Building market for subnational infrastructure bonds

DAR ES SALAAM: INFRASTRUCTURE needs are growing faster than public budgets alone can comfortably accommodate.

The challenge is therefore not only how much the country needs to invest, but how it can mobilise additional pools of long-term capital to finance that investment sustainably.

The scale of this financing challenge is reflected in the Government’s 2026/27 budget. At 62.33tri/-, the budget is supported by 46.79tri/- in projected revenue and 15.54tri/- in borrowing.

As the government continues to invest in strategic development priorities, particularly infrastructure, the pressure to mobilise additional sources of longterm capital is clear.

The question is no longer whether Tanzania needs to invest in infrastructure, it clearly does, but how the country can mobilise additional capital to complement public resources, development finance and traditional bank lending.

Building an infrastructure-financing ecosystem Tanzania’s infrastructure needs are too large and diverse to be addressed through a single source of financing.

Government budgets and grants will remain essential, particularly for socially important projects that cannot generate sufficient revenues on their own.

Development finance institutions can provide longer-term funding, technical assistance and risk mitigation, while commercial banks can finance project development and construction.

At the same time, pension funds, insurers and investment managers control substantial pools of long-term savings that need suitable investment opportunities.

Capital markets can help connect those savings with appropriately structured infrastructure projects, allowing public entities to raise longer-term funding and repay investors from project revenues or other dedicated income streams.

The bigger question: Could this financing model work at the subnational level? Could municipalities and public entities raise money from Tanzanian investors to finance a water project, bus terminal, market, waste-management facility or other revenue-generating infrastructure and repay investors from the project’s revenues or other dedicated municipal income?

Tanga UWASA: Proof of concept Tanga Urban Water Supply and Sanitation Authority (Tanga UWASA) issued Tanzania’s first subnational green bond in 2024, raising 53.12bn/- (approximately 20.8 million US dollars) through a 10-year bond to finance water infrastructure and environmental conservation.

The bond was listed on the Dar es Salaam Stock Exchange and subsequently cross-listed on the Luxembourg Green Exchange.

The United Nations Capital Development Fund (UNCDF) served as the lead technical and financial adviser and provided a 1 million US dollars catalytic grant, resulting in a leverage ratio of 1:20.

The bond was 103 per cent oversubscribed, with approximately 65 per cent of the funds coming from domestic investors, including pension funds, insurers, asset managers and financial institutions.

The proceeds are being used to expand water production and distribution, extend the distribution network, rehabilitate ageing pipelines, install smart meters and protect water sources.

The project was expected to connect an additional 6,000 households to clean water. The Tanga UWASA experience demonstrates that subnational entities can access Tanzania’s capital market under the right conditions.

The opportunity now is to move from one successful transaction to a repeatable model and ultimately to a sustainable subnational bond market.

From one transaction to a repeatable model The Tanga UWASA transaction is therefore more than a successful individual issuance.

It provides a practical reference point for how Tanzania can develop a broader market for subnational infrastructure financing.

But replicating the model will require more than simply issuing similar bonds. It will require bankable projects, credible revenue models, strong institutions, appropriate risk allocation and supportive market infrastructure. Five principles are particularly important.

First, start with bankable projects and credible revenue streams. Not every infrastructure project is suitable for bond financing.

Public entities should prioritise projects with clear economic or social benefits, defined funding requirements, predictable cash flows and a credible mechanism for repaying investors.

A project may be socially important, but that does not necessarily make it financially bankable. Before approaching the capital market, issuers need to demonstrate who will pay, how much revenue is expected, whether tariffs or charges are affordable and whether those revenues can be sustained over the life of the bond.

Second, strengthen the institutions behind the projects Investors ultimately assess not only the project but also the creditworthiness and institutional capacity of the issuer.

Sound financial management, audited financial statements, effective revenue collection, strong governance, transparent reporting and capable management systems are therefore essential. A strong project cannot compensate indefinitely for a weak institution.

Third, allocate risks appropriately and protect investors Infrastructure projects do not always perform as planned.

Construction delays, cost overruns, lower-thanexpected revenues and other unforeseen events can affect a project’s ability to service debt.

Financing structures should therefore establish in advance how such risks will be managed, who bears them and what protections are available to investors.

Depending on the transaction, these may include reserve accounts, guarantees, insurance, covenants, escrow arrangements or other forms of credit enhancement.

The objective is not to assume that nothing will go wrong, but to ensure that the project and financing structure remain resilient when risks materialise.

Fourth, build investor confidence and standardise transactions Successful issuance depends on investors having confidence in the information, institutions and structures supporting a bond.

Clear and timely disclosure, appropriate financial and technical assessments, credible advisers and transparent reporting throughout the life of the bond are essential.

At the same time, each new transaction should not require the market to start from scratch. Standardised documentation, disclosure templates and transaction processes can reduce costs, shorten preparation times and make future issuances more efficient and predictable.

Fifth, build a pipeline rather than pursue isolated transactions Ultimately, the objective should not be to replicate one successful bond, but to develop a sustainable pipeline of credible issuers and bankable projects.

Water authorities, municipalities and other public entities should identify potential projects early, assess their financing requirements and prepare them for future capital-market access.

A consistent pipeline would help build investor familiarity, deepen the market and gradually establish subnational bonds as a viable component of Tanzania’s infrastructure-financing ecosystem.

The objective, therefore, should not be simply to encourage more borrowing. It should be to create a market in which financially sound public entities with credible projects can access long-term capital on transparent and sustainable terms.

Conclusion: Build the market, not just the debt Tanzania’s infrastructure challenge should therefore be viewed not only as a question of public expenditure, but also as an opportunity to deepen the country’s capital markets.