Sabac and Stara Pazova are the first Serbian cities to publicly issue municipal bonds, therefore enabling less expensive and more affordable financing of major infrastructure facilities, whereas clients – citizens and businesses – have an opportunity to invest their money in a secure and favourable manner. Cities and Towns Assembly’s project runs under the EU-funded EU Exchange 4 programme.
City of Sabac’s long term bond emission, worth RSD400 million, has been entirely implemented, while demand exceeded supply by 50 per cent. Official results of the first public municipal bond emission were presented at the press conference held at the City Council.
“I am happy with the success of the joint municipal bond emission project by the City of Sabac and SCTM. There was a minor concern, given the fact that the City of Sabac was the first to get down to this work. I thank all the bond buyers, both citizens who have bought bonds worth RSD26 million, and businesses, i.e. economic entities who have recognised this offer as a way to earn money. We have now secured conditions for reconstruction and construction of the city swimming pool,“ said Mayor of the City of Sabac, Nebojsa Zelenovic.
Djordje Stanicic, Secretary General of the SCTM said that “the City of Sabac is the first Serbian local self-government to publicly issue municipal bonds aimed at domestic and foreign, natural and legal persons, thus providing an example to other towns and municipalities. Citizens are able to see how, through their own investment, major infrastructure facilities are being constructed in their vicinity and, once the deadline has passed, to get their money back with interest rates much higher than those they would gain for saving money in banks.“
Aleksandar Bucic, Assistant Secretary General of SCTM in charge with finance, said that the City of Sabac is the first Serbian city to have its securities traded on Belgrade Stock Exchange; an important fact for Serbian capital market. He stressed that Sabac is the first local self-government in Serbia that showed readiness to fulfil all the criteria and go through complex procedures which preceded the emission.
For the first time in Serbia, local self-government bonds were available to all domestic and foreign, legal and natural persons, and the City of Sabac has done all of this with the support from Standing Conference of Towns and Municipalities (SCTM) under the EU Exchange 4 programme and Banca Intesa as the selected sponsor. Sabac is the first Serbian city to issue bonds for the market (until now, this was the practice when a specific client is involved) and thanks to this, reconstruction and extension of the indoor swimming pool will continue.
All of the bonds issued so far, as well as the bonds of the City of Sabac, are the result of EU’s assistance to Serbia provided through IPA funds. Preparation of the bonds has been implemented through EU-funded and SCTM-implemented Exchange programme.
Public emission of Stara Pazova municipal bonds starts
Following the first tranche of municipal bonds worth RSD125 million, realised in early 2014, Municipality of Stara Pazova and UniCredit Bank signed the contract for the second bond tranche of the same value on 11 December 2014. Bond emission process was supported by Delegation of the European Union through Standing Conference of Towns and Municipalities.
Djordje Radinovic, President of the Stara Pazova Municipality, said on this occasion: “We have recognised our interest in investing in municipal infrastructure, so our citizens can now practically invest in what they need. This time it is a kindergarten, a hall, regulation of certain areas in our municipalities; next time, it may be something else. It would all concern infrastructure, naturally, because we believe it is what citizens need the most.“
Goran Savic, Assistant President of the Municipality said that the tranche issued municipal bonds worth 125 million dinars, i.e. 12.500 bonds 10.000 dinars each. “Bonds will be available to citizens, repayment period is five years at an interest rate of six per cent, meaning that citizens of the Stara Pazova Municipality may gain more money compared to the amount they would gain with commercial banks. We will surely publish brochures and inform citizens on bond requirements, and each house in the Municipality will receive one of those, so that everyone interested could invest in their infrastructure,“ Savic said.
“Municipality of Stara Pazova and the City of Sabac are the first two local self-governments that have decided to finance infrastructure projects, important to local community and citizens, in this manner. For the first in Serbia, we have a public issuance of municipal bonds, and I am free to say it is the most appropriate and ideal way of collecting funds to finance major projects,“ Aleksandar Bucic, Assistant Secretary General of SCTM, said.
Enriko Verdosa, Member of the UniCredit Bank Executive Board expressed his satisfaction “with the fact that UniCredit Bank has been selected a partner in this, to Stara Pazova, financially important project. Driven by our system of values, we have been taking an active part in providing assistance fo local communities development and living conditions enhancement. As a socially responsible company, we support sustainable projects beneficial not only to local self-government, but also to its citizens.“
Second tranche municipal bonds will be available to citizens in the first quarter of 2015. So far, the Municipality of Satra Pazova has issued bonds worth 250 million dinars, and the total amount is aimed at infrastructure projects, including the second tranche, and will be used for the regulation of Nova Pazova neighbourhood, construction of sports hall with bowling alley in the neighbourhood of Golubinci, as well as the construction of kindergarten in the neighbourhood of Belegis.
Why municipal bonds
Financial aspects of public emission of municipal bonds are as follows:
- For a town or a municipality, bonds certainly represent the most affordable form of borrowing, with a significantly lower interest rate compared to a credit, and a better deadline structure, dictated by a town/municipality alone and not a creditor (bank), in accordance with its plans
- Bonds open way to a broadest possible investment base: to all domestic and foreign, legal and natural persons. Serbian citizens may buy bonds (apart from citizens, bonds can be bought by banks, insurance companies, pension funds, any business, i.e. legal entities, regional investors). On the other hand, only banks are able to give credits, thus public bond issuance provides us with the broadest competition possible, resulting in the most favourable funds in any given local community
- Situation regarding lending to the economy is rather tough at the moment and banks are searching for more secure destinations for their funds, while local self-governments are ideal clients in this situation, given that their guarantee is a local self-government budget
- Town/municipality may at any time monitor the cost of its debt within secondary market (Belgrade Stock Exchange) with a possibility of early repayment and a call option (an important possibility depending on debt cost trends and interest rates)
The most important novelty of the emission is that municipal bonds can be bought by citizens. At the moment, Serbian citizens hold over 8 billion euros in short term deposits (up to one year); having in mind that savings’ interest rates have drastically fell over the previous years, one can expect as much as 1-2 per cent interest rate annually.
When a town/municipality decides to issue bonds on their own and allow citizens to buy them, citizens are then offered an opportunity to invest money in development of their own town and earn money at a higher interest rate compared to the one in banks.
Why municipal bonds are a good investment
- Bond-based revenues are completely tax-free (as opposed to savings in banks where tax amounts to 15 per cent)
- Apart from the generated income, citizens get a bridge, a kindergarten, a new street or any other local infrastructure project that is always and exclusively of capital nature
- This form of investment is guaranteed by local self-governments’ budgets
- Citizens may sell their bonds at any given moment at the secondary market, i.e. Stock Exchange, thus gaining a more liquid investment compared to bank deposits (cancellation of term deposit lowers the interest rate, whereas selling a bond one can even earn extra money due to difference in buying and selling price).
Serbian citizens, notably in Vojvodina, have for years used personal contributions as a way of financing local projects – they have donated money. When someone asks: What are municipal bonds?, it is not completely wrong to say that they are rather similar to personal contributions, only in the case of bonds, you get the entire principal, i.e. your savings, while earning money at an interest rate significantly higher than those offered by banks. This is the great advantage of bonds.
Municipal bonds represent an ideal solution for financing communal infrastructure projects in Serbia. They are an affordable financial instrument to citizens, affecting the increase in accountability and transparency of public finance management at a local level.
