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Obtaining finance

Obtaining finance. Some ideas from the Municipal Fund. Needs growing everywhere. Decentralization to reduce pressure on central govt. budget Decentralization because local decision-making, implementation and maintenance are better Population growing (naturally and by migration)

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Obtaining finance

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  1. Obtaining finance Some ideas from the Municipal Fund

  2. Needs growing everywhere • Decentralization to reduce pressure on central govt. budget • Decentralization because local decision-making, implementation and maintenance are better • Population growing (naturally and by migration) • Standards rising

  3. Sub-sovereigns’ sources of finance • Own cash generation • Taxes • Transfers from central governments • Commercial banks • Local capital markets (bonds) • Development banks, multilaterals, etc.

  4. Competition • Sub-sovereigns are competing for all but own-generated sources • Moreover you’re competing for long-term funds with the Central Treasury • Need to move early • Need to achieve quality • Need to maintain market track record

  5. Mexico • All municipal financing had depended on securing lenders by intercepts on Federal transfers • Banks had limits, everyone competed for bank finance • Growing needs • Essential to develop new approaches

  6. Tlalnepantla Project: Latin America Municipal Finance Of the Year Local Government Bond of the Year Municipality/OPDM 3 2) Trustee issues loan to Municipality and water company and transfers net funds to water company. 2 3) Muni pledges proceeds from water fees to pay the Trust’s loan 4 nd 2 order Beneficiary of the trust 4) Issue guarantee to cover princ.and interest 1) The Trustee issues certificates to investors. 5 1 CERTIFICATE HOLDERS 5) Investors buy certificates Debt paid by water fees. Secured by cash reserves and guarantee. st 1 order Beneficiary Of the trust TMWC Mexico Trustee

  7. What happened • Bond sold well – viewed as great success • Market noted the absence of Federal intercept • But no more municipal bonds issued in past year • Why? – the banks have dropped their security requirements for intercepts and become more competitive in price and maturities • Lesson – new approaches can influence all parts of the market

  8. Bank financing • Close relationship between borrower and lender • Easier to fit conditions to borrower’s needs • Disbursements and repayments can be phased with projects cash flows • Volumes constrained by regulation, bank prudential limits • Maturities must fit bank’s funding and strategy • Easier to negotiate (maybe)

  9. Bond financing 1 • Long-term savings enable long-term investment • Bond financing very suitable for infrastructure investment • Potential volume of funding available is enormous • Introduces competition for the banks • Structured financings are quickly developed, driving prices down • Secondary markets develop to provide liquidity

  10. Bond financing 2 • Experience has shown market is relatively stable financing source • There are minimum sizes • Drawdown and repayment schedules set by market • Terms may be less flexible • If problems arise, borrower must deal with many bond holders, not a few banks • Supplemental to existing financing

  11. Investors/ lenders look for: • Good management in operations, budget, finance and project implementation • Transparency and accountability • Good decision-making • Clarity of relationship with central government • Reliable cash flows • Continuity • Focus on essential projects

  12. Sub-sovereign borrowers offer: • Productive, necessary, local, investment • Absence of market risk • Regular, predictable, earnings • Oversight by both central government and local citizens • Long-term users of finance • Stability

  13. Municipal Fund • New products added to World Bank Group range • Commercial finance for sub-sovereigns without a sovereign guarantee • Currently experimental, but a high enthusiasm for Africa • Institution-building, loans, quasi-equity, guarantees • Bond enhancements and liquidity facilities

  14. Municipal Fund Website Global Finance for Local Needs Bringing global financing to local public institutions to improve lives and reduce poverty. The Municipal Fund is a combined initiative of the World Bank and the International Finance Corporation. We provide needed capital investment to municipalities and other local public entities in the developing world without central government guarantees. Learn more about our Program and our business opportunities. Website:www.ifc.org/municipalfund Email:municipalfund@ifc.org

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