Why Pooled Financing of
Municipal Infrastructure?
Pavel Kochanov
Municipal Finance Specialist
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
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
Note: Color of a country
corresponds to its
percentile in the world’s
distribution: red – 0-25th,
yellow – 25-50th, blue –
50-75th, green – 75100th.
-
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.
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
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