BBL sponsored by the Municipal Finance Thematic Group

1
BBL sponsored by the Municipal Finance Thematic
Group

• Municipal Insolvency Principles and Practice --
• Comparing the Cases of Hungary and South Africa
• Wednesday, April 7
• Presenters
• Matt Glasser, AFTU1, and Mihaly Kopanyi, TUDUR,
  World Bank

2
Introduction

• Does municipal insolvency matter?
• Local governments often face financial troubles
  overdue debt, unpaid suppliers bills, tax
  arrears
• Three basic scenarios
• No-rule scenario often entails moral hazard and
  bail-out by the sovereign government
• Insolvency legislation rule-based treatment of
  troubled cases
• Use corporate bankruptcy law works well in the
  US but may lead to no-rule scenario in developing
  countries

3
Dealing with Municipal Insolvency

• Hungarys Experiences in
• Policy, Legislation, and Practice
• Mihaly Kopanyi
• Sr. Municipal Finance specialist
• TUDUR Urban Development Unit

4
Municipal Borrowing and Insolvency

• Pre-transition
• State guarantee on deposits and on municipal
  debt
• 1990 1995
• Principle No state guarantee on municipal debt
  (LG Act)
• Practice Implicit guarantee and discretionary
  bail out
• 1996 2003
• Act on Municipal Debt Resolution 1996
• CG statement on No Bail out unless Parliament
  approval
• 19 M Bankruptcy Procedure Commenced, about 100
  out-of court agreements between 1996 and 2003

5
Act on Municipal Debt Adjustment 1996

• Objectives
• Prevent and preempt M defaults
• Maintain public services in defaulted M
• Clear admin and legal procedure for those
  affected
• Rule-based reorganization and workout procedure
• Allow market expansion of M debt as revenues
  increase
• Sovereign guarantee need Parliament authorization
  in the national budget

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Debt Resolution Process
Petition to court
Justified
Process halted, appeal possible
NO
Enterprise Registry Trustee appointed Debt
Committee Notice to creditors Emergency Budget
Reorganization Plan
NO Agreement
Court order for inventory of assets for
liquidation
Trustee prepares a liquidation report for Court
approval
Agreement
Compromised workout Debt w-o plan signed
Submission of Plan to Court Publication of Plan
closure of w-o process no appeal possible
Court approves liquidation plan appeal possible
Assets liquidated, creditors paid
Trustee paid Publication of outcome Closure of DR
7
An Out-of-court Resolution - Tokaj

• External audit on M institutions and management
  end-1995
• Consolidate/merge institutions and reduce staff
  by 15
• Set up a municipal treasury, improved cash
  management and liquidity
• Zero based Budgeting and new financial
  information system
• Renegotiate debt with the lead bank and suppliers
• Results
• Solvency restored and deficit reduced (HUF34 mo
  by 1997), balanced budget since 1998,
• Increased liquidity and cost efficiency
• Solid city development since 1998.

8
Insolvency Procedures 1996-2003
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Lesson learned 1

• Key Factors in Avoiding Bankruptcy Petition
• Early debt restructuring with all lenders and
  vendors
• Rationalization of M budgetary institutions
• Municipal treasury (soft or hard)
• Internal audit and reduction of staff
• Decrease voluntary M services
• Enhance internal control and asset liability
  management
• LAST RESORT Application for a deficit grant
  (grant for bridging gaps in the operational
  budget)

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Lessons Learned 2

• Cautious, market driven borrowing
• Strong incentives for timely out-of-court
  resolution
• Poor financial and project mgmt. skills at local
  level
• MBr Act does not constrain lending
• Banks view the MBr Act overly protects borrowers
• Councilors and M executives can not be held
  personally liable for default
• MBr Act does not constrain M borrowing (the M
  sector is 70 below borrowing ceiling)