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Elio Codato

The World Bank Group. Local Governments: Facilitating Framework and Enabling Policies for Accessing Debt Finance. October 2004. Elio Codato. Local government community representation core non-revenue services local tax administration

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Elio Codato

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  1. The World Bank Group Local Governments: Facilitating Framework and Enabling Policies for Accessing Debt Finance October 2004 Elio Codato

  2. Local government community representation core non-revenue services local tax administration sets service objectives within natl. standards, regulates utilities/ concessions Muni. enterprises provision of revenue-earning services should be business-like: management autonomy, financial self-reliance, rational “make-or-buy” decisions General Framework • National Govt. • inter-govt. finance framework / flows • standards, rules of the game • monitoring, capacity building • capital grants Users, NGOs, Developers • Private sector • provides goods, works, services, finance to LG and enterprises • runs / develops services under municipal concessions and BOT

  3. Sources of Funds • Cash from operating savings is the main source of municipal investment in developed countries and LDC • A sufficient and steady cash-flow is also the basis for credit and private concessions • credit • sponsor’s equity • CASH: • local govt’s op. savings • utility earnings and deprec’n • user/ developer contributions

  4. Financial sector dev’t. macro stability bank regulation, securities market market depth, diversity, competitiveness Municipal Access to Credit • Local credit-worthiness • cash flow • collateral • capacity sustained market financing of viable projects limited invest. from cash & grants

  5. Segmenting Municipalities Creditworthy Local Govt. • BOT /concessions • revenue bonds • commercial bank loans • GFI loans • GFI loans • MDF loans • commercial bank loans, general obligation bonds social / environmental projects revenue-earning projects • Grants and TA • BOT / concessions • GFI loans and TA • limited MDF loans and TA Non-creditworthy LGs

  6. Frequent MDF Shortcomings politicized lending allocation forgiveness (contagious) interest rate subsidies can undermine emerging commercial alternatives government provision of credit fails to initiate relationships between local borrowers and “real-world” lenders bias against concessioning Better MDF designs external audits, prudential oversight, management autonomy affiliated to Min. of Finance not Min. Interior or Public Works explicit, simple eligibility criteria automatic transfer intercept for loan recovery unbundling loans from grants unbundling TA (“information intermediary” role) from finance MDF performance & design issues

  7. think access to debt finance “speak to” financial market participants involve the financial sector in allocating credit and sharing risks, to the extent possible work out underlying cash flow, collateral and capacity issues unbundle subsidies from debt finance look into specifics of “market failure”, seek minimal govt. intervention that addresses it design a strategy for market sustainability think only about flow of IFI funds create ad-hoc, state-run financial arrangement to meet real-sector capital needs solve a fiscal problem by tweaking financing instruments unfocused, supply-driven municipal management TA prefer fake loans to subsidies copy an instrument without reading the prescription create agencies / funds without worrying about what they might grow into Do’s Don’ts

  8. Balancing goals, looking for win-win Better incentives • better pricing • service concessioning • risk allocation to most able party • rating-driven discipline • standard disclosure, GAAP • listening to users • “drop dead” • strict fiscal federalism • incentive regulation of utilities, competition More money • central micro-management of local revenue sources, utility rates • unfunded recurrent spending mandates • murky chart of accounts • explicit or implied sovereign guarantees, MDFs • BOT with guaranteed traffic, “cost-plus” utilities • unrestrained pledging of transfers • tax exemption on muni bonds

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