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Boosting access to market-based debt financing for sub-national entities

Kirti Devi's picture



Many countries are experiencing urbanization within the context of increased decentralization and fiscal adjustment. This puts sub-national entities (local governments, utilities and state-owned enterprises) in the position of being increasingly responsible for developing and financing infrastructure and providing services to meet the needs of growing populations.
 
However, decentralization in many situations is still a work in progress. And often there is a mismatch between the ability of sub-nationals to provide services, and the autonomy or authority necessary to make decisions and access financing—often leaving them dependent on national governments. Additionally, they may also contend with inadequate regulatory and policy frameworks and weak domestic financial and capital markets. 

Because infrastructure investment tends to be lumpy and long-term, financing on a pay-as-you-go basis limits the ability of sub-nationals to develop critical infrastructure at the necessary pace. Additionally, infrastructure assets generate revenues in local currency and hard currency loans expose sub-national entities to exchange rate risks they are not well positioned to manage.

These reasons underscore the need for access to long-term financing, which can also ensure inter-generational equity. Mobilizing private capital in domestic markets for long-term lending for infrastructure development is one way to help address this issue. Here is some background and other options for sub-nationals.

Emerging development agenda supports sub-national development and finance 
 
The 2030 Agenda for Sustainable Development is ambitious and meeting the Sustainable Development Goals (SDGs) will require resources. The 2015 Financing for Development conference in Addis Ababa introduced a paradigm shift in development finance. The resolution commits to scaling-up international cooperation to strengthen capacities of municipalities and local authorities and to work towards developing domestic capital markets using blended finance instruments across key development sectors, including those led by sub-nationals. The World Bank Group’s efforts to support the 2030 development agenda rely on an increasingly important role for private finance.
 
Several multilateral and bilateral agencies have already identified the critical development gap in sub-national development finance and offer loans and credit enhancements directly to sub-nationals, such as: Many bilateral donor programs offer Technical Assistance programs to improve sub-nationals’ access to finance for infrastructure development, such as: Resources from non-traditional sources such as the Rockefeller Foundation, the Bill & Melinda Gates Foundation and the Bloomberg C40 network have targeted efforts to improve the capacity of cities in recent years.

Increasing access to financing
 
Launched in 2007, the Public-Private Infrastructure Advisory Facility’s (PPIAF) Sub-National Technical Assistance Program (SNTA) helps sub-national entities develop their capacity to access market-based financing without sovereign guarantees to improve infrastructure services. Technical Assistance activities include capacity building designed to improve the creditworthiness of sub-national entities and their investment projects, as measured by appropriate local credit ratings and/or actual access to financing.
 
Here are some examples of Sub-National Technical Assistance (SNTA) activities that resulted in improved access to financing:
  1. Quintana Roo, Mexico: This was the first transaction of its kind in Mexico, which helped raise $196 million to be invested in sub-national infrastructure. Support included the structuring of borrowing transactions by a state financing facility, including assistance to restructure debt, raise new debt at better terms and tenor, and reduce financing costs.
  2. Lima, Peru: SNTA has assisted eight regional and municipal entities by facilitating credit ratings, implementing financial assessments and training, supporting transaction preparation, and helping the central government monitor and evaluate the financial health of local authorities. Ultimately the Municipality of Lima signed two significant deals: a $70 million commercial bank loan with BBVA Banco Continental in 2010 (the loan was partially backed by a $32 million IFC guarantee), and a subsequent $120 million loan with BBVA and Scotiabank in 2013. The TA also helped the Regional Government of Arequipa obtain a $10 million commercial bank loan in 2011 to finance a road rehabilitation project.
  3. Dakar, Senegal: Helped the city with a financial management diagnostic, and to undertake a Public Expenditure and Financial Accountability assessment. The assistance helped Dakar to eventually obtain a €10 million ($15.8 million at the time of the transaction), 20-year loan from AFD to support a public lighting program.
  4. Sergipe, Brazil: Helped strengthen the creditworthiness of Companhia de Saneamento de Sergipe-DESO, the water company of the Northeastern State of Sergipe, and to help it prepare financial projections and a credit memorandum for purposes of submitting it to prospective lenders. In November 2010 IFC closed a BRL 18.9 m (~$11 million), 7-year loan to DESO to implement investments necessary to reduce water losses including purchasing water meters.
  5. Izmir, Turkey: This program supports a pilot of potential borrowing transactions to finance priority infrastructure projects in selected municipalities. It also helped the central government strengthen its coordination mechanisms and policy framework for financing sustainable cities, which resulted in the IFC issuing a €28 loan to the IZSU General Directorate (the Water and Sewerage Administration of the Izmir Metropolitan Municipality) to help finance its wastewater treatment program.
Any type of borrowing essentially creates a liability that needs to be repaid from future revenues and should take place within a regulatory and policy framework that ensures sustainable debt management. From our experience as finance specialists with the SNTA, we recommend these systems should be in place in order for sub-national entities to be able to access long-term financing: credible capital investment plans and financial reporting systems, predictable long-term cash flows that can ensure debt repayment, and regulatory frameworks that withstand governmental change.
 
View more SNTA programs here, and please share your thoughts below if you have worked on innovative financing solutions for sub-nationals.

 

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Sub-national pooled financing: Lessons from the United States

 

Comments

Submitted by FEMI OBIOMAH on

This would work for sub nationals that are fiscally independent. In most cases, these entities would do more if they autonomous but they are not. Lots of time their financials are tampered with by Primary Govts. This make debt management difficult. Most of these subs can finance the projects (as well as manage the debts) independently but are prevented from doing so due selfish reasons under the Guise of political restraints.

Submitted by Dr. Mohamed Taher Abdelrazik Hamada, Ph.D on

Urbanization is a symptom of real development that shows increase in life quality.
The more the process of urbanization the more the need for decentralization to
facilitate developing infrastructure .
All these processes can not be tackled without long term financing and increasing the role of the private sector , and also encouraging sub-national
development finance of which the World Bank has a major role , and there are many
major vital examples of such finance as cited in the above comment.
Yours Very Respectfully,
Dr. Mohamed Taher Abdelrazik Hamada, Ph.D
Retired Professor at Strayer University, USA
[redacted]

Submitted by Stanley on

This works well where there is stability in governance. As long as the National leadership is committed to honor pledges, and support the sub national Governments. and not use it as, yet another tool of control or an escape route to abdicate their National responsibilities. However much technical support will be needed for both National and the sub National levels. Experts in these matters are scares Yet rapid urbanization comes with a host of other demands and challenges, that will create competition for resources

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