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.

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.