INCA MUNICIPAL DEBT FUND (RF)

The objective of INCA Municipal Debt Fund (RF) Limited (IMDF) is to play a catalytic role in developing the supply of capex finance to intermediate municipalities in South Africa.  Through the IMDF, long-term resources from South African institutional investors wishing to develop a responsible investment activity are mobilised and blended with international development finance loans.  This funding is utilised to finance municipal infrastructure with a high economic and social impact.

The project has been initiated by INCA Portfolio Managers Proprietary Limited (IPM), a South African consulting firm also acting as managing agent for the IMDF.  IPM was created in 2008 by the founding team of INCA, a historical counterpart of the AGENCE FRANÇAISE DE DÉVELOPPEMENT[1] (AFD) Group, which has recognised expertise in municipal finances.  IPM is using its knowledge of the sector to develop a financing vehicle that will allow investors to access the intermediate city financing market and enable them to benefit from loans with long maturities that are currently lacking.

A special purpose vehicle has been incorporated (being the IMDF) which is borrowing funds from AFD and other development financial institutions (in the form of loans) and Local Funders (by issuing Programme Notes) and lend those funds through due tender process to Municipalities.

Loans extended by IMDF to creditworthy Municipalities of intermediate size for the financing of urban infrastructures and services (water, sanitation, waste, electricity, transport) will also be complemented by technical assistance to enhance long-term planning and budgeting capacity.  The governance of the IMDF will be very similar to that of an investment fund.  Management of IMDF (identification, appraisal and monitoring of loans) will be performed by IPM, acting as Managing Agent, which will have to comply with Investment Guidelines decided on by the Funding Participants and governed through a Master Participation Agreement. Investment decisions will be taken by an Investment Committee comprising IPM, one representing Local Funders and independent members.  IPM will report to AFD and other Funding Participants in the framework of an Advisory Panel.  Credit enhancement is available through a cash backed First Loss Facility financed by SECO[2], which will cover Funding Participants (including AFD) up to 5% of the financing granted.  IPM aims to raise a total of ZAR 1.5 billion from Funding Participants (including AFD) during the first fund raising window.

This new funding vehicle established by IPM is intended to make it possible for local institutional investors to invest in much needed municipal infrastructure within an acceptable risk framework and with the involvement of a well known group of municipal experts involved.  However the IMDF will only lend funds to Municipalities that qualify due to specific criteria of good governance, financial prudency and an acceptable long-term credit rating.

[1] AGENCE FRANCAISE DE DEVELOPPEMENT, a French public entity (établissement public) governed by French law, with registered office at 5, Rue Roland Barthes, 75598 Paris Cedex 12, France, registered with the Trade and Companies Register of Paris under number 775 665 599

[2] "SECO" – The State Secretariat for Economic Affairs, an office of the Federal Department of Economic Affairs, Education and Research of Switzerland