On the upside: Urbanization and economic development are correlated and there are other benefits of density and agglomeration economies. Production is concentrated in cities, which are also centers of demand and social convergence. No country has achieved high-income status without significant urbanization. However, increasing energy use, accelerating CO2 emissions and more environmental pressures will accompany GDP growth. Mismanaged urbanization will impose social and environmental costs that will be difficult to reverse.
In many countries, this urbanization trend is playing out within the context of increased decentralization and fiscal adjustment, and local governments are increasingly responsible for the provision and financing of public infrastructure for their constituencies. This has placed an increased strain on local financing resources and led to an emphasis on the development of local credit markets and resorting to public-private partnerships (PPPs).
Since infrastructure investment tends to be lumpy and long-term, local budget financing on a pay-as-you-go basis limits the ability of the city to develop critical infrastructure at the necessary pace.
To access long-term financing for local infrastructure projects in countries with developed capital markets — such as the U.S., Canada and Germany — large local governments routinely issue bonds, while municipal pooled finance helps to address the needs of small and medium-sized municipalities.
Inter-municipal cooperation
Municipal pooled financing is the most remarkable example of inter-municipal cooperation. This indicates a well-functioning decentralized local self-governance system in a country, which enables economies of scale to work in the public sector across administrative boundaries.
The first municipal pooled financing institution was created over 100 years ago in Denmark, a country that now has one of the most decentralized governments in the world. In Denmark, about 60 percent of all general government expenditures are done by local government (approximately 26 percent of GDP).
In addition to economic infrastructure, Danish municipalities are accountable for social security, health care, education, childcare, and elder care. Local governments are not allowed to declare bankruptcy and have an unlimited right to levy taxes on income and property. Not surprisingly, the first municipal pooled institution, KommuneKredit, was created in Denmark in 1899. It is legally organized as an association of Danish municipalities, liable for all KommuneKredit obligations, and claims 90 percent market share.
An idea whose time has come
Today, state-level “municipal bond banks” exist in the US and Canada, and national level “specialized lenders for regional and local governments” are found in all Nordic countries (KommuneKredit in Denmark, Kommunalbanken AS in Norway, Kommuninvest i Sverige AB in Sweden, Municipality Finance plc in Finland), as well as in New Zealand and Japan. The French Agency (Agence France Locale: AFL), created in October 2013, is the most recent pooled finance entity. A similar agency in the United Kingdom — where municipalities already have deep PPP experience, especially with utilities — is now being established.
Countries such as Brazil and Colombia also have some experience with municipal bonds. In the past, the World Bank and USAID have promoted municipal bond issuance (including pooled finance mechanisms), in other countries as well, especially Mexico, South Africa and India. Most recently, China’s new Budget Law, which came into effect in 2015, has allowed provincial level government to issue debt.
PPIAF’s Sub-National Technical Assistance (SNTA) program, the World Bank’s City Creditworthiness Initiative and IFC’s Municipal Infrastructure unit have been assisting in the effort to improve cities’ creditworthiness and help them access market-based financing. Moving closer to this goal would promote the use of pooled finance mechanism in developing countries — a trend we’d like to track more of.
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