Experience of Municipal Finance Institutions and Municipal

Download Report

Transcript Experience of Municipal Finance Institutions and Municipal

World Economic Forum
Financing for Development Initiative
Sao Paulo
October 2004
A. Pellegrini
Centennial Group
Increasing private domestic currency
finance of infrastructure is one of the
keys to sustainability
• Needs are great: $180 billion to meet Millennium
Development Goals for W&S alone.
• There is not enough money available from national
government subsidies, nor from aid institutions to finance
needed infrastructure.
• Eventually finance will need to come from domestic capital
markets –at least for infrastructure that does not earn
revenues in FX. It is imperative that new approaches to
access these markets be developed.
Decentralization has added a critical
dimension to infrastructure financing
• Local Governments given major new
responsibilities with little experience to draw on
• Banks and capital markets unfamiliar with local
governments or have negative experiences
• Local governments unfamiliar with requirements
of market.
Sustainable financing will
involve a wide range of
institutions including local banks
and bond market institutions
• Banks have advantage of “relationship” but tenors
are often short and i rates high
• Few examples of local governments in developing
countries issuing domestic currency bonds.
• Very few examples of MDBs or bi-laterals providing
assistance or credit enhancement.
• For small and medium sized cities it is costly and
often impractical to float a bond.
MDBs can play an important role in
helping improve access by sub-national
entities to domestic capital markets but
it will require doing business
differently
• Tlalnepantla, Mexico and Johannesburg, South
Africa are two recent positive examples of IFC
assistance to specific local governments that
demonstrate the utility of MDB credit
enhancements and partial guarantees.
• More systemic approaches will be needed to have
a real impact on the scope of the problem
MDBs have traditionally
helped countries set up local
intermediaries to facilitate their
lending to local governments
Examples
•
•
•
•
Columbia
Parana State
Tamil Nadu
Tunisia
• Sri Lanka
• Jordan
Findeter
Paranacidade
Tamil Nadu Urban Dev authority
Caisse des Prets et de Soutien des
Collectivity Local
Local Government Loans Fund
Banque de Development des Villes et
des Villages
Examples
(continued)
• Bolivia
•
•
•
•
•
•
Czech Rep.
Latvia
Morocco
Philippiines
Panama
etc,
Servicio Nacional de Desarollo
Urban
Municipal Finance Co.
Municipal Dev. Fund Latvia
Fonds d'Equipement Communal)
Municipal Development Fund Office
Fondo de Desarollo Municipal
There are over 60 such institutions in
developing countries and the number is
growing
Most operate as revolving funds
without leverage
The MDB makes a large loan to the government,
with a central government guarantee. The central
government on-lends to the local intermediary.
The local intermediary appraises subprojects
proposed by local government entities and “retails”
the MDB funds by on-lending for projects that pass
agreed criteria.
These intermediaries lend to a wide
range of local governments ---including financially weak local
governments.
Some have performed well and others have not
– E.g. MDFO in the Philippines and Paranacidade in
Parana State in Brazil have essentially zero NonPerforming Loans;
– Kenya LGLA, Indonesia RDA: very high rates of NPL
Those revolving funds that perform well, require
collateral of some type from borrowers and lend
within national guidelines that set specific limits on
local government borrowing to prudential levels.
(Collateral might be a pledge of tax revenues or an
intercept of central or provincial government
transfers, or even real property owned by the LG; )
A management contract with a private entity and a
board of directors that gives some independence
from government is another positive indicator
Those that perform well
• Help create a credit culture among local
governments
• Help establish track record of repayment
• Help encourage fiscal discipline among
Local Governments
But…even when they perform well
most do not serve a long term market
role and are not part of a sustainable
financing framework
• Most obtain capital exclusively from loans by Multilateral Development Banks perhaps augmented by
central or provincial government subsidies
• Danger that they may make it harder for local banks
or other private financial institutions to enter market
especially when they enjoy special advantages
Issue:
Can these existing institutions play a role in bringing
in domestic private capital and reduce the
dependence on national budgets or foreign capital?
In most market economies,
specialized intermediary institutions
exist for lending to local governments
 The US Bond Banks;
 The US State Revolving Funds
 The Canadian Municipal Finance Associations;
 Nordic communal Banks
Examples from advanced economies
•
•
•
•
•
•
•
•
USA
Canada
Norway
Sweden
Netherlands
Denmark
Finland
Etc.
SRFs, and 17 State Bond Banks
6 Provincial Municipal Finance Corps
Kommunal Bankan
Kommuninvest
Bank of Netherlands Municipalities
KommuneKredit
Municipality Finance plc
These institutions fill a market niche
They help small and medium sized local
governments (many of which which would have
difficulty floating a bond on their own) take
advantage of the favorable terms of bonds.
They pool borrowing needs among sub-national
entities, and issue a large pooled bond in their
own name, taking advantage of economies of scale
and risk sharing.
They provide a credit structure to
bonds to enhance security and raise
credit ratings
• Over-collateralization through maintenance of
reserve funds, e.g. six months expected payments;
• Pledge of full faith and credit from borrowing LGs;
• Other guarantees or security from LGs e.g. intercept,
pledge of property tax receipts, etc.
Three LDC examples of enhancing
access to domestic private capital
Colombia, and Czech Republic
• Second tier institutions that rediscount private bank
loans to Local Governments;
• Extend tenor of private bank loans and “introduce”
private banks to LG market
Tamil Nadu State Municipal Fund in India
• Private management; Some Private investment
• Successful domestic bond floatation with structure
modeled on US SRF supported by USAID
Several developing countries are
considering local intermediaries to
enhance access to domestic private
capital
• The government of India is issuing national
guidelines to encourage states to set up pooled
finance institutions;
• The Philippines, Ukraine and Mexico are also
moving in this direction
There are other measures that need to
be considered in addition to setting up a
financing institution:
•
•
•
•
•
•
Stable macro environment;
Domestic capital market regulations; disclosure rules;
Legal framework, contract enforcement;
LG code specifying roles and resources
National regulation of LG borrowing;
Local government and utility reform: tariffs, utility
regulation, taxation, project analysis, transparent
procurement, accounting, and provision of clear, accurate,
consistent, timely, information on LGs
Role of MDBs
• Adopt the goal of improving access to domestic private
capital
• Make greater use of credit enhancements than direct
lending (resource leveraging rather than resource
transfer)
• Provide advice and technical assistance to get the
framework right (legal, regulatory, policy, institutional)
• Support transactions that test framework in a country and
identify necessary changes
Role of MDBs
(Continued)
• Provide technical advice and financial support to develop
local, market based specialized intermediaries to help
small and medium sized sub-national entities access
domestic finance for infrastructure.
• Help restructure existing traditional municipal
revolving funds to bring them to market
In the case of the World Bank this would be enhanced by
ability to lend without sovereign guarantee