Transcript Obtaining finance

Obtaining finance
Some ideas from the
Municipal Fund
Needs growing everywhere
• Decentralization to reduce pressure on
central govt. budget
• Decentralization because local decisionmaking, implementation and maintenance are
better
• Population growing (naturally and by
migration)
• Standards rising
Sub-sovereigns’ sources of finance
• Own cash generation
• Taxes
• Transfers from central governments
• Commercial banks
• Local capital markets (bonds)
• Development banks, multilaterals, etc.
Competition
• Sub-sovereigns are competing for all but
own-generated sources
• Moreover you’re competing for long-term
funds with the Central Treasury
• Need to move early
• Need to achieve quality
• Need to maintain market track record
Mexico
• All municipal financing had depended on
securing lenders by intercepts on Federal
transfers
• Banks had limits, everyone competed for
bank finance
• Growing needs
• Essential to develop new approaches
Tlalnepantla Project:
Latin America
Municipal Finance
Of the Year
Local Government
Bond of the Year
TMWC Mexico
Municipality/OPDM
3
2) Trustee issues loan to 2
Municipality and water
company and transfers
net funds to water company.
3) Muni pledges proceeds from
water fees to pay the Trust’s loan
Trustee
4
2 nd order
Beneficiary of the
trust
1) The Trustee issues
1
certificates to investors.
5
CERTIFICATE HOLDERS
1 st order
Beneficiary
Of the trust
4) Issue guarantee to
cover princ.and interest
5) Investors buy certificates
Debt paid by water fees.
Secured by cash reserves
and guarantee.
What happened
• Bond sold well – viewed as great success
• Market noted the absence of Federal intercept
• But no more municipal bonds issued in past year
• Why? – the banks have dropped their security
requirements for intercepts and become more
competitive in price and maturities
• Lesson – new approaches can influence all parts of
the market
Bank financing
• Close relationship between borrower and lender
• Easier to fit conditions to borrower’s needs
• Disbursements and repayments can be phased with
projects cash flows
• Volumes constrained by regulation, bank prudential
limits
• Maturities must fit bank’s funding and strategy
• Easier to negotiate (maybe)
Bond financing 1
• Long-term savings enable long-term investment
• Bond financing very suitable for infrastructure
investment
• Potential volume of funding available is enormous
• Introduces competition for the banks
• Structured financings are quickly developed, driving
prices down
• Secondary markets develop to provide liquidity
Bond financing 2
• Experience has shown market is relatively stable
financing source
• There are minimum sizes
• Drawdown and repayment schedules set by market
• Terms may be less flexible
• If problems arise, borrower must deal with many
bond holders, not a few banks
• Supplemental to existing financing
Investors/ lenders look for:
• Good management in operations, budget,
finance and project implementation
• Transparency and accountability
• Good decision-making
• Clarity of relationship with central government
• Reliable cash flows
• Continuity
• Focus on essential projects
Sub-sovereign borrowers offer:
• Productive, necessary, local, investment
• Absence of market risk
• Regular, predictable, earnings
• Oversight by both central government and
local citizens
• Long-term users of finance
• Stability
Municipal Fund
• New products added to World Bank Group
range
• Commercial finance for sub-sovereigns
without a sovereign guarantee
• Currently experimental, but a high
enthusiasm for Africa
• Institution-building, loans, quasi-equity,
guarantees
• Bond enhancements and liquidity facilities
Municipal Fund Website
Global Finance for Local Needs
Bringing global financing to local public institutions to improve lives and
reduce poverty.
The Municipal Fund is a combined initiative of the World Bank and the
International Finance Corporation.
We provide needed capital investment to municipalities and other local public
entities in the developing world without central government guarantees.
Learn more about our Program and our business opportunities.
Website: www.ifc.org/municipalfund
Email: [email protected]