1. Since the revenues of local authorities are in local currency, they need to avoid foreign exchange risk by using local currency debt obligations. Therefore, since the national scale rating measures default risk on local currency obligations, it is the most appropriate type of rating for a local authority.
  2. Due to the FX and other transnational risks, the primary non-governmental investors that might be interested in financing municipal infrastructure will be local banks, pension funds, and insurance companies. Before providing financing to municipalities, local investors will want to understand the comparative risk of holding municipal debt compared to holding extremely low risk national government bonds. A national scale rating makes that comparative risk clear, and therefore facilitates financing from local investors.
  3. Global scale ratings do not offer adequate differentiation for local investors to judge comparative risk among alternative local currency investments, because all ratings will be lower than the sovereign’s global scale rating which is not indicative of the risk associated with local currency debt.

From a development perspective: what credit ratings do not include

There are however, important development objectives for cities that are not mentioned in rating criteria for cities. Two obvious examples of this relate to climate change (greenhouse gas (GHG) mitigation and resilience to climate change) and pro-poor policies that seek to improve the quality of life of low income residents, but may not hold the promise of immediate financial return for the city’s bottom line.

It is true that rating agencies do not explicitly list these factors in their criteria for developing a credit rating. However, it should be stressed that ratings are not cookie-cutter products; the best agencies will consider all factors on a contextual basis that affect the ability of cities to manage crises and weather financial shocks that could affect a city’s ability & willingness to service its debt obligations.

  • 5. “Methodology For Rating Non-U.S. Local And Regional Governments” Standard & Poors Global Ratings (2014)

Climate Smart Capital Investment Planning

A city is only as creditworthy as the projects it invests in. While a city may demonstrate excel - lent liquidity management and cash surpluses capable of servicing debt, without projects that are ready for investment and have a demonstrable economic rate of return, the ‘investment grade’ rating will remain elusive.

Capital Investment Plans (CIPs) enable cities to prioritize infrastructure investments matched to the financial resources available to the city at a given time. A best practice CIP will include cost estimates (capital, maintenance, project design & build and lifecycle) and be able to match particular government resources to those costs at the necessary point in time.6

Climate Smart CIPs perform all of the above functions with the added benefit of also including in the life-cycle cost estimates of the project considerations of greenhouse gas mitigation and resilience. Both aspects can be highly relevant to long term creditworthiness: mitigation activities reduce expenditures of a resource, such as carbon-based energy consumption, whereas resilience can reduce the financial impact of extreme environmental events. When taken on a life-cycle basis, building climate-smart considerations into the CIP process often will not only mitigate future environmental shocks, but will also offer a financial return above business as usual practices.

Under the World Bank City Creditworthiness Initiative, Professor Jan Whittington of the University of Washington has developed one of the first integrated climate-smart CIP modules ready for implementation in developing coun-tries. As with regular CIPs, the module takes detailed assessments of a city’s proposed invest-ment programs, timelines and matchesthem with government revenue sources. In addition to this, the climate-smart CIP assesses variables such as project location, building materials and alternatives and provides policymakers with a comparison base case and the savings possible by taking a ‘climate smart’ route.

So far the climate-smart CIP module has been tested in four municipalities in Tanzania and Kampala City in Uganda. These cities now have not only a detailed capital investment plan but also one with the potential to save millions of dollars in reduced usage of resources and exposure to climatic shocks.

  • 6. J. Whittington & A. Greve “Tanzanian Municipalities: Climate-Smart Capital Investment Planning” World Bank (2016)

Demand vs. Supply for Access to Finance

As defined in the beginning of the chapter, city creditworthiness is an assessment of a city’s ‘willing-ness and ability’ to service its financial obligations. In effect, this is a measurement of entities with the demand for capital to repay. The criteria for a credit rating measure the risks for this very well.

However, in terms of access to capital there is of course another side to the story: supply. Any city intending to access commercial capital will need to assess the current status of its local capital and credit markets for investing in sub-national public entities:

  • What are the potential classes of investors (i.e. banks, insurance companies, pension funds etc)?
  • What are the barriers: are the regulations clear for these investors to lend/invest in cities, and also from the borrower perspective?
  • What types of investment would entice different classes of investor?
  • Is there any past experience of borrowing by similar entities (i.e. other cities)?

These are issues not covered in great detail by a credit rating. A city that is considering moving forward with a strategy to attract commercial investors will need to perform a solid market-sounding analysis to inform their financing strategy.

Becoming known as creditworthy in the marketplace

After all the hard work there comes time for a city to test the waters and seek commercial financing for projects. It’s time to show the world that it is creditworthy.

When pursuing a rating, a city administration will find the following steps useful:

Talk to other cities: Inquire about the basics: How did they select the credit rating agency? What information was required? How much staff time was needed to engage with the raters? What did it cost? Additional useful questions relate to how the cities used the ratings, how elected officials were engaged, whether and how they publicized the rating outcome and engaged with potential lenders/investors.

Perform a market sounding study: Understanding the commercial financing environment for urban infrastructure is critical. What kinds of investors are out there that could invest in municipal debt? Do they have barriers to access? Which types of investments would they be interested in? What is the capacity of local capital and credit markets form municipal debt?

Prepare the documents: As mentioned previously, there are a variety of ratings that a city can complete, whether they are General Obligation or Structured, International or Local. Cities will want to ensure that they are being rated for local currency debt obligations and avoid all hard currency risks. Two of the key sets of documents always required are the past three years of independently audited financial statements as well 5 years of projected budget estimates.

Approach a reputable agency to obtain a rating: If the city administration is not yet ready to publicize the rating, a shadow rating is an option that will give a full picture without public exposure. For any rating, the city should fully understand the methodology of the rating and any weaknesses/strengths therein.

Once the city is sure that the rating process will result in an investment grade score, a public rating can be pursued. The city administration should know at this point whether a general obligation or transactional rating is appropriate. The city should competitively bid out the rating contract to ensure that it gets the best possible services from the agency for the money. For example, agencies can help coordinate outreach to potential investors, where they can answer technical questions on the city’s creditworthiness.

Establish a dependable presence in the market-place: Once the rating has been completed, it will be important for the city to establish consistency in the marketplace. A single investment grade rating 5 years ago will not reassure potential current investors. Ratings should be updated at regular intervals to highlight predictable patterns of creditworthy management. In addition, regular updates with ratings will also give the city a current picture of the status of its long-term creditworthy strategy.

Epilogue – Kampala City Continues its Creditworthy Journey

“We came in to put Kampala back on its feet” – Jennifer Musisi, Executive Director, KCCA

Kampala’s hard fought battle to achieve credit-worthiness is an excellent example of a focused, well-executed strategy. How they accomplished this swift turnaround is an important case study in a developing country context.

Institutional reform

Perhaps the greatest single factor in the turn-around was the creation of the Kampala Capital City Authority (KCCA) in 2010. The initiative was not without controversy: in one deft maneuver the old regime was swept aside and the executive function of the city became a cabinet level ministry in the central government. While there are criticisms of the reform, the direct line to the central government gave the newly appointed Executive Director a streamlined authorizing environment that sidelined calcifying elements of the old Kampala City Council.

A focus on revenues

One of the greatest successes of the KCCA over the last 5-6 years has been the dramatic increase in Own Source Revenues achieved. In fiscal year 2011, just before the creation of the KCCA, Kampala reported $98 billion Ugandan Shillings in revenue (UGX); in 2014 that number increased to UGX227 billion.

The key factor in that dramatic shift was the strategic decision taken to focus reform resources on the sources of revenue with the largest potential. These included property rates, parking fees, business licenses and service taxes – all revenue sources already mandated to the KCCA under existing law. KCCA used a combination of new IT systems to identify tax and fee payers not on the roles and its relative political protection to tirelessly pursue those residents not paying taxes owed.

In maximizing existing sources before attempting to levy new taxes and fees on residents, KCCA followed accepted best practice. It is true that the KCCA benefitted from an advantageous operating environment, however, the case clearly demonstrates the success of using tried and tested techniques for improving revenue collection.

Own Source Revenues (UGX bn), KCCA 2012-2014
Own Source Revenues (UGX bn), KCCA 2012-2014

Looking to the future

As any city that has achieved a creditworthy rating, Kampala still faces challenges and unforeseen circumstances that threaten its status. While in the afterglow of the rating many were discuss-ing the possibility of sizeable bond issuances, the city is currently limited to borrowing an amount equivalent to only 10% of its annual local revenue collections. In addition, sizeable reductions in transfers from the central government have left KCCA with budget shortfalls.7 The city is proposing to levy new sources of revenue on residents, including property rates on owner-occupied residents, new fees on the 300,000 boda-boda taxis in the city as well as raises in fees associated with parking, building plans and outdoor advertising.

However, the great achievements in reform that the KCCA over the last years have enhanced the ability of the city to withstand such shocks. The increase in OSRs as a percentage of central government transfers means that the impact of sudden reductions, while serious, is less keenly felt. The initiation of new revenues can be achieved more smoothly because these new sources were identified in advance through the adoption of a comprehensive revenue enhancement strategy. The journey to achieve and maintain creditworthiness can be long and winding, but the benefits should always remain clear.

  • 7. “Tax Hike in Kampala” The Independent (2017)


This chapter has reviewed the concept of creditworthiness as it relates to cities. It has explained the meaning of creditworthiness, the importance of the concept as it relates to accessing finance and long-term development as well as how a city can demonstrate its creditworthiness to the market.

  • Cities need investment from all providers of capital, including – necessarily – commercial sources
  • For commercial investors to invest in a city’s projects, the city will need to be creditworthy
  • Creditworthiness is a risk assessment on ‘ability and willingness’ to service financial obligations
  • While creditworthiness is a status, it is important to be aware that it is not a binary condition but a point on a continuum
  • Creditworthiness is closely synonymous with long-term financial sustainability – and empowers a city to achieve it
  • To become known as creditworthy in the market a city will need to engage an agency for a rating; there are many important aspects of a rating that will need to be considered from a city perspective
  • Investors seek predictable operating environments – in demonstrating their creditworthiness to the market it is important to consistently update ratings and/or other assessments

Other resources

The World Bank City Creditworthiness Initiative is a global program that delivers comprehensive, hands-on, and long-term support to help cities:

  • Achieve higher creditworthiness by strengthening financial performance;
  • Develop an enabling legal and regulatory, institutional, and policy framework for responsible sub-national borrowing through reforms at the national level;
  • Improve the “demand” side of financing by developing sound, climate-smart projects that foster green growth;
  • Improve the “supply” side of financing by engaging with private sector investors.

The Initiative has developed tools to help cities identify their areas of weakness and build a preliminary work program, as well as models for climate-smart Capital Investment Plans. Find out more at

The World Bank Municipal Finances: A Handbook for Local Governments is a reference text for municipal finance, creditworthiness and access to finance in developing countries.

The UN Habitat Guide to Municipal Finance (2009)