US State Department Workshop on Sustainable Cities December 2004

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US State DepartmentWorkshop on Sustainable
Cities December 2004

• Anthony Pellegrini
• IADF and Centennial Group

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Water and Sanitation is a key sub-national service

• 1 billion people still lack access to an adequate
  supply of water,
• 2 billion do not have adequate sanitation
  facilities.
• 3 million people still die every year from
  avoidable water-related disease
• 4 billion without sound wastewater disposal

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Emerging international consensus on MDGs.

• Goal 2 Ensure environmental sustainability
• Between 2000 and 2015 halve the proportion of
  people without sustainable access to safe
  drinking water
• Halve the proportion of people without safe
  sanitation by 2015
• Goal 4 Reduce Child Mortality
• Reduce by 2/3 the under-5 mortality rate by
  2015.

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The financing requirements are great

• The cost estimates vary but
• Halving the proportion of people without
  sustainable access to both improved water supply
  and improved sanitation would cost on the order
  of US11 billion per year OVER current
  expenditures ( Source WHO)

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Increasing private domestic currency finance of
infrastructure is one of the keys to
sustainability

• There is not enough money available from
  government grants, nor from aid institutions to
  finance needed infrastructure.
• Eventually finance will need to come from
  domestic capital markets and domestic banks.
• Foreign borrowing on large scale is feasible only
  for infrastructure that earns foreign exchange
  (e.g. ports)
• It is imperative that new approaches to access
  these markets be developed.

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Decentralization has added a critical dimension
to infrastructure financing

• LDC local Governments given major new
  responsibilities with little experience to draw
  on. Many bright young mayors but cities dont
  have the basic tools of good governance systems
  for budgeting, urban planning, modern accounting
  systems, community participation, competitive
  procurement, training of civil servants.
• Banks and capital markets in LDCs are unfamiliar
  with local governments or have negative
  experiences. Banks have typically lent to
  national institutions. Bonds have been floated by
  national institutions. Risks of local governments
  are difficult to assess.
• Local governments unfamiliar with requirements of
  market. Mayors reluctant to be seen to pay high
  interest rates invest in expensive feasibility
  studies

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Decentralization and urbanization has lead to an
important new development agenda

• Help improve processes, procedures, policies and
  institutions in newly empowered local governments
• Help improve interaction between domestic
  providers of funds and potential local government
  users of funds

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Sustainable financing will involve a wide range
of institutions including

• local banks and
• local bond market institutions

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• Banks have potential advantage of understanding
  their local government borrowers through
  relationship style lending, but tenors are
  often short and i rates high.
• Bonds have the advantage of offering better rates
  and longer tenors but issuing a bond is more
  costly
• There are still few examples of local governments
  in developing countries issuing bonds ( even
  local currency bonds).
• For small and medium sized cities it is costly
  and often impractical to float a bond.

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Bilaterals and multi-laterals can play an
important role in helping improve access by
sub-national entities to domestic capital markets

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Most Multi-lateral and Bilateral assistance is
through grants or lending that directly support
an individual project

• Financial impact limited to project being
  financed rather than promotion of long term
  sustainable finance solutions.
• Direct lending can sometimes discourage local
  institutions that have a hard time competing with
  official assistance.
• Direct lending by MDBs and Bilaterals is useful
  to support pilot projects that demonstrate a new
  approach and to promote reform

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How can local government finance be put on more
sustainable basis ?
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• Tamil Nadu India and Johannesburg, South Africa
  are two recent positive examples of USAID and IFC
  assistance that demonstrate the utility of credit
  enhancements and partial guarantees that LEVERAGE
  official assistance with domestic private funds
  to have a larger impact.

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Tamil Nadu, India Issues that faced LGs

• Many LGs , though poor, did have some capacity to
  pay back a loan . However, there was no access to
  bond market and no bank lending to local
  governments without guarantee by state.
• New requirements for improved water and
  sanitation implied major investment by local
  governments
• State no longer in position to give needed
  guarantees
• An existing local lending institution, TNUDF,
  wanted foreign assistance to lend to local
  governments

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Tamil NaduPooled Bond

• Tamil Nadu Urban Development Fund floated the
  first domestic pooled bond in the developing
  world without government guarantees on behalf of
  thirteen small, low income local governments.
• It was supported by a USAID Development
  assistance partial guarantee

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What is a pooled bond?

• A bond issued by a local financial institution
  on behalf of multiple small local government
  entities that would not have the wherewithal to
  issue a bond themselves individually.
• Since bonds are costly to issue, pooled bonds
  take advantage of economies of scale

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Tamil Nadu Result

• Successful floatation of fairly small initial
  bond (US 6.4 million)
• Being used by 13 local governments for env
  infrastructure
• USAID not only leveraged their resources,
• they established a more sustainable model for
  infrastructure finance in India.
• Followed by Karnataka bond and activity in
  several other states.
• Indian government issuing national guidelines to
  encourage other states.

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JohannesburgIssues

• Need for sharp increase in environmental
  sanitation and other infrastructure especially in
  black townships
• National guarantees unavailable
• No local gov in South Africa had issued a bond
• Need for clean audit
• Need for credit rating improvement
• Etc.

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JohannesburgMunicipal bond

• USAID provided technical assistance to local
  government finance and IFC provided a partial
  credit guarantee to a successful domestic bond
  issue by the Johannesburg Metropolitan Council
• A small guarantee led to significant leverage of
  local resources

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JohannesburgResults

• Two successful bond issues of 170 million dollars
  each
• Reduced average cost of borrowing saving 3.4
  million dollars per year
• Improved the debt maturity profile by spreading
  debt service payments forward.
• Stimulated interest in municipal market by
  pension funds, etc

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• More systemic approaches along these lines will
  be needed to have a real impact on the scope of
  the problem

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Tamil Nadu and Johannesburg are not isolated
examples

• In most developing countries local
  intermediaries ( like the early version of the
  Tamil Nadu Fund) have been set up by governments
  to on-lend official assistance to local
  governments

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Several other developing countries are
considering reform of local intermediaries to
enhance access to domestic private capital

• The Philippines, Ukraine and Mexico among others

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Many Other similar institutions exist. Eg.

• Colombia Findeter
• Parana, Brazil Paranacidade
• Tunisia Caisse des Prets et de Soutien des
  Collectivity Local
• Sri Lanka Local Government Loans Fund
• Jordan Banque de Development des Villes et
  des Villages

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Examples (continued)

• Bolivia Servicio Nacional de Desarollo Urban
• Czech Rep. Municipal Finance Co.
• Latvia Municipal Dev. Fund Latvia
• Morocco Fonds d'Equipement Communal
• Panama Fondo de Desarollo Municipal
• Etc.

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The issue for sustainability is

• Can these existing institutions play a role in
  bringing in domestic private capital for
  infrastructure finance and reduce the dependence
  on national budgets and foreign borrowing?

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Good models exist in the US and other advanced
market economies of specialized market based
intermediary institutions for lending to local
governments for infrastructure

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Examples from advanced economies

• USA SRFs, and 17 State Bond Banks
• Canada 6 Provincial Municipal Finance Corps
• Norway Kommunal Bankan
• Sweden Kommuninvest
• Netherlands Bank of Netherlands Municipalities
• Denmark KommuneKredit
• Finland Municipality Finance plc
• Etc.

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Its not just about creating finance institutions

• Important governance measures also need to be
  implemented to make financing feasible

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Governance Reforms needed for sub-national
finance

• Stable macro environment
• Domestic capital market regulations disclosure
  rules
• Legal framework, contract enforcement
• LG code specifying roles and resources
• National regulation of LG borrowing
• Local government and utility reform tariffs,
  utility regulation, taxation, project analysis,
  transparent procurement, accounting, and
  provision of clear, accurate, consistent, timely,
  information on LGs

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Role of Official Assistance

• Adopt the goal of improving access to domestic
  private capital as one of the objectives of
  country assistance strategies
• Provide advice and technical assistance to get
  the sub-national governance framework right
  (legal, regulatory, policy, institutional)
• Support transactions that test the framework in a
  country in order to identify necessary changes

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The US bilateral and diplomatic assistance can
play a key role in influencing the thinking of
governments and multilaterals in recognizing the
importance of local government infrastructure,
MDGs and sustainable finance models for
sub-national entitiesUS institutions can
provide valuable assistance US Bond Banks,
credit rating agencies, etc
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Thank You