Creditworthiness is essentially an opinion by third parties, mainly lenders, on whether debt service payments will be made fully and on time. A lender that has confidence in the long-term financial strength of the borrower, and in the ability and willingness of the municipality to pay its obligations in full and on time, will regard that municipality as creditworthy.
In order to attract private financing, cities must demonstrate that they are a viable investment proposal, that they are able to effectively manage their own finances and are transparent in this process. Improving the creditworthiness or the credit rating of a city is a gradual process partly limited by factors external to the city, such as the wealth and credit rating of the national authorities. However, there are measures a city can take to strengthen its creditworthiness.
A city seeking to improve its creditworthiness should focus on improving conditions in the following five broad categories:
- economic conditions, for example, municipal income levels and economic diversification
- financial management, including transparency, administrative capacity, professional management of debt and liquidity
- budgetary performance or operating balance budgetary flexibility, for example, own-source revenues
- current level of debt, debt servicing requirements and other liabilities.
While some of these dimensions are difficult to change in the short term, a city may develop a creditworthiness action plan as a start. This allows the city to set a current baseline and realistic ambitions and aims, as well as identify problematic and priority areas that need to be addressed. Key areas may include managing expenditure, developing a pipeline of public infrastructure projects to be funded and undertaking its own ‘shadow’ credit rating assessment.
An official municipal credit rating issued by a well-recognised rating agency has several benefits. Beyond improving access to private financing, it represents and guides a process aimed at improving the financial management of a municipality. This also provides valuable information, to the benefit of central authorities and potential donors. It also further enhances the accountability of city management as it clearly shows the financial rigour of the municipality.
Resource implications and key requirements
A creditworthiness enhancement programme is not difficult to develop, but is challenging to implement. It is also important to remember that improving the creditworthiness or the credit rating of a city is a gradual process. For example, Zaprešić in Croatia has worked to improve its creditworthiness since the establishment of a local treasury system in 2012. The city was assessed in 2016 as having a low credit risk, with a high level of budget liquidity, and has been placed in the top 5 per cent of exceptionally transparent local budgets in Croatia.
In Uganda, Kampala’s improvements in municipal revenue can be attributed to the work undertaken by local authorities since 2012 to improve its creditworthiness, delivered through a city-wide strategic plan. Despite the city's growing economy, Kampala has faced significant financial problems, including poor revenue collection, weak governance and reliance on government transfers. This limited the city’s ability to invest in improving its local services and implementing infrastructure projects. In light of this situation, a strategic plan was developed to strengthen governance and service delivery. The plan identified key areas to target, including human resource development, better record management and stronger monitoring processes.
To improve its administrative capacity, the city received assistance from the World Bank and PPIAF, enabling the Kampala authorities to develop more robust accounting approaches. The plan was extremely successful and in one year, Kampala managed to increase its revenues by 86 per cent. However, as identified creditworthiness is a continuum, this requires continuous effort and commitment to financial management.
Implementation obstacles and solutions
Pursuing a credit rating can be an administratively and technically challenging task, as it requires addressing any gaps or weaknesses in financial management. Cities can seek support from the national level or through the capacity-building programmes of international organisations, for example, the C40 Cities Finance Facility. Incorporating a resourcing timeline into a creditworthiness action plan allows cities to effectively manage their staff and budgets for this process.
External factors may include an unstable wider economy and, as the national assessment forms an element of a credit rating, this may impact a city’s ability to obtain private finance. Improving these external factors can be beyond the remit of a city. However, active stakeholder engagement with the national government and other surrounding cities or municipalities can enable the sharing of best practice and improvement of wider conditions.
 World Bank Group and Government of Austria (2018), “Urban Partnership Program (UPP): Improving Local Government Capacity”.
 City of Zaprešić, Finance and Budgeting Department (2018), “The City of Zaprešić Experience in the Application of MFSA – Action Plan”.