Pooled Financing Mechanisms, different ways of cooperation between local authorities with the aim of achieving cost-efficient financing for local infrastructure projects.
Local Government Funding Agency, a type of pooled financing vehicle that is common in Europe, but also used in New Zealand. Typically, majority-owned by local authorities.
Municipal Bond Bank
A pooled financing vehicle used predominantly in the USA. Typically, owned by the state.
A one-off bond issue in which a number of local authorities participate. Each local authority is responsible for their part of the bond issue.
Special Purpose Vehicle, an entity created for a special reason, for example for pooled financing.
Joint and several guarantee
A guarantee where the guarantors are both severally and jointly liable for any claims under the guarantee (all for one, one for all). Used by, for example, Kommunekredit (Denmark) and Kommuninvest (Sweden).
Municipal scoring system
Systems to assess the creditworthiness of local authorities that are used by LGFAs to supervise the financial development of the local authorities that the agency serve.
In a paper now published by Fonds mondial pour le développement des villes (FMDV) entitled “What the world needs now… is local infrastructure investments – Challenges and solutions with a focus on finance” I outline how economic growth can be supported after the financial crisis. Faced with immense challenges such as rapid urbanisation and climate change, local authorities worldwide must be given the tools to support investments in local infrastructure. These investments need to be properly financed. Raised taxes and central government transfers are not enough and raising finance directly from banks and the international capital market can become a costly affair for many local authorities. This is the reason why it is necessary to look closer at the option of Pooled Financing Mechanisms (PFM) in which local authorities come together to jointly, and with solidarity, raise funding in a cost-effective way from the markets. These PFMs or Local Government Funding Agencies also help foster professionalism and transparency within local authorities, as well as contributing to increased local democracy. Read the full paper here.
Lars M Andersson
Next week (Dec. 8 – 12) I will attend a meeting with the Supervisory Board of Agence France Locale in Lyon. The agency has recently got 31 new members, which makes a total of 82 members to date. Read more about Agence France Locale on www.agence-france-locale.fr
From Lyon I will continue to Marrakech, to attend the conference ”Resolutions Africa - Financing African cities: Which agenda, alliances & solutions? ”. The conference is organized by FMDV, Marrakesh City Council and UCLG Africa. I will speak at Roundtable B2 ”Access to capital markets in Africa” on Friday morning next week. Read more about the conference on www.resolutionstofundcities.org
Lars M. Andersson
I have been commissioned to do a pre-feasibility study for the IFC, concerning the possibilities to develop pooled financing mechanisms for cities in South Africa. This week I am in South Africa meeting central government entities, the City of Johannesburg, financial institutions and South African local government organisations.
Lars M. Andersson
In Australia, the Municipal Association of Victoria (MAV) has taken the initiative to create a funding vehicle for the local authorities within the state of Victoria. The new entity has been given the name Local Government Funding Vehicle (LGFV).
The Board of LGFV will consist of independents, council representatives and MAV representatives. Day to day activities is outsourced to subsidiaries of National Bank of Australia.
Moody’s has assigned a Aa2 rating to LGFV. This rating has been given although the participating councils are not liable to one another, but will instead severally guarantee their debt obligations. According to Moody’s “The very high credit quality of the participating councils and the mature and supportive institutional framework under which they operate support the ratings”. It continues: “In addition, councils in the State of Victoria enjoy significant revenue flexibility with full discretion on the setting of property taxes, fees and charges, which together account for almost 70% of their total revenues”.
The rating is also underpinned by the fact that there has been no historical default by a Victorian Council.
30 councils in Victoria, out of 79, will participate in the inaugural bond issuance. In order to keep the rating for later bond issues, LGFV will apply a council eligibility criteria, “i.e. a new council must not have a negative impact on the rating of new or existing bonds”.
According to an article in the Australian Kanganews, “the potential attraction for councils is clear. Reports released by a number of councils refer to analysis conducted by Ernst & Young suggesting the LGFV will improve councils’ cost of funds by around 100 basis points.” Kanganews also writes that “a number of other states are exploring ways for local authorities to move at least some of their debt funding out of the bank sector”.
The new Board of Directors of FMDV, elected in Hyderabad on the 7th of October, is now presented on FMDV’s website.
The Annual Meeting of FMDV has appointed Lars M Andersson as a member of their Board of Directors.
The Fonds mondial pour le développement des villes (FMDV, in English: Global Fund for Cities development) is an organisation for local authorities, by local authorities. It was created in October 2010 at the initiative of Metropolis, United Cities and Local Governments (UCLG) and 34 founding members (cities and city networks). It is an international political organisation that aims to strengthen solidarity and financial capacity by and among local authorities and is complementary to existing mobilisation, coordination and advocacy networks.
FMDV provides technical expertise and financial engineering throughout the urban development project process (definition, fundraising and organisation). It facilitates territorial authorities’ access to financial resources, which match the needs that they themselves have identified, and under the best possible conditions: guarantees, loans, subsidies, grants, financial markets and endogenous mechanisms.
FMDV is based in Paris and is present in Africa, Asia and Latin America via its regional offices. This allows the organisation to work as closely as possible with its members and the territorial projects they are implementing.
FMDV, via its local offices, forms a readily available network of expert and committed international and regional partners, comprising chief financial officers, engineers and technicians from local authorities, universities, NGOs, private groups and international institutions.
FMDV’s website: www.fmdv.net
Lars M Andersson has been commissioned to participate in a group that will assist the Swedish Ministry of Finance to develop methods to follow the financial performance of local authorities.
The findings will be presented in February next year.
Last week (September 15 – 18) was busy. I had interesting meetings in both Lyon and London.
First to Lyon: Agence France Locale will be moving to the beautiful city of Lyon in the beginning of October and the Supervisory Board had its first meeting there September 16. The meeting took place on the 27th floor of the Tour Oxygen. On the same day, there were also a meeting of the Board of the Mother Company of the agency and a subsequent press conference. Read the press release (in French) here.
Then to London the following day, September 17: I was asked to speak at a meeting with representatives of councils interested to join the UK Municipal Bond Agency. My speech included a brief presentation of existing agencies in Europe and elsewhere and a more detailed description of Kommuninvest and Agence France Locale. More specifically I went through the applied guarantees and supervision of members/local authorities. Other external speakers at the meeting where Dr Stefan Vetter (Deutsche bank), Bernard Gordon (EIB), and Jennifer Wong (Moody’s).
I also had the opportunity to meet the team of the Local Capital Finance Company, the newly created entity for the Bond Agency. Read the Local Government Association’s press release issued on September 9, 2014, here.
Lars M. Andersson
During the Resolutions-to-fund-cities conference in Paris in the beginning of July, I presented a paper that explores questions concerning the financing of local government infrastructure investments in western Europe. It especially concentrates around the trend to create local government funding agencies. What are the reasons for this trend? Why do we see this trend now? Why is this development important for growth?
This paper is published on www.resolutionstofundcities.org. Here is a link to the paper.