IPWA
Financial Tools Task Force
A. Pellegrini
Centennial Group
The idea of revolving funds to support
local government borrowing for
infrastructure is not new
even in developing countries
Many countries of the developing world have set up
revolving funds of various types to facilitate
borrowing by local governments
Examples from developing economies
•
•
•
•
Columbia
Parana State
Tamil Nadu
Tunisia
• Sri Lanka
• Jordan
Findeter
Paranacidade
Tamil Nadu Urban Dev authority
Caisse des Prets et de Soutien des
Collectivity Local
Local Government Loans Fund
Banque de Development des Villes et
des Villages
Examples from developing economies
(continued)
• Bolivia
•
•
•
•
•
•
Czech Rep.
Latvia
Morocco
Philippiines
Panama
etc,
Servicio Nacional de Desarollo
Urban
Municipal Finance Co.
Municipal Dev. Fund Latvia
Fonds d'Equipement Communal)
Municipal Development Fund Office
Fondo de Desarollo Municipal
There are over 60 such institutions in
developing countries and the number is
growing
Many were set up with limited objectives, as simple
pass-through revolving funds for Multilateral
Development Bank lending. The central
government guarantees the multinational loan.
Most will lend for a wide range of sub-national
infrastructure and are not limited to a single sector
such as water and sanitation
All lend to a wide range of local
governments including
financially weak ones.
Some have performed well and others have not
– E.g. Philippines MDFO and Paranacidade in Parana
State in Brazil have essentially zero NPLs;
– Kenya LGLA, Indonesia RDA: very high rates of NPL
Those revolving funds that perform well, typically
require an intercept pledge of central or provincial
government transfers in case of default, and lend
within national guidelines that limit local
government borrowing to prudential levels.
A management contract with a private entity and a
Board of directors that gives some independence
from government is another positive indicator
Those that perform well
• Help create a credit culture among local
governments
• Help establish track record of repayment
• Help encourage fiscal discipline among
LGs
But…even when they perform well
most do not serve a long term market
role
• Most obtain capital exclusively from central or
provincial government subsidy or loans from Multilateral Development Banks. Neither the national
government nor MDBs can satisfy all investment
needs of local governments;
• Danger that they may substitute public for private
capital especially when they enjoy special
advantages
Questions many countries should
ask
• How can these “revolving funds” evolve to bring in
domestic private capital and reduce the dependence
of local government finance on national budgets or
foreign capital;
• How to use domestic subsidies and MDB funds to
leverage domestic funds;
What should the future of these funds
look like?
For those that wish to evolve, models from
developed world exist:
 The US Bond Banks;
 The Canadian Municipal Finance
Associations;
 The Nordic Communal Banks.
Examples from advanced economies
•
•
•
•
•
•
•
•
•
USA
Canada
Norway
Sweden
Netherlands
Italy
Denmark
Finland
Etc.
17 State Bond Banks
6 Provincial Municipal Finance Corps
Kommunal Bankan
Kommuninvest
Bank of Netherlands Municipalities
Crediop
KommuneKredit
Municipality Finance plc
These institutions fill a market niche
and have goals similar to SRF
help small and medium sized local
governments take advantage of the
favorable terms of bonds by pooling
borrowing needs among sub-national
entities, taking advantage of economies of
scale and sharing risks;
They employ operating principles
similar to SRF to enhance security and
raise credit ratings
• Over-collateralization through maintenance of
reserve funds, e.g. six months expected payments;
• Pledge of full faith and credit from borrowing LGs;
sometimes joint and several obligations.
• Other guarantees or security from LGs e.g. intercept,
pledge of property tax receipts, etc.
Three LDC examples of enhancing
access to domestic private capital
Columbia, and Czech Republic
• Second tier institutions that rediscount private bank
loans to Local Governments;
• Extend tenor of private bank loans and “introduce”
private banks to LG market
Tamil Nadu State Municipal Fund in India
• Private management; Some Private investment
• Successful domestic bond floatation with structure
modeled on SRF supported by USAID
Proposals have been made in several developing
countries to move in this direction. Tamil Nadu
has already done so; The DOF in Philippines is
considering restructuring MDFO;
USAID
and WB have both recommended Indonesia to
consider this approach.
IFC , ADB interested in these concepts
There are other measures that need to
be considered in addition to setting up a
financing institution:
• Stable macro environment;
• Domestic capital market regulations; disclosure
rules; municipal credit ratings;
• Solid legal framework, contract enforcement but
also LG code, regulation/limits for LG borrowing;;
• Local government and utility reform: tariffs, utility
regulation, taxation, project analysis, transparent
procurement, accounting, clear, accurate, consistent,
timely, information on LGs
Implications for W&S Financing
in Developing countries
• The performance of an existing revolving fund in a country,
even an unreformed one, may be an indication of prospects
for an SRF type mechanism for W& S in that country;
• A restructured revolving fund, modeled on those in the
developed world, could itself be an important source of
domestic currency for W&S; MDBs should consider the
agenda of restructuring these revolving funds to bring them
to market;
• The existing revolving funds can be a “home” for a
specialized SRF type fund for W&S.
Philippines
• Decentralization supported by strong Local
Government Code –1991;
• Significant equalization transfers of centrally
collected taxes to LGs;
• Well defined own-source revenue base for local
government (but very poorly used).
Philippines LG borrowing experience
• MDF established in 1984 as revolving fund for ODA
to local governments and utilities; re-flows stay in
fund; national gov. repays international loan.
• National gov. allows intercept of its flows to
borrowing local entity as security for MDF loans;
• Good lending record: essentially zero NPL;
• Recently government owned development banks
also lending to local entities, also with zero NPLs
Private capital use in Philippines for
local government infrastructure
• 8 local government bonds issued in recent years
demonstrating some market appetite; high cost of
issuing bond compared to bank loans limits demand;
• No private bank lending to LGs or utilities; local
banks do not have access to intercept and are not
depository banks.
• The MDF has accumulated on the order of
50 million dollars in re-flows from past
loans that could be used to capitalize a
pooling institution.
A healthy LG finance system
in Philippines needs



Private bank lending for better off
LGs
Direct bond market access; and
Market oriented specialized financial
intermediary to help smaller LGs to
increase access to domestic markets
Wider access to private domestic
capital in Philippines will depend on

Leveling playing field for private banks to
encourage gradual entry

Establishment of an intermediary that pools
needs of multiple LGUs and floats bonds on
their behalf;

Continued, capital market, local government and
utility reform