Why Pooled Financing of Municipal Infrastructure?

Pavel KochanovMunicipal Finance Specialist

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Medium and small municipal borrowers face challenges and higher costs when accessing capital markets

Developed countries Developing countries

• Expensive credit ratings, due diligence, documentation

• Relatively small financing needs• Low debt management

sophistication

• Same as for developed countries plus

• Low fiscal autonomy and credit quality

• Weak local capital markets• Lack of investment management

capacity

However,

• Strong capital markets• Adequate or strong credit quality

of municipalities• Stable subnational framework• Fiscal autonomy• Investment management

capacity

• Reliance on financing from the higher level government or donors

Municipal pooled financing

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Examples of municipal pooled financing institutions

National financing authority for local government – Options assessment / Ernst & Young, 2013

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If municipal pooled financing is pursued in developing countries additional challenges should be addressed

Challenges Possible solutions

Low credit quality Possible Credit Enhancements: - 3rd party and pooled entities guarantee- Escrow account- Debt service fund- Intercept (claim on transfers)

Weak local capital markets

- Partial funding by IFIs, central government and local development institutions

Lack of investment management capacity

- Donors’ support is needed for preparation and execution of investment projects

Lack of tradition of inter-municipal cooperation

- Central government (with support from development agencies) may need to play a core role in establishing municipal pooled financing

Inadequate subnational borrowing regulations

- IFIs (such as WB) may play a role in advocating and establishing good practice for medium and small municipal borrowers to access capital markets

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Average weight of criteria factors in a credit rating of local governments

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Relative Importance of local (including cities) governments varies greatly measured by share of LG expenditures in consolidated general government expenditures

- LG expenditures shares vary greatly - from virtually zero percent in a number of countries (Guyana, Mozambique, Haiti, etc.) to 59 percent in Denmark,

- A large majority of countries (63 percent) have local government expenditure shares less than the sample average of 13 percent, and only 11 percent of the countries have LG expenditures shares higher than 30 percent.

Note: Color of a country corresponds to its percentile in the world’s distribution: red – 0-25th, yellow – 25-50th, blue – 50-75th, green – 75-100th.

Source: Maksym Ivanyna and Anwar Shah (2012). How Close Is Your Government to Its People? Worldwide Indicators on Localization and Decentralization. Policy Research Working Paper 6138, WB