World Economic Forum Financing for Development Initiative Sao Paulo October 2004. A. Pellegrini Centennial Group. Increasing private domestic currency finance of infrastructure is one of the keys to sustainability.
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A. PellegriniCentennial Group
MDBs can play an important role in helping improve access by sub-national entities to domestic capital markets but it will require doing business differently
There are over 60 such institutions in developing countries and the number is growing
The MDB makes a large loan to the government, with a central government guarantee. The central government on-lends to the local intermediary.
The local intermediary appraises subprojects proposed by local government entities and “retails” the MDB funds by on-lending for projects that pass agreed criteria.
Some have performed well and others have not
Those revolving funds that perform well, require governments ---- including financially weak local governments. collateral of some type from borrowers and lend within national guidelines that set specific limits on local government borrowing to prudential levels. (Collateral might be a pledge of tax revenues or an intercept of central or provincial government transfers, or even real property owned by the LG; )
A management contract with a private entity and a board of directors that gives some independence from government is another positive indicator
Can these existing institutions play a role in bringing in domestic private capital and reduce the dependence on national budgets or foreign capital?
They help small and medium sized local governments (many of which which would have difficulty floating a bond on their own) take advantage of the favorable terms of bonds.
They pool borrowing needs among sub-national entities, and issue a large pooled bond in their own name, taking advantage of economies of scale and risk sharing.
Colombia, and Czech Republic
Tamil Nadu State Municipal Fund in India
In the case of the World Bank this would be enhanced by ability to lend without sovereign guarantee