City of Cape Town aims to borrow R4bn over next three years

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Cape Town - The City wants to borrow R4 billion over the next three years to fund its capital projects. It doesn’t want to use its own funds as that places a burden on the current ratepayer. One of the loans the city wants approved is an €80million (R1.3billion) loan from the German government-owned KfW Development Bank. The proposed loan was discussed at Tuesday’s Mayco meeting, and will be tabled at council at the end of the month. The proposal document, undersigned by mayoral committee member for assets Stuart Diamond, states that the city’s Medium Term Revenue and Expenditure Framework (MTREF) for 2018/19 identified the need to take loans up to R4bn. “For the past number of years the city has funded its capital programme out of its working capital. However, this is not a best practice as it places a burden on the current ratepayer due to the fact that it does not spread the related costs over the useful life of the related projects and artificially inflates the tariffs,” the reports states.

The projects earmarked by KfW funding include projects at the Cape Flats, Bellville, Mitchells Plain, Borcherds Quarry, Hout Bay, Gordon’s Bay and Zandvliet wastewater treatment plants.

“The city is currently earning an average interest rate of 8.22% on its investments. The tentative interest rate indicated in the information statement is for a rand-denominated loan and is a fixed rate for the period of the loan. The unsecured loan from KfW Development Bank will be for 15 years and will be drawn down in three separate disbursements between January and December, 2019,” the report says.

An upfront management fee of 0.25% of the nominal amount of the loan is payable prior to disbursement of the first tranche.

The indicative rate provided by KfW at September 28 was 8.41%, and if the management fee is included, an effective rate on this date will equate to 8.45%. “All costs relating to the loan have already been factored into the tariffs, which were implemented from July 1,” it said.

The intention is to draw down the loan in tranches, with the first tranche in January, the second tranche in May and the last tranche in November next year. National Treasury acting accounting-general Zanele Mxunyelwa said the first and second tranches, amounting to R829.173m, would have to be drawn down in the current financial year, with the third tranche taken in the 2019/20 financial year.

“It appears that the three separate tranches will result in an 8.75% interest rate each. The rate appears to be expensive as compared to taking the total amount of R1.3bn in one tranche with one interest rate, while we recognise the 15-year tenure of the loan. The municipality must ensure that this is the most cost-effective way of structuring the loan,” she said.

Although the stable cash position of the municipality indicated affordability for its loan repayments, the municipality would still need to manage the level of borrowings prudently, she added.

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