34 Replies Latest reply: Nov 17, 2016 5:45 AM by larsmandersson RSS

    Pooled Financing for Municipalities

    545477 C4D Extraordinaire

      Thanks to Lars M Andersson and Pavel Kochanov who participated to the City Creditworthiness Academy in Bogota, Colombia (Feb 9-13, 2015), I'm linking here useful references on Local Government Funding Agencies as a way to pool together the borrowing needs of municipalities. It's great to have the author of these notes among the members of our community (hint: ask questions in this space!). And let's add our own knowledge on this topic!

       

      • What the World Needs Now is Local Government Infrastructure Investments (ENGLISH - SPANISH)
      • Finance Cooperation Between Local Authorities in Developing Countries (ENGLISH - SPANISH)
      • Local Government Finance Agencies in Europe (ENGLISH)
      • Comprender el Concepto de Agencia de Financiamiento de Gobiernos Locales (SPANISH)
      • Presentation on Pooled Financing at the City Creditworthiness Academy (SPANISH)
      • Andersson, Lars M, 2015, Municipal Pooled Financing in South Africa – Executive summary, IFC (ENGLISH)
      • Brady, Aidan, Lars M Andersson & Francis Breedon, 2014, The UK Municipal Bonds Agency - Establishment of a Local Government Collective Agency for the issue of Local Authority Bond, English Local Government Association (ENGLISH)
      • Infrastructure Development Finance Company Limited (IDFC), 2010, Market Borrowing by Small and Medium Urban Local Bodies using a Pooled Fund Mechanism (ENGLISH)
      • USAID, 2005, Concept Paper: Introduction to Pooled Financing (ENGLISH)
      • Zipfel, Frank, 2013, France establishes sub-sovereign finance agency: A model for Germany? Deutsche Bank Research (ENGLISH)
      • Zipfel, Frank & Stefan Vetter, 2014, Small is beautiful? Capital market funding for sub-sovereign authorities on the rise, Deutsche Bank Research (ENGLISH)
      • Andersson, Lars, 2015, Pooled Financing: Additional Key Questions and More (ENGLISH)
      • Andersson, Lars, 2013: Creating a Bond (ENGLISH)
      • Andersson, Lars, 2013: Local Cooperation Leads to Growth (ENGLISH)
        • Re: Pooled Financing for Municipalities
          pbrean@crystalus.ca C4D Enthusiast

          Thanks very much for the links to the pooled finance material -- this is a crucially important funding dimension in developing countries and much more can be accomplished, building on efforts to date.  In addition to European and US experiences, I would like to add a Canadian perspective.  Canada has an extensive and varied history and approach to municipal funding, including engagement from national and sub-national actors.  Municipal Finance Authorities (MFAs) exist in numerous provinces, both large (British Columbia) and small (Nova Scotia), with investment-grade credit ratings supported by cross-collateral obligations of the respective member municipalities.  Some MFAs (e.g., in BC (www.mfa.bc.ca)) offer not only pooled funding services, but also pooled investment services (short and long term) to support municipal liquidity and cash management.  Canada has a national agency (PPP Canada (www.p3canada.ca)) to fund and support public-private infrastructure projects, providing both grants and advisory expertise -- all municipal infrastructure projects above a certain dollar threshold must be screened for P3 eligibility prior to federal government funding being approved.  Finally, the Federation of Canadian Municipalities (www.fcm.ca) operates Green Municipal Fund, a unique entity providing funding (grants and concessional loans) and knowledge sharing services for environmentally beneficial municipal infrastructure projects -- funding recipients include both municipalities and their private technology partners.

           

          One of my development finance focus areas is generating greater funding for local infrastructure, through creative engagement of private sector capital, risk appetite, and resources.  Central to this is so-called "blended finance" leveraging limited concessional public funding with significant private funding (both offshore and local).  New approaches are vital in addressing infrastructure funding gaps, as highlighted in my recent article (Mind The Gap: Canada’s Infrastructure Funding Needs - Crystalus), which applies equally to developed and developing countries.

           

          Any further thoughts on practical funding approaches are welcome.

          • Re: Pooled Financing for Municipalities
            dpainter.dp@gmail.com C4D Enthusiast

            I thnk that some of you may be interested in a presentation made by Fernando Gama, Senior Vice President of Evensen Dodge International, last May that expalins in some detail how the U.S. model of pooled financing was successfully adapted for use in Mexico. Please view the attached pptx in presentation mode to appreciate the various steps involved in pooed financing.

             

            The success of this approach in Mexico suggests that other emerging market countries should explore the potential of introducing market based pooled financing mechanisms in their own countries.

              • Re: Pooled Financing for Municipalities
                545477 C4D Extraordinaire

                David Painter, another excellent presentation by Fernando Gama. Quick question: can you clarify the last step highlighted on slide 4 (see below)? It suggests that the fees to service providers come from the Bond Bank (instead of the public entities that receive the proceeds from the bonds). I'm assuming, therefore, that "service providers" refers to transaction-related services (such as credit ratings, legal services, etc) and not infrastructure-related services (such as access to reliable water) that are the ultimate purpose of the bond issuance.

                 

                CapturePooled.JPG

                  • Re: Pooled Financing for Municipalities
                    dpainter.dp@gmail.com C4D Enthusiast

                    Regarding Joshua's question about the meaning of the term "service providers" in the slide 4 diagram included with his post, Joshua's interpretation is correct. The service providers referred to are the ones that facilitate the pooled bond transaction and that is why they are paid by the Bond Bank.  These service providers are typically hired by a Bond Bank on a competitive basis for either a fixed term (perhaps one year to several years for a financial advisor) or for a specific bond issuance (in the case of a specialized lawyer known as a bond counsel).  Credit rating agencies, another service provider, generally have a long term relationship with the Bond Bank because they update the Bond Bank's institutional credit rating annually and provide ratings for each of the Bond Bank's bonds at the time they are prepared for issuance.  The cost of these transaction services are built into the cost of financing that each entity in the pool pays to the Bond Bank, but because there are typically a large number of entities in each pool, the cost of service provider fees to each one is much lower than it would be if they each issued their own bond or sought long term financing from a local bank.

                • Re: Pooled Financing for Municipalities
                  C4D Explorer

                  Gracias por la información,

                   

                  Es muy poderosa la idea de que los municipios se unan para que puedan negociar y lograr economías de escala para la financiación de inversiones.

                   

                  En Colombia se debe recorrer un camino de tipo legal para que se consolide dicha idea.  Las asociaciones de municipios (no financieras) en el pais no han sido exitosas porque carecen de recursos para funcionar y financiar, se tiene dificultades para que los socios cumplan, algunos municipios tienen insolvencia económica y falta liderazgo de las directivos de estas asociaciones.

                   

                  De otra parte, algunos departamentos colobianos tienen Instituciones financieras de desarrollo (conocidas como IFI´s ),aunque otorgan recursos de crédito a los municipios, no cumple con la normatividad, que a nivel del disciplina fiscal, deben cumplir las entidades territoriales, generando en ocasiones desequilibrios fiscales.

                   

                  De otra parte, tal como lo anunicaron en la Academia Créditicia de Bogotá, esperamos que estos nuevos instrumentos sean estudiados por las entidades competentes con el fin de contar con nuevos instrumentos de financiación para el desarrollo local.

                  • Re: Pooled Financing for Municipalities
                    sossougadoss C4D Connoisseur

                    Ok , Before the municipality finance success, the local governance must be democratic, accountable with public account.

                    • Re: Pooled Financing for Municipalities
                      sossougadoss C4D Connoisseur

                      Local government must know that, people they have in charge rights, are in their hands. The must protect them by good infrastructures( good roads, electricity for all, good sanitation, good transformative industries, good social houses for vulnerable people, inclusive society for development. This is why, the world we want now, need the full respect of the human rights of all and everywhere.

                      • Re: Pooled Financing for Municipalities
                        545477 C4D Extraordinaire

                        Find HERE a short paper (UN DESA Working Series, 2012) on "Financing Small-Scale Infrastructure Investments in Developing Countries", which includes a chapter on pooled financing and an appendix with various examples of related infrastructure financing programs.

                         

                        Find HERE another short paper (USAID, 2005) providing an overview of the US state pooled financing facilities including benefits, operations, ownership, management, financial structures, security provisions and credit enhancements. It also provides brief summaries of special lending programs in developing countries that have operations similar to U.S. pooled financing programs.

                        • Re: Pooled Financing for Municipalities
                          545477 C4D Extraordinaire

                          Lars M Andersson, thank you for the reference to the paper on pooled financing in Europe. Any chance you can you share with us some hints as to your work on pooled financing in the coming months? Did you participate to the Paris AFD/FMDV meetings? Any upcoming research? I'm copying Pavel Kochanov in case he can share something from IFC's end as well.

                           

                          Cheers,

                          Joshua

                          • Re: Pooled Financing for Municipalities
                            545477 C4D Extraordinaire

                            I just received from Jean-Francois Habeau, Executive Director of FMDV, copy of the (attached) report from the workshop held in January in Johannesburg on Pooled Financing mechanisms. The workshop was part of FMDV's global program on subnational pooled financing mechanisms (related presentation also attached).

                             

                            Below is a screenshot from the report's table of content - I've highlighted the sections more directly relevant to pooled financing.

                            Index.GIF

                             

                            A multi-stakeholders Task Force has been proposed to follow up on the agenda set at this workshop (see page 26 of the report). The Task Force should gather a group of voluntary and committed municipalities, government/central agencies in South Africa (selected as pilot country), and other interested stakeholders like private banks, pension funds, consulting firms and rating agencies. Its first objective will be to build an exploratory business case identifying clearly the potential, opportunities, obstacles, necessary conditions and possible way forward to integrate Pooled Financing strategies and mechanisms for sub national authorities in the South Africa context. To this end, consultative and cooperative dialogue, data collection and exchange of views and expertise between the core stakeholders appointed will be organized and systematized. Then, depending on the findings of this business case, to be endorsed by the Task Force members and their interlocutors, the second objective of the Task Force would be possibly to prepare a first pilot transaction, by setting up training and awareness sessions, technical assistance, including legal and regulatory advice, and financial engineering.

                             

                            FMDV is an international alliance of subnational authorities and their networks, created by UCLG and Metropolis in 2010. It aims at providing support for developing and implementing suitable operational solutions for sustainable access to financial resources, and the deployment of resilient local economic development policies.

                             

                            Copy to:

                            Lars M Andersson, Pavel Kochanov, David Painter

                            • Re: Pooled Financing for Municipalities
                              545477 C4D Extraordinaire

                              Video-presentation (link below) by our community member Lars M Andersson on Municipal Finance. The section on bonds and pooled financing starts at 7'50" - in case you want to forward the player to that section.

                               

                              Lars M. Andersson explaining municipal finance - YouTube

                              • Re: Pooled Financing for Municipalities
                                khalifeh C4D Expert

                                Thank you dear Joshua

                                 

                                Really you mentioned some helpful references that bear important information.

                                • Re: Pooled Financing for Municipalities
                                  545477 C4D Extraordinaire

                                  Colleagues, I just received this interesting paper on pooled financing, by our friends at FMDV and AFD:

                                   

                                  The Potential Catalytic Role of Subnational Pooled Financing Mechanisms (FMDV, AFD - July 2015)

                                  • Re: Pooled Financing for Municipalities
                                    khalifeh C4D Expert

                                    Thanks Joshua for these useful references. Thanks David. It is important to keep updated.

                                    • Re: Pooled Financing for Municipalities
                                      545477 C4D Extraordinaire

                                      Developing Municipal Credit Markets: Experience with Pooled Finance


                                      ByKirti Devi, Municipal Finance Specialist, Public-Private Infrastructure Advisory Facility (PPIAF), Sub-National Technical Assistance (SNTA) Program

                                      andPavel Kochanov, Senior Municipal Finance Specialist, International Finance Corporation (IFC) Municipal Infrastructure

                                       

                                      Urbanization is a defining trend of our time. In 1990, 13% of the world population was urban. Today more than half of the estimated population of 7.2 billion lives in cities. And this growth has happened in one century. On the upside: Urbanization and economic development are correlated and there are other benefits of density and agglomeration economies. Production is concentrated in cities, which are also centers of demand and social convergence. No country has achieved high income status without significant urbanization.[1]

                                       

                                      However, increasing energy use, accelerating CO2 emissions, and increasing environmental pressures, will accompany GDP growth. Mismanaged urbanization will impose environmental costs that will be difficult to reverse. Unresponsive supplies of infrastructure and affordable housing, and unmet socio-economic needs will result in degeneration and increasing numbers of vulnerable population.


                                      In many countries, this trend is playing-out within the context of increased decentralization and fiscal adjustment, and local governments are increasingly responsible for the provision and financing of public infrastructure for their constituencies. And this has placed a renewed emphasis on the development of local credit markets and Public-Private Partnerships (PPP). Since infrastructure investment tends to be lumpy and long-term, local budget financing on a pay as-you-go basis limits the ability of the city to develop critical infrastructure at the necessary pace. In countries with developed capital markets, such as the U.S., Canada, and Germany, large local governments routinely issue bonds, while municipal pooled finance helps to address the needs of small and medium sized municipalities.


                                      Municipal pooled financing is the most remarkable example of inter-municipal cooperation which indicates of a well-functioning decentralized local self governance system in a country, which  enables economies of scale to work in the public sector across administrative boundaries. The first municipal pooled financing institution was created over a hundred years ago in a country, which is now one of the most decentralized country in the world. In this country about 60% of all general government expenditures are done by local government or 26% of GDP. In addition to economic infrastructure, municipalities in this country are now accountable for social security, health care, education, childcare and elderly care. Local governments in this country are  ot allowed to declare bankruptcy and have an unlimited right to levy taxes on income and property. So, the first municipal pooled institution (KommuneKredit) was created in Denmark in 1899. It is legally organized as an association of Danish municipalities jointly and severally liable for all KommuneKredit obligations. 90% market share.


                                      Today state-level “municipal bond banks” exist in the US and Canada; and national level “specialized lenders for regional and local governments” are found in all Nordic countries (KommuneKredit in Denmark, Kommunalbanken AS in Norway, Kommuninvest i Sverige AB in Sweden, and Municipality Finance plc in Finland), New Zealand, Japan. The French Agency (Agence France Locale: AFL) is the most recent pooled finance entity, created in October 2013. A similar agency in UK is being established now, where municipalities already have much experience with PPPs, especially with utilities.


                                      Developing countries are often constrained in their access to capital markets and private financing. The decentralization context (municipal authority to raise revenue, borrow, pledge assets, hypothecate taxes, etc.), legal frameworks that transcend government change, (property rights, contract enforcement, creditor protection, etc.), institutional and administrative structures and capacities, economic and environmental regulations, public and private sector capacity, depth of local capital markets etc…. all underpin risk assessments and impact the cost of financing. Countries such as Brazil and Colombia have some experience with municipal bonds. In the past The World Bank and USAID have promoted municipal bond issuance – including pooled finance mechanisms - in countries such as Mexico, South Africa, and India.[2] Most recently the new Budget Law that came into effect in 2015 in China, has
                                      allowed provincial level government to issue debt.

                                       

                                      PPIAF through its Sub-National Technical Assistance (SNTA) program, the World Bank’s City Creditworthiness Initiative and the IFC Municipal Infrastructure unit, have been coordinating to improve cities creditworthiness to assist them to access market-based financing, including through the use of pooled finance mechanisms. 

                                      [1] The Commission on Growth and Development finds that, “There is a robust relationship between urbanization and per capita income: nearly all countries become at least 50 percent urbanized before reaching middle-income status, and all high-income countries are 70-80 percent urbanized.” (LINK)

                                       

                                      [2] Daniel Platz (2009). Infrastructure finance in developing countries—the potential of sub-sovereign bonds. Working Paper No. 76. Department of Economic and Social Affairs of the United Nations Secretariat (LINK)

                                      • Re: Pooled Financing for Municipalities
                                        C4D Enthusiast

                                        I found this interesting as about 8 years ago I did an investigation for the Gauteng provincial authority in South Africa on a pooled bond issue for the province .I in the end got unstuck due to:

                                        The credit quality of the potential participating municipalities was widely disparate and would have necessitated a primary credit enhancement to bring them to the same level to prevent the better municipalities subsidising the pricing on the weaker municipalities. This could be done through cessions of their equitable share  without real guarantee fee costs. However testing the proposal in the capital market virtually every potential investor indicated unwillingness to participate in underwriting the issue as they viewed it as too complex  without clear accountability and recourse .and questions about joint and several liability .

                                        I am now in Nigeria looking at the potential of pooled bonds again and would like to have inputs on how others have addressed the issue of a single bond with the participants having different credit qualities

                                        Johan Kruger Afcapconsult  

                                        • Re: Pooled Financing for Municipalities
                                          545477 C4D Extraordinaire

                                          Great paper reviewing innovative local credit enhancement entities and techniques that help mobilize domestic commercial debt resources for sub-sovereign finance. It includes financial intermediary institutions that pool sub-sovereign debt to fund in the commercial markets. (LINK)

                                           

                                           

                                           

                                          Screen Shot 2015-09-13 at 10.02.27 AM.png

                                          • Re: Pooled Financing for Municipalities
                                            545477 C4D Extraordinaire

                                            Highly relevant blog on pooled finance (LINK), by community members Kirti Devi and Pavel Kochanov

                                             

                                            Abstract: Today, state-level “municipal bond banks” exist in the US and Canada, and national level “specialized lenders for regional and local governments” are found in all Nordic countries (KommuneKredit in Denmark, Kommunalbanken AS in Norway, Kommuninvest i Sverige AB in Sweden, Municipality Finance plc in Finland), as well as in New Zealand and Japan. The French Agency (Agence France Locale: AFL), created in October 2013, is the most recent pooled finance entity. A similar agency in the United Kingdom — where municipalities already have deep PPP experience, especially with utilities — is now being established.

                                            CaptureBlog.GIF

                                            • Re: Pooled Financing for Municipalities
                                              larsmandersson C4D Explorer

                                              First Study Tour of European Agencies for Pooled Financing

                                               

                                              A study tour to Agence France Locale in Lyon and Kommunekredit in Copenhagen took place 3 – 5 November. The participators were from South Africa, Peru and Colombia. The purpose of the trip was to study two agencies for pooled financing for local authorities and draw experiences for projects to introduce pooled financing in the country of the participators.

                                               

                                              The study trip was arranged by IFC - International Finance Corporation (initiation and concept), FMDV – Fonds mondial pour le développement des villes (mobilisation of participants and organisational support), and PPIAF/SNTA (grant financing). I contributed with the overall design of the program and I also wrote the accompanying informational material.

                                               

                                              A short video from the study tour has been produced and here is the link to it: https://www.youtube.com/watch?v=p9txHFvKEdU&feature=youtu.be

                                               

                                              Lars M Andersson
                                              Twitter: @LarsMarten

                                              • Re: Pooled Financing for Municipalities
                                                545477 C4D Extraordinaire

                                                Brief reference to pooled financing from the new Public-Private Partnership Knowledge Lab, which has a section on Municipal PPPs. Nothing particularly new on pooled financing for readers of this blog, however a useful reminder that pooled financing can apply to PPPs as well as to other financing mechanisms such as bonds.

                                                PPPs.GIF

                                                • Re: Pooled Financing for Municipalities
                                                  545477 C4D Extraordinaire

                                                  Factsheet on Pooled Financing Mechanisms for the New Deal (UNDP) - focus on fragile and post-conflict countries.

                                                  Screen Shot 2016-02-15 at 11.29.10 AM.png

                                                  • Re: Pooled Financing for Municipalities
                                                    545477 C4D Extraordinaire

                                                    As we discuss pooled financing, I thought it useful to include here a reference to a great book (available HERE), Dealing with Public Risk in Private Infrastructure, edited by Tim Irwin, Michael Klein, Guillermo Perry, and Mateen Thobani (World Bank, 1997). While not directly related to pooled financing, the book is a very useful guidance on ways for the public sector to reduce risk, and how to value/budget for risks it assumes.

                                                     

                                                    Screen Shot 2016-03-21 at 6.14.51 PM.png

                                                    • Re: Pooled Financing for Municipalities
                                                      545477 C4D Extraordinaire

                                                      A new Handbook on Urban Infrastructure Finances has just been released, authored by Dr. Julie Kim, New Cities Foundation. The Handbook discusses innovative financing models and critical roles stakeholders have to play in dealing with the global infrastructure financing crisis. Beginning on page 89, a section is dedicated to Local Government Funding Agencies - Multi-City Pooled Approach, drawing also from work by our community member Lars M Andersson.


                                                      Screen Shot 2016-05-02 at 11.17.11 PM.png

                                                      • Re: Pooled Financing for Municipalities
                                                        545477 C4D Extraordinaire

                                                        Presentation on pooled financing delivered by David Painter at the City Creditworthiness Academy in India, May 2016: LINK. It includes examples of transactions from Mexico.

                                                        Screen Shot 2016-05-11 at 3.00.32 PM.png

                                                        • Re: Pooled Financing for Municipalities
                                                          545477 C4D Extraordinaire

                                                          Just run into this 2013 Options Assessments by Ernst&Young for the Department of Regional Australia (LINK). It provides advice on options for aggregating debt finance sought by the local government sector in Australia. It identifies feasible models for debt aggregation (including models for a collective financing vehicle), explore the relevant design issues, and develop the preferred options.

                                                           

                                                          Screen Shot 2016-06-15 at 5.23.58 PM.png

                                                          • Re: Pooled Financing for Municipalities
                                                            larsmandersson C4D Explorer

                                                            UN-Habitat has recently published Finance for City Leaders Handbook. Pavel Kochanov and I have written a chapter in the book named Municipal Pooled Financing Mechanisms, where we present an overview of pooled financing entities and their functions. I enclose the chapter.

                                                             

                                                            Lars M Andersson