Introduction

In Cameroon, the government has emphasized the role of decentralization, and local governments play a significant role in improving and promoting local and regional development. To achieve the development objectives and goals, local governments must invest in local infrastructure projects that meet their local needs and support sustainable economic development. CEPI recently took part in training with local governments and stakeholders on how to access finance for local climate change adaptation projects. As a result, this article reviews the legal framework that underpins local government financing, and guarantee schemes with recommendations on how to attract private sector financing for climate change adaptation projects.

Local governments in Cameroon play a crucial role in the process of decentralization with the view of promoting local development. A significant aspect of local governments is their ability to raise funds through taxes, loans, and grants to fund local projects. Such borrowing is governed by a legal framework that is supported by state guarantee schemes.

Legal Framework Underpinning Local Government Financing

The legal framework governing local government borrowing in Cameroon is primarily established by several laws that facilitate decentralization and empower local councils. Law No. 2004/17 on the Orientation of Decentralization and Law No. 2004/18 on Rules Applicable to Councils provide the foundational legal framework for local governance, including financial management and borrowing. This law gives local governments the power to collect taxes that can be used as collateral for loans. According to Law No. 2019/019, local authorities can collect taxes and levies that can be used for securing loans. The taxes have to be created through the legislative process and they must manage the proceeds effectively to repay these funds.

Additionally, the Council Support Fund for Mutual Assistance (FEICOM) plays a vital role in this framework by authorizing loans for revenue and capital spending, particularly for projects with social value such as schools and healthcare facilities. FEICOM is funded by local governments who contribute 20% of their local land taxes to FEICOM to fund nationwide regional development led by councils. Local governments must comply with specific criteria set forth by these laws when seeking loans, ensuring that borrowing aligns with national development strategies and fiscal sustainability.

Guarantee Schemes for Local Governments

To enhance the borrowing capacity of local governments, Cameroon has implemented state guarantee schemes designed to mitigate risks associated with lending. The State Guarantee Facility was established in the 2023 Public Finance Law, which allows governments to guarantee loans that they take from public establishments and private businesses. This facility covers 30% of the loan amount for large companies and 70% for SMEs – reducing their risk premium on guaranteed loans. The state does this to ensure that local businesses can access funding at more favorable terms and fosters an environment where infrastructure projects can be adequately financed in a decentralized manner i.e. without the central government providing the loans themselves. Not only does this mechanism support infrastructure development projects, but it also encourages economic growth by allowing local authorities to invest in essential projects without overextending their financial capacity.

Examples of Local Governments Borrowing

The majority of local government borrowing happens through FEICOM and the council of Yaounde has successfully engaged in borrowing to finance local urban development initiatives that aim to improve public services and infrastructure development. In recent years, Yaoundé has focused on improving its transport systems and public utilities through loans authorized by FEICOM, which are supplemented by national and international partners.

Another notable example is the Douala City Council, which has accessed loans for major urban redevelopment projects to reduce housing shortages and improve sanitation facilities in the city. These examples illustrate how local governments can leverage borrowing not only to meet immediate financial needs but also to invest in long-term developmental goals that benefit their communities. A common thread among local governments is the glaring absence of the private sector in funding local projects that could improve Cameroon’s climate adaptation prospects. According to an IMF report of October 2018, the balance sheet total of the Cameroonian banking sector amounted to CFAF 5,308 billion giving them sufficient capacity to lend to local governments provided they have the right guarantees.

In summary, local government borrowing is supported by a robust borrowing framework and state guarantees that improve access to credit. Through careful management of financial resources, local authorities can undertake significant projects that can contribute to regional development and improve the quality of life for their constituents. As such systems evolve, they hold the potential to improve the effectiveness of local governance and boost local development across Cameroon.

The Case of the Douala Urban Community

The Douala Urban Community (CUD) entered into a public-private partnership with Sic Congo Management back in 2013 for the construction of the Congo Market, securing a CFA 3.2 billion loan from several banks such as Afriland First Bank (AFB) and Commercial Bank-Cameroon (CBC).

CUD acted as a guarantor for this loan, covering 75% of the amount. On November 2, 2023, CUD filed a lawsuit against AFB and CBC to invalidate its guarantee on the loan as it said it was illegal for the bank to issue a loan without authorization from the community council. This has made banks reluctant about lending to local governments, especially with a CFA 2.4 billion default loan guarantee.

Strategies to Strengthen Private Sector Finance in Local Adaptation Projects

Local governments must collectively request legislation that allows a certain portion of their central financing to be used for debt repayments. While this will not unequivocally encourage local banks, it will provide a framework through which local councils can more readily borrow from the private sector, especially commercial banks.

Legislation allowing local governments to borrow up to 25% of their yearly budgets will provide more room to borrow for climate adaptation projects. This can be financed via local taxes and donor funds that explicitly target specific projects like waste management, sea barriers, water management systems to prevent flooding in coastal regions, etc.

Regular engagement between private sector partners and local councils will enable them to chart a pathway towards the financing of relevant projects. The requirements, execution, and types of projects can be pre-defined using specific quantifiable criteria to ensure disbursement after the completion of milestones. This will ensure greater accountability for local governments and also permit banks to exercise adequate due diligence regarding such projects that are financed.

Conclusion

Local governments can borrow from institutions such as FEICOM which are mandated to finance relevant projects, especially as the institution receives 20% of local land taxes from councils and municipalities. To attract private sector funds, local councils and municipalities will need to engage adequately with the private sector to set criteria that can enable them to lend effectively and finance climate adaptation projects that are vital for improving the standards of living

AUTHORS

Henri Kouam

Executive Director

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