WEF Public-Private Roundtable: Anthony Pellegrini June 2005 IADF and Centennial Group

Achieving MDGs will require a broad approach that reaches down to small and medium sized cities 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.

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 don’t 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. Local governments unfamiliar with requirements of market. Mayors reluctant to be seen to pay “high” interest rates; invest in “expensive” feasibility studies;

Increasing private domestic currency finance of infrastructure is one of the keys to sustainability There is not enough money available from government grants and aid institutions to finance needed infrastructure. Foreign borrowing is feasible only for large projects or those that earn foreign exchange Eventually significant levels of finance will need to come from domestic capital markets and domestic banks. It is imperative that new approaches to access these markets be developed.

Sustainable financing will involve a wide range of institutions including banks and bond market institutions

Larger cities with medium - term investment plans have been able to access markets and develop a credit relationship with the private Sector e.g. Johanesburg, Shanghai, Ahmedabad, Hyderabad, Ho Chi Minh City, etc But -- of the approx. 3,700 towns and cities in India, only 50 were deemed creditworthy enough to access domestic capital markets on their own

Smaller local governments have not had access to domestic private capital market for infrastructure needs on their own Capital markets institutions (and even banks) often don’t understand the risks of small local governments and find it too costly to do an assessment Smaller local governments often don’t understand the requirements of market finance The cost of issuance precludes bonds for small amounts Banks could play a key role but have short tenor funds

Where there has been capital market access --small and medium sized cities and towns rely on intermediation Examples include: Columbia-FINDETER, South Africa-INCA, Mexico-Several states/national level India-TNUDF, Karnataka, National Program

Intermediation can: Lower interest rates and lengthen tenors for ULB borrowers by: –Reducing risk to bondholders through diversification of borrowers –Reducing the unit cost of borrowing through economies of scale –Providing volume that can lead a secondary market –Taping a larger base of investors including pension funds and insurance companies

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

Most Multi-lateral and Bilateral assistance is through grants or lending that directly support an individual project Direct lending by MDBs and Bilaterals is useful and necessary to fill a funding gap for large projects, support pilot projects that demonstrate a new approach and to promote reform Financial impact limited to project being financed rather than promotion of long term sustainable finance solutions. Direct lending can sometimes discourage local financial institutions that have a hard time competing with official assistance.

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.

Tamil Nadu Pooled 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 It was a structured credit through a trust where the credit rating was independent of the financial strength of TNUDF

( From Roy Torkelson) Bond Proceeds Debt Service Payments Annual Debt Service Payment Bond Service Fund (Reserve Funds) GoTN Deficiency Make-up & USAID Guarantee* WSPF and ULB Flow of Funds TNUDF/WSPF ULBs Loan Proceeds Monthly Loan Payments to Escrow Account Ninety Days Before Debt Service Payment Date * GoTN replenishes full interest and 50% of principal and USAID replenishes 50% of principal payments made from Bond Service Fund SFC Devolution Intercept, if Necessary

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.

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

Several other developing countries are considering reform of local intermediaries to enhance access to domestic private capital Mexico, The Philippines, Ukraine, and South Africa among others

A number of models exist in the US and Europe

Examples from advanced economies USASRFs, and 17 State Bond Banks Canada6 Provincial Municipal Finance Corps NorwayKommunal Bankan SwedenKommuninvest NetherlandsBank of Netherlands Municipalities DenmarkKommuneKredit FinlandMunicipality Finance plc Etc.

Its not just about creating finance institutions Important governance measures also need to be implemented to make financing feasible

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

Role of Official Assistance Adopt the goal of improving access to domestic private capital as a key objective of country assistance strategies rather than resource transfer. 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 Work with governments and other AID institutions to develop a common agreed strategy

Thank You