Financial Intermediation Working Group Financial Intermediation for Municipal Finance

1
Financial Intermediation Working
Group Financial Intermediation
for Municipal Finance

• Michel Noel

2
Agenda

• Past experience with municipal LOCs and MDFs

• Going forward
• - Banking sector finance- limits
• - Capital market finance- opportunities

3
Past Experience With Municipal MLOCs and MDFs
OED Review
4
Past Experience with MLOCs and MDFs
MDF Performance Review (2000)

• Erratic repayment record (non-performance from
  0 to 80)
• Explicit or implicit government guarantees
  (contingent liabilities for the budget)
• Poor lending practices government grants or MDF
  lending to municipalities in default
• With one exception, no links with competitive
  capital market sources

5
Going Forward
Bank Lending to Municipalities Limitations

• Limited tolerance for municipal risk without
  explicit or implicit government guarantees
• Limited access to long-term resources on
  domestic market
• FX risk in accessing long-term foreign resources
  for onlending to municipalities

6
Going Forward
Developing Domestic Sub-Sovereign Capital Markets

• Higher tolerance for risk
• Bridge with institutional investors (insurance,
  pension funds) with long-term horizon
• FX risk on eurobond market
• Focus on domestic market development

7
Going Forward
Public Finance Model Borrowing by Municipalities
on Own Account
Headroom for general government borrowing
Limit
Partial credit guarantee facilities for
sub-sovereign bonds
Instruments
- Low to Medium risk without sovereign
counter-guarantee (MIC Facility) - Medium to High
risk with sovereign counter-guarantee
Options
8
Going Forward
PPP Model Private Sector Participation in
Municipal Utilities (BOO, BOT, concessions,
divestitures)
Reluctance of transitional operators to book
equity in local infrastructure deals in emerging
markets
Limit
Equity mobilization First-round private equity
funds Second round mixed funds
Instruments
- Extend partial credit guarantee facilities to
utility corporate bonds - Partial risk guarantee
facilities to cover for sub-sovereign breach of
contract risk
Debt Enhancement