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.
External Resources
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.).
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.
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.
Dar es Salaam: 
Loans granted by the local government loans board
Loans granted by the local government loans boardSpecial 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.
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.)
Croatia: Bond issuances by municipalities
Bond issuances by municipalitiesBucharest: Borrowing through bond issuance
Borrowing through bond issuanceThe guarantee is based on the ability to directly capture revenue streams generated by the entity covered by the guarantee, in the event of default
Advantages:
Risk mitigation thus providing further incentive to invest in a context of insufficient financial information and opacity ; opportunity to create a reserve fund for guaranteed entities whose revenue streams are unsufficiently known
Drawbacks and precautions:
May represent a disincentive to get to know local governments who borrow money, the way they operate and the determining factors of their financing equilibrium ; need to identify clearly revenue streams
Prerequisites:
Suitable Regulatory Framework
Operation:
Guarantors can be federal governments, local governments, international insitutions or private or public entities operating in the same industry.
Guarantees provided for all types of loans - bank loans, bond issues, etc.
Guarantors' resources.
Loans guarantees protect creditors acting as a hedge against default risk. It is therefore a form of insurance that enhances credit quality and decreases credit cost. Guarantees can be provided by federal governments, by local governments themselves, international institutions or the private sector.
Advantages:
Risk mitigation thus providing further incentive to invest in a context of insufficient financial information and opacity ; opportunity to create a reserve fund for guaranteed entities whose revenue streams are unsufficiently known
Drawbacks and precautions:
May represent a disincentive to get to know local governments who borrow money, the way they operate and the determining factors of their financing equilibrium ; need to identify clearly revenue streams
Prerequisites:
Suitable Regulatory Framework
Operation:
Guarantors can be federal governments, local governments, international insitutions or private or public entities operating in the same industry.
Guarantees provided for all types of loans - bank loans, bond issues, etc.
Guarantors' resources.
When local governments partner with the private sector to finance and build new infrastructures, they created a public private partnership. Those partnerships are set up in order to provide public services that meet the public's expectations while transferring part of the risks to the private entity: the most transferred the risk, the further away from the project the local government. Hence, local governments are financially involved (through subsidies, guarantees, etc.) but do not bear the risks associated with project management and delivery risks.
Advantages:
Control by the public entity.
Risk transfer, especially delivery risks and risks associated with project management.
Drawbacks and precautions:
Lowest level of externalization, where the public body is still responsible for project management, thus bearing a significant part of operational and maintenance risks, time-consuming and rigid procurement procedure and direct budetary impact.
When the level of risk transfer is too high, local goverments can be kept away from the project and lose control over operations.
Prerequisites:
Suitable Regulatory Framework.
Success factors:
Use of technical engineering and socio-economic expertise : when the public authority is not competent to do it, it has to seek assistance from specialized experts while preventing any conflict of interest.
Operation:
Ownership: Public and private entities work hand-in-hand.
Uses: Investment attached to the public private partnership.
Sources: Own or external resources.
Santiago de Chile: Urban highway concession
Urban highway concessionWhen local governments partner with the private sector to finance and build new infrastructures, they created a public private partnership. Those partnerships are set up in order to provide public services that meet the public's expectations while transferring part of the risks to the private entity: the most transferred the risk, the further away from the project the local government. Hence, local governments are financially involved (through subsidies, guarantees, etc.) but do not bear the risks associated with project management and delivery risks.
Advantages:
Combines the flexibility of private organizations with public control over decision making.
Risk transfer, especially delivery risks and risks associated with project management.
Drawbacks and precautions:
Limited risk transfer.
When the level of risk transfer is too high, local goverments can be kept away from the project and lose control over operations.
Success factors:
Use of technical engineering and socio-economic expertise : when the public authority is not competent to do it, it has to seek assistance from specialized experts while preventing any conflict of interest.
Operation:
Creation of a company with public and private capital funding.
Investment attached to the public private partnership.
Own or external resources.
When local governments partner with the private sector to finance and build new infrastructures, they created a public private partnership. Those partnerships are set up in order to provide public services that meet the public's expectations while transferring part of the risks to the private entity: the most transferred the risk, the further away from the project the local government. Hence, local governments are financially involved (through subsidies, guarantees, etc.) but do not bear the risks associated with project management and delivery risks.
Advantages:
Balanced distribution of risks due to transfer of the construction risks amongst others ; lifecycle cost approach ; guarantee of performance ; single rent payment for a lower impact on budget.
Risk transfer, especially delivery risks and risks associated with project management.
Drawbacks and precautions:
In case of abusive use, potential desequilibrium in risk distribution, cumbersome and expensive process for candidates.
When the level of risk transfer is too high, local goverments can be kept away from the project and lose control over operations.
Success factors:
Use of technical engineering and socio-economic expertise : when the public authority is not competent to do it, it has to seek assistance from specialized experts while preventing any conflict of interest.
Operation:
Contract by which a local government entrusts a third party with a broad mission related to investment.
Investment attached to the public private partnership.
Own or external resources.
When local governments partner with the private sector to finance and build new infrastructures, they created a public private partnership. Those partnerships are set up in order to provide public services that meet the public's expectations while transferring part of the risks to the private entity: the most transferred the risk, the further away from the project the local government. Hence, local governments are financially involved (through subsidies, guarantees, etc.) but do not bear the risks associated with project management and delivery risks.
Advantages:
Transfer of operational risks (in addition to construction risks) to the private sector ; acceleration of project implementation ; low impact on public budget.
Risk transfer, especially delivery risks and risks associated with project management.
Drawbacks and precautions:
Additional financing cost, inability to cover independently unprofitable areas ; public control more remoted.
When the level of risk transfer is too high, local goverments can be kept away from the project and lose control over operations.
Success factors:
Use of technical engineering and socio-economic expertise : when the public authority is not competent to do it, it has to seek assistance from specialized experts while preventing any conflict of interest.
Operation:
A franchise is a management system in which the local government entrusts the co-contracting party with construction work and allows it to provide their services at their expense for a specified period.
Investment attached to the public private partnership.
Own or external resources.
Financial support.
Advantages:
Subsidies can mobilize more external resources by acting as a leverage, especially on the private sector ; subsidies can also serve as guarantees.
Prerequisites:
Be eligible for the subsidy.
Operation:
Uses: Investment linked to the subsidy.
Sources: Resources from the entity providing the subsidy.
France Axione Infraestructure: Financing infrastructure through project bonds
Financing infrastructure through project bondsDonations from individuals, philantropic foundations, non governmental organizations.
Operation:
Ownership: non profit or philantropic foundations ; non governmental organizations.
Uses: Investment linked to the donation.
Sources: Donations.
