By Anish Abraham
The City of Johannesburg will soon issue a R1-billion retail bond, enabling residents to invest in the city.
Following its successful issuing of municipal bonds to institutional investors, the City of Johannesburg is now preparing to issue a R1-billion retail bond before year end, which will be open only to the residents of the metro.
"We have already appointed the adviser and we are on the verge of appointing a marketing company to roll out a concerted and aggressive marketing campaign to target Johannesburg's residents," said Jason Ngobeni, the City Treasurer.
Joburg has chosen Standard Bank as its adviser - not only is it on the City's panel of approved advisors, but it has also issued its own retail bond, and Ngobeni is sure the City will benefit from their experience.
As far back as April 2005, the City approached its panel of lead managers to conduct a feasibility study into issuing municipal notes to retail investors, to fund Joburg's capital expenditure programmes.
Funds raised through the bond issue will be used to partly fund the City's capital expenditure programme for the current financial year, set at R3,2-billion.
Though Ngobeni believes all mechanisms have been put in place to ensure that the retail bond issue is a success, he pointed out several differences between the institutional and retail bond issues.
"One difference is that the issue will take place over a long period of time as opposed to previous bond issue auctions, where for example, we raised R1,2-billion in three hours," he said.
It could even take the whole year before the City can achieve its target of issuing R1-billion worth of retail bonds, with maturities ranging from one to five years.
By far the biggest challenge will be in dealing with investors - whereas issued bonds are held by a small group of institutional investors, the City will have to deal with a multitude of people who invest in the retail bond.
This means the retail bond will require much more administrative work and Council has already approved the creation of a small call centre dedicated to the issue.
"It will be staffed by five or six professionals who will have a good knowledge of the financial instrument, and they will be well placed to assist the public with their queries," Ngobeni said.
In addition, he said they would add a Frequently Asked Question section dealing with the retail bond on the City's official website.
The City is currently in discussions with its adviser regarding the various channels through which the bond can be distributed. They include banks, post office branches and even the City's own regional offices and people's centres.
"We are still investigating all the possibilities though," he added.
Ngobeni said the reason National Treasury had taken a long time to raise R1- billion through its retail bond issue is that they did not have a vigorous marketing campaign. Joburg on the other hand, plans to carry out an aggressive campaign to market the bond to its residents.
"We will have a full marketing and advertising campaign to persuade the residents of Johannesburg to take part in the retail bond issue. We have no doubt that we can raise that level of finance within the city, considering it contributes so significantly to South Africa's Gross Domestic Product," he explained.
Though Ngobeni is aware that some investors will just move their savings from one financial instrument to another higher-yielding one, he said the main aim was to increase the rate of savings in the country.
"Compared to many other countries, South Africa has a very poor savings record," he said.
By getting Joburg residents to invest in the retail bond, the City will not only promote savings, but it will also instil civic pride, discipline and a sense of ownership.
"Now people will be investing directly into the city in which they live, not just contributing through rates and services. They will take a keener interest on what the City is doing as it is their investments being used for new developments," Ngobeni explained.
One of the case studies that the City has looked into in preparation for the retail bond issue has been Mexico, where retail bonds have become a very cheap source of raising finance over a period of time.
Though initial start-up costs associated with entering the bond market might be high, they are eventually brought down when such financial instruments are used regularly.
"What we can guarantee is that it will be a high-yielding instrument and that investors will get their money back at maturity. It might even stimulate some competition in the retail bond market, leading to higher yielding bonds. This in turn will entice more people to save money, which is what is needed," Ngobeni concluded.
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