Borrowing

Bond issues
Description

The goal is to restructure private or partly private properties in a given area, with public intervention (Regulation, authorization, financing, and even targeted expropriations), in order to maximize their usefulness.

Advantages

Need to draw long term domestic and international savings to finance public investment needs ; availability and transparency of financial information.

Drawbacks and precautions

Significant credit needs; potential constraint  due to the fact capital demand must meet supply on financial markets, particularly regarding interest rates,  maturity or repayment profile ; available and transparent financial information.

Prerequisites

Suitable Regulatory framework ; sovereign debt market at least ; local government's rating ; availability of financial information and transparency.

Success factors

Provide investors with as much information as possible, with the highest level of transparency in order for them to be able to assess the investment opportunity and the optimal combination  interest rate /risk ; be surrounded by qualified professionals (counsellors, sale agents, legal experts).

Operation

Operating: Recurring investment and project financing.

Main resources: Long term savings that can/shall be invested by assets managers , particularly institutional investors (banks, insurance companies, pension funds, mutual funds, etc.)

Dedicated funds
Description

Special purpose vehicules are only maintained until completion of the mandate for which they were created. These entities lend to local governments granted that the investments involved fall within their scope.  Such funds are created to finance income generating activities, not activities with intended positive externalities. They also can acquire stakes thus investing in equity.

Advantages

Focuses on a specific area which results in a higher level expertise ; Acts as leverage to involve the private sector in activities of general interest.

Drawbacks and precautions

The main disadvantage lies in the necessary identification of income generating projects and not only projects generating positive externalities.

Prerequisites

Suitable Regulatory framework ; Income-generating activities.

Operation

Ownership: Public (State and/or local governments), Private, Public-Private.

Operating: Interventions restricted to the special purpose vehicule's pre-defined focus area.

Main resources: Bond issuance, credit lines/ loans from international financial insitutions (World Bank, etc.) or national institutions.

Government agencies
Description

As opposed to "bond banks", governmental agencies rarely or never use financial markets to meet their financial needs.  Most of their lending resources stem from federal or local governments’ budgets, through public subsidies and other transfers.

Advantages

Needs are pooled and  the allocation of funding is based on needs and priorities ; such agencies may enable local governments to raise additional external resources by playing a leveraging role, especially on the private sector.

Drawbacks and precautions

Mechanism which hardly provides any incentive on either the borrower nor the lender sides ; financial constraint not important and a disincentive  ;  the main limitation lies in the difficulty for the State or the local government to tap enough resources to meet investment needs.

Prerequisites

Suitable Regulatory framework.

Success factors

A framework for action cleary defined, especially to coordinate the joint work between local governments and state administrations.

Operation

Ownership: Public (State)

Operating: Recurring investment and project financing.

Main resources : transfers and State and local governments' subsidies.

Bond banks
Description

A bond bank is a financial intermediary that borrows on financial markets and then lend the money collected to local governments.  The concept of Bond bank conveys the idea of pooling the local governments' credits to build a portfolio that allows gains from economies of scale and risk diversification, ultimately ensuring high credit standards for the Bank.

Advantages

Creation of loan portfolio allocated to local governments - the size of bond issues - allowing economies of scale, risk diversification and asset liquidity for investors ; greater legibility for local governments as a whole ; government agencies’ expertise in local governments’ finance ; little or no transformation needed ; no explicit State guarantee needed ; government agencies as financial institutions are able to raise more external resources by leveraging the private sector investment.

Drawbacks and precautions

Requires building equity (particularly if local governments become shareholders) ; dependency on financial markets ; potential risk of creating a monopolistic situation ; guarantee facilities.

Prerequisites

Suitable Regulatory framework; Sovereign-debt market ; Bond bank's rating.

Success factors

Relationship of trust between investors (bond bank) and local governments ; stable rating ; diversified loan portfolios ; a combination risk/interest rate ensuring the sustainability of credit activities.

Operation

Ownership: Public (State and/or local governments), Private, Public-Private.

Operating: Recurring investment and project financing.

Main resources : bond issues on financial markets (domestic and international), own equity share (long term savings) ; credit lines and loans from other international financial institutions  (World Bank, International Finance Corporation , etc.) and sometimes states' resources.

Retail banks
Description

The retail bank 's main activity is to collect deposits and then lend that money to borrowers while providing other banking services. Retail banking acts as an intermediary between lenders with surplus financial resources and borrowers with financing needs.

Advantages

Economies of scale, including in the collection and analysis of financial data; opportunity to diversify the bank's credit activities ; potential grouping or splitting of the distribution systems ; more flexible borrowing conditions.

Drawbacks and precautions

Banks' ability to turn a short term and liquid resource into a long-term illiquid loan.

Prerequisites

Suitable Regulatory framework; available and sufficent resources to lend to local governments.

Success factors

Relationship of trust between banks and local governments ; Development of the bank experstise in local government finance (especially credit analysis) ; a combination risk/interest rate ensuring the sustainability of credit activities; banks's ability to attract local governments' deposits.

Operation

Ownership: Public (State) and Private. 

Operating: Recurring investment and project financing.

Sources: short-term, liquid investments and deposits; credit lines extended by national or institutional financial institutions (AFD, EIB, FINDETER, etc.).