Many countries are experiencing urbanization within the context of increased decentralization and fiscal adjustment. This puts sub-national entities (local governments, utilities and state-owned enterprises) in the position of being increasingly responsible for developing and financing infrastructure and providing services to meet the needs of growing populations.
However, decentralization in many situations is still a work in progress. And often there is a mismatch between the ability of sub-nationals to provide services, and the autonomy or authority necessary to make decisions and access financing—often leaving them dependent on national governments. Additionally, they may also contend with inadequate regulatory and policy frameworks and weak domestic financial and capital markets.
Because infrastructure investment tends to be lumpy and long-term,Additionally, infrastructure assets generate revenues in local currency and hard currency loans expose sub-national entities to exchange rate risks they are not well positioned to manage.
These reasons underscore the need for access to long-term financing, which can also ensure inter-generational equity. Mobilizing private capital in domestic markets for long-term lending for infrastructure development is one way to help address this issue. Here is some background and other options for sub-nationals.
Emerging development agenda supports sub-national development and finance
- International Finance Corporation’s (IFC) sub-national finance offering.
- European Bank for Reconstruction and Development’s (EBRD) Municipal and Environmental Infrastructure unit.
- French Development Agency’s (AFD) direct lending to sub-nationals.
- US Agency for International Development’s (USAID) Credit Authority’s partial credit guarantees.
Many bilateral donor programs offer Technical Assistance programs to improve sub-nationals’ access to finance for infrastructure development, such as:
- USAID’s well-recognized programs, including the Financial Institutions Reform and Expansion project in India and the Municipal Infrastructure Investment Units in South Africa.
- The UK’s Department for International Development’s programs for improved urban services for the poor and ongoing programs to improve the capacity of cities: Infrastructure and Cities for Economic Development, and Cities and Infrastructure for Growth.
Resources from non-traditional sources such as the Rockefeller Foundation, the Bill & Melinda Gates Foundation and the Bloomberg C40 network have targeted efforts to improve the capacity of cities in recent years.
Here are some examples of Sub-National Technical Assistance (SNTA) activities that resulted in improved access to financing:
- Quintana Roo, Mexico: This was the first transaction of its kind in Mexico, which helped raise $196 million to be invested in sub-national infrastructure. Support included the structuring of borrowing transactions by a state financing facility, including assistance to restructure debt, raise new debt at better terms and tenor, and reduce financing costs.
- Lima, Peru: SNTA has assisted eight regional and municipal entities by facilitating credit ratings, implementing financial assessments and training, supporting transaction preparation, and helping the central government monitor and evaluate the financial health of local authorities. Ultimately the Municipality of Lima signed two significant deals: a $70 million commercial bank loan with BBVA Banco Continental in 2010 (the loan was partially backed by a $32 million IFC guarantee), and a subsequent $120 million loan with BBVA and Scotiabank in 2013. The TA also helped the Regional Government of Arequipa obtain a $10 million commercial bank loan in 2011 to finance a road rehabilitation project.
- Dakar, Senegal: Helped the city with a financial management diagnostic, and to undertake a Public Expenditure and Financial Accountability assessment. The assistance helped Dakar to eventually obtain a €10 million ($15.8 million at the time of the transaction), 20-year loan from AFD to support a public lighting program.
- Sergipe, Brazil: Helped strengthen the creditworthiness of Companhia de Saneamento de Sergipe-DESO, the water company of the Northeastern State of Sergipe, and to help it prepare financial projections and a credit memorandum for purposes of submitting it to prospective lenders. In November 2010 IFC closed a BRL 18.9 m (~$11 million), 7-year loan to DESO to implement investments necessary to reduce water losses including purchasing water meters.
- Izmir,Turkey: This program supports a pilot of potential borrowing transactions to finance priority infrastructure projects in selected municipalities. It also helped the central government strengthen its coordination mechanisms and policy framework for financing sustainable cities, which resulted in the IFC issuing a €28 loan to the IZSU General Directorate (the Water and Sewerage Administration of the Izmir Metropolitan Municipality) to help finance its wastewater treatment program.
Any type of borrowing essentially creates a liability that needs to be repaid from future revenues and should take place within a regulatory and policy framework that ensures sustainable debt management. From our experience as finance specialists with the SNTA, we recommendcredible capital investment plans and financial reporting systems, predictable long-term cash flows that can ensure debt repayment, and regulatory frameworks that withstand governmental change.
View more SNTA programs here, and please share your thoughts below if you have worked on innovative financing solutions for sub-nationals.