Municipal Bonds and Community Currency
A Concept Paper based on observations during the FMDV inspired conference: Conference Resolutions Africa / Marrakesh 2014: Financing African Cities: agenda, alliances and solutions
Why is this interesting?
- What if local governments could fund, incredibly underfunded, budgets through the support of the informal sector? Community Currencies could be the solution for sustainable local development and formalizing public and informal sector relationships.
- What if the informal sector paid taxes using their own goods and services and could trust that the money would be well used? The inability to pay and undesirability of tax paying due to corruption and lack of local impact - especially in developing countries is something we must overcome to create a more equitable society. Community Currencies are a way for local areas to tap into underutilized trade capacity, hedge in their own local abundance and use it to promote local development.
- We hope to see an example of such a Municipal Bond purchased in Community Currency this year in South Africa.
Jo-Burg did it's first Green Bond in 2014 and more generally Climate Bonds do have a framework (albeit is quite new) "Climate bond, also known as green bond, are a relatively new asset class. Most Climate Bonds are asset-backed, or ringfenced, with investors being promised that all funds raised will only go to specified climate-related programs or assets, such as renewable energy plants or climate mitigation focused funding programs." Creating a new asset class for Municipal Bonds dealing with Community Currencies is touched on below. These bonds could also fit within a Social Impact or Development Impact Bond framework.
- Definitions:
- Municipal Bonds (MBs) are debt securities issued by a state, municipality or county to finance capital expenditures. We will focus on Municipalities for this paper, but the topics could well be applicable to corporate and other bonds.
- Community Currencies (CCs) for this purpose are debt securities backed by goods and services of local businesses (formal and informal within the community). This group of businesses is below called the Trading Network or Network. CCs in this case are given a value of 1:1 to the National Currency and may be issued on paper or electronically. This preludes many
- Complimentary Currencies which are not locally issued or backed.
- Community Currency Municipal Bonds (CCMBs) are bond that are eligible to be purchased in Community Currency.
- Mixed Community Currency Municipal Bonds (MCCMBs) are bond that are eligible to be purchased using a mixture of National Currency and a Community Currency.
We will focus on CCMBs in this paper but the concepts can be readily expanded to MCCMBs.
The CCMB represents an investment made by a CC trading network. The network made up of local businesses is making a loan in CC to the Municipality. The Municipality will use this loan to fund expenditures such as environmental programs or the construction of highways, bridges or schools.
The investors in this case are a network of businesses trading using a Community Currency. The Bond is purchased by direct transfer of CC from the Network to the Municipality, and transfer of a Bond letter or promissory note to the Network (see MBCC below).
CCMBs specifications:
- Face Value, or Amount of the Bond, will depend on the size of the program, usability of the CC in the program, and size of the trading network. The suggestion is that much lower Face Values with faster turnover could be achieved using a CCMB.
- Coupon, or interest on the Bond, could be as low as 0% depending on the municipalities perceived payoff and risk. Lower interest rates would be appropriate due to the lower relative value of the CC with respect to a National Currency loan. This should also be seen as a low risk investment by the trading network as the Bond's purpose ( community program outcomes ) should benefit them directly or indirectly. Interest should be payable in National Currency as the supply of the CC is generally limited.
- Maturity Time of the Bond could be as low as one month and as high as one year. At the end of this period the bond matures and is payable back in either CC or a mixture of CC and National Currency – along with any interest accrued.
- Expiration Date of the Bond - is the date at which the Bond receipt (MBCC - see below) is no longer redeemable. This is to protect the Municipality from holding outstanding debts. Bond holders – the Business Network as a whole or each of the members individually, keep a receipt of their loan to the municipality and after it matures it can be redeemed at the municipality plus whatever interest has accrued. Definition:
- Municipal Bond Community Currency (MBCC) - The Bond receipt or receipts may be resold and hence used as a Community or Complementary Currency. MBCC usage would temporarily increase the amount of CC in the community. The MBCC would have to look different (or be issued electronically) from the original CC – so that people would know to redeem it for National Currency at the Municipality. The MBCC is a promissory note or notes that are backed by the CCMB promise to repay in Rand or CC - and used as a currency in their own right. This could also be considered a type of Term Currency.
- CCMB program examples
2a. Alien Vegetation Clearing in South Africa
The municipal council has a mandate to care for the environment but currently lacks sufficient funds - Funds are expected to come the following year.
The program for Alien Vegetation Clearing will cost 10,000 Rand – of which 5,000 is for salaries of day laborers and 5,000 is for transport, administration and material costs. The Municipality only has ,7,500 Rand for the program, hence needs an additional 2,500 Rand. The Muni. Decided that 50% of salaries could be paid for in CC and therefore issues a CCMB by way of printing a MBCC worth 2,500 CC (which is worth 2,500 Rand).
The Trading Network decided to purchase the CCMB using their community fund, which is a collection of the Networks contributions toward community betterment. The Municipality issues the CCMB using their own MBCC – either in the form of a single receipt or promissory note or many notes worth the total Face Value of the Bond and a clear interest rate, value, maturity and expiration date.
The Network holds the MBCC (promissory note to repay) but may also sell it or use it for other community work, such as setting up a monthly market.
The Municipality holds the CC notes worth 2,500 in National Currency and uses them to begin the program. Note that the workers in the program must agree to being paid partially in CC and partially in National Currency. Once paid in CC the program workers will use the CC for goods and services of the Network members.
Once the MBCCs maturity date has been reached and before the expiration date (allowing an ample gap between the two), any holder of a MBCC note may redeem it for National Currency from the Municipality in CC or National Currency plus any interest accrued and depending on the rules.
- In the case where the community fund is not enough for the proposed Municipal Program, nor is there enough CC in circulation to purchase the CCMB.
- Then unallocated CCs could be purchased. Unallocated CCs are those that are printed but have not yet been issued or backed by the Network. It would be disastrous for these unallocated CCs to enter circulation without proper backing as it would undermine the local trust in CCs and cause inflation. In this case it is important that the CCs that enter circulation are later removed without causing harm to the Network through inflation.
- In this case the National Currency returned to the holders of the MBCCs after maturity, should be exchanged for CC (which would then be destroyed or removed from circulation). In other words the MBCCs alone would not be able to redeem the National Currency. A MBCC holder would have to have an equivalent about of CC as well. This CC would be collected by the CC verifier and removed from circulation, at which point the MBCC holder would be able to redeem National Currency plus interest if any.
A simple option would be for municipalities to offer a zero interest bond purely purchasable and redeemable in CC from the Community Fund of CC. With the incentive for the Network being that community service is taken care of in CC and the Municipality must also accept enough CC (through taxes or other purchases) to pay back the loan in CC.