Optimizing borrowing capacity of local government Frédéric AUDRAS Program Manager

1. Optimizing borrowing capacity of local government Frédéric AUDRAS Program Manager Local authorities and urban development department

2. Breakdown of the presentation: 1 Main steps to evaluate borrowing capacities of LG 2 Main issues: LG still an “unknown” entity 3 A comprehensive and long term financial approach 4 Case study with the City of Dakar (Senegal) 5 PEFA approach as a referent methodology for LG

3. 1 Main steps Evaluation of borrowing capacities of LG • Institutional context: decentralisation process in the institutional framework, legal capacity to borrow (domestic and external borrowing), indebtedness limits, financial autonomy of LGs, possible guarantees (debt repayment), • Organizational context of LG: administrative capacities (skilled and experienced staff), financial information system, accountability system, certified accounts, • Political context: Master Plan (urban planning) • Financial capacities: classic financial assessment, risk analysis (including currency risk) => rating (rating agency or internal rating)

4. 2 Main issues LG: still an “unknown” entity • Financial assessment: LG often considered as “Central government services” => Inappropriate financial tools (calculation of fiscal balances, debt ratios, cash on hands…) • Donors are cautious: implementation of Municipal Funds as a preliminary step => Way to reinforce decentralisation process but no direct dialogue with LG leaders and no real transfer of responsibilities • Donors favour most populated cities (State or regional capitals), which exacerbates financial inequities within a country of a region: direct loan with Central Government guarantee and / or credit line to local banks to finance LG

5. Classic types of financial support for LG Central government Loans / Subsidies Loans / Subsidies Donors Municipal Fund Support of a reliable fiscal decentralization Loans / Subsidies LG & municipal companies Loans Loans Specialized financial institution Local banks Loans / Subsidies Loans Donors Loans Support of LG direct access to financial markets

6. 3 New approach A comprehensive and long term financial approach based on PEFA methodology 1/4 • PEFA methodology as a comprehensive approach: PEFA first used to evaluate financial performances of States (Ex: European Commission => PEFA & budgetary support for EDF project implementation) • PEFA studies for LG can provide: • a global evaluation of local public finances system, • an evaluation on a long term (every 3-4 years) to identify progress (better rating for weak component), • an objective diagnostic to implement an coordinated Action Plan (stakeholders: Central government, LG, national audit office)

7. 3 New approach PEFA study’s place in a reform cycle of Local Public Financial Management (LPFM) 2/4 LPFM Implementation of LPFM reforms LPFM reforms (short & long term Objectives) Financial & risk assessment Recommendations & measures to be taken Identification of main weaknesses Analysis of causes

8. 3 PEFA methodology Six dimensions taken into account 3/4 • Credibility of the budget: the budget shall be realistic and executed as planned, • Comprehensiveness and transparency: complete follow-up of financial risks, communication of budget and financial information to public, • Policy-based budgeting: according to local public policies voted by local assemblies, • Predictability and control in budget execution: existing of mechanisms and procedures, • Accounting recording and reporting: adapted accounting system, perfect recording (paper – numeric) • External scrutiny and audit: certification and / or national public office

9. 3 PEFA methodology Three categories for indicators 4/4 • Outputs of financial management system: immediate outputs (to be compared with expected expenditures and revenues), amount of arrears and “debts”, • Cross-cutting issues of financial management system: capacity to produce full information at every step of budget cycle (budget, execution, final account), • Budget cycle: performance of each system, process and entities participating in the budget cycle of the LG.

10. 4 City of Dakar General context and issues 1/4 General context • Reinforcement of fiscal decentralisation process in Senegal • Improvement of street lighting in poorest districts of Dakar • Need for capacity building for technical and financial staff of Dakar Issues at stake • First direct external lending to a LG in Senegal: processes & mechanisms to define and implement • Bad fiscal reputation of local public sector • No reliable fiscal analysis • IMF constraints: financial conditions to respect to grant an external loan in foreign currency

11. 4 City of Dakar The need for a long term partnership 2/4 • Urban planning: technical support (foreign and local consultants + French city cooperation), training for staff and municipal councillors, geographical information system, • Financial management: PEFA study (with PPIAF support): not a rating but an internal tool to evaluate and improve Dakar’s management capacities and its direct partners,  Financial Management Action Plan: training for staff and executives (financial analysis, investment planning), final objective is direct access to commercial loans / bonds, • Design of a specific financial architecture to grant a loan to Dakar (10 M€ + 7 M USD) without State guarantee

12. 4 City of Dakar PEFA study: a short time process 3/4 • May 2008: presentation of PEFA methodology to Dakar, concept paper, request for financing to PPIAF (SNTA program dedicated to sub sovereign entities), • June 2008: submission to PPIAF, approval, tender for consultants, • July – August 2008: selection of consultants • October 2008: First workshop in Dakar with all stakeholders • End of January 2009: Last workshop – final report – presentation to press & TV Next steps: Financial Management Action Plan (July 2009 – municipal elections took place in March 2009)

13. 4 City of Dakar Impacts of PEFA study 4/4 • Focus on the weaknesses of the local public finances system: shared responsibilities with Central government (administration of public funds, tax collection, accounting system, human resources…) • Identification and prioritization of difficulties to solve • Dedicated team with a clear mandate • Provides useful financial data for City partners: donors, commercial banks, companies, population  Common data base • Reinforce strong dialogue upon fiscal decentralisation (realistic and wishful changes)

14. 5 Next steps PEFA approach as a referent methodology for LG in African countries • PEFA studies to be implemented in Ouagadougou, Cotonou, Lomé, Nairobi and several cities in Ghana, • Opportunities to: • Create a South-South network of “good financial management practices”, • Reinforce fiscal decentralisation processes in Africa, • Change mentalities of donors: financing LG in developing countries through a long term support based on a comprehensive approach, • Support, on a regional basis or at a national level, the creation of Specialised Financial Institutions dedicated to finance LG and provide them adequate support

15. Thank you for your attention 15