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BUILDING LOCAL CREDIT MARKETS

This article explores different vehicles for local credit, such as banks, municipal bonds, on-lending external credits, and environmental funds. The objective is to build a consistent system of credit while reducing credit risks and tapping long-term savings for long-term credit. It also discusses the role of credit ratings, collateral, tapping long-term savings, and the potential partnership between banks and bonds. Additionally, it examines blended credit systems and the use of environmental funds in introducing subsidies to market-based credit.

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BUILDING LOCAL CREDIT MARKETS

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  1. BUILDING LOCAL CREDIT MARKETS

  2. Vehicles for Local Credit • Banks • Municipal Bonds • On-Lending External Credits • Environmental Funds • OBJECTIVE: Build a Consistent System of Credit

  3. Dangers of Fragmentation • Brazil—30 years of on-lending; no market • Indonesia—52% default rate on water loans • Municipal Bank Monopoly? • Tax Exemption only for Municipal Bonds? • OBJECTIVE: Level Policy Field

  4. Goals for Maturing Market • Identify Credit Risk • Reduce Credit Risk • Tap Long-Term Savings for Long-Term Credit • Provide Technical Support for Local Financing

  5. Identifying Risk • Credit Ratings • Their Special Role in Local Borrowing for Developing Countries • Disclosure before Credit Rating

  6. Reducing Credit Risk (1) • Building Precedents for Repayment • Indonesia • Kenya • Lockbox Approaches to Revenues • Ahmedabad Bond • Municipal Utilities • Role of Trustee

  7. Reducing Risk (2) • Collateral • China—Land • Other Assets • Intercepts & Offsets • Tamil Nadu v. Brazil

  8. Tapping Long-Term Savings • Insurance Companies • The ‘prudential investment’ test • Pension Funds • Legal Restrictions (e.g. Poland) • Paradox of US Tax Exemption • Secondary Market • Securitizing Local Loans? • Re-selling Municipal Bonds?

  9. Banks or Bonds? • Partnership Banking with Technical Support • Bonds—Unbundling the Partnership

  10. Blending Grants & Subsidies • Blockage of Credit Created by Poor Design • Initial E. European Environmental Funds • Revolving Funds • Way to Introduce Subsidies to Market-Based Credit

  11. Blended Credit Systems • China • Full Tariffs for Wastewater Treatment Plants, plus Asset Collateral • Bank Lending + Enterprise Bonds • South Africa • INCA as Specialized Intermediary • Czech Republic • Banks and Bonds

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