Pooled Financing in Bulgaria

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The National Association of Municipalities in the Republic of Bulgaria (NAMRB) has given me the assignment to do a first study of the possibilities to introduce Pooled Financing Mechanism (PFM) in Bulgaria. I presented the study in Sofia on February 24 in front of 500 representatives of Bulgarian municipalities, in conjunction with the Annual Meeting of the NAMRB. Further discussions on the same subject took place the following day at NAMRB’s headquarters.

In conclusion, I found that the introduction of PFM in Bulgaria is feasible and recommended next steps. Here you will find the executive summery of my study.

Lars M Andersson

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Sweden and Norway exceptions in local authority borrowing

Local authorities are responsible for a large part of public infrastructure investments in all European countries. These investments are supposed to have a long life, let’s say 30-40 years or more. When borrowing to finance these capital expenditure most European local authorities prefer loans with a duration that corresponds to the life of investment. However, limitations in the credit markets can sometimes make it difficult to borrow beyond 20 – 25 years.

In France, recent trends show that more and more local authorities ask for 20 years or more. The same preference for long with long duration can be seen in the UK. Aidan Brady, chief executive of UK Municipal Bond Agency, said the other week in an interview that “A lot of authorities like to borrow 40 to 50 years”.

In Sweden, the situation is very different; many municipalities tend to borrow short-term. Kommuinvest’s lending during the first half of 2015, ”the average period for which capital… was tied up was 2.3 [years]” (Kommuninvest’s Interim Report 2015). The CEO of the Norwegian Kommunalbanken, Kristine Falkgård, recently wrote an article where she points out that municipal short-term borrowing increased during the last year to around NOK 70bn. It is easy to agree with Falkgård’s opinion that substantial refinancing risks could arise from financing long-term investments with short-term loans.

Today, the difference in interest rates between short-term and long-term is relatively modest, so it is not easy to see the rationale of choosing short-term solutions. Even if the interest rate differences were bigger, local authorities should evaluate and be more transparent with the risks they are taking in their borrowing operations, just as Falkgård writes in her article.

  • Read Kristine Falkgård’s article in Kommunal Rapport (in Norwegian)
  • Read the interview with Aidan Brady and Sir Merrick Cockell in Room 151

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UK Municipal Bond Agency

Read about the latest development of UK Municipal Bond Agency in the article in Public Finance: Municipal bond agency opens for business.

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First Study Tour of European Agencies for Pooled Financing

participatorsLast week’s study trip to Agence France Locale in Lyon and Kommunekredit in Copenhagen (3-5 November) is concluded. It was a rich and intense experience with participation of representatives from South Africa, Peru and Colombia. Thank you all for your input. 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.

PavelThe study trip was arranged by the 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.YVES ET MOI

Finally, a big thank you to Yves Millardet and Johnny Munk, and their colleagues at Agence France Locale and Kommunekredit, for their hospitality and very informative presentations of the two agencies.

Lars M Andersson

JOHNNY ET MOI

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Financement des collectivités locales en Europe: défis et opportunités

L’Europe est aujourd’hui confrontée à un certain nombre de défis, qui tous influencent nos collectivités locales.

Le principal sujet à l’agenda du monde d’aujourd’hui est la question climatique, sujet qui sera également le thème de la conférence mondiale qui se tiendra à Paris en Décembre prochain. Il s’agit peut-être de notre dernière chance de trouver une solution commune avant que les conséquences soient irréversibles. La lutte contre le changement climatique exige, entre autres choses, des investissements et des ajustements de l’action publique.

L’évolution démographique va conduire à une population plus âgée en Europe. Moins de personnes actives pourront soutenir un groupe croissant de retraités. Dans le meilleur des cas, la base d’imposition sur le revenu augmentera lentement, dans le pire, elle n’augmentera pas du tout. Il y aura également un besoin croissant de soins et de soutien pour les personnes âgées, cette charge étant souvent de la responsabilité des collectivités locales.

L’urbanisation est une tendance mondiale. En Europe, c’est un développement très ancien, mais il continuera.

Cela produit une série de questions difficiles qui doivent être abordées :

  • D’une part : les grandes villes ont un besoin d’augmenter rapidement les services publics et les investissements dans les infrastructures. Il y a souvent un besoin urgent d’améliorer les systèmes de transport et de construire des logements. Il y a également besoin de construire de nouvelles écoles ainsi que des crèches. Cela produit une pression supplémentaire à l’augmentation des plans d’investissement et à la nécessité d’avoir accès aux meilleurs financements possible.
  • D’autre part : la nécessité de fournir des services dans les collectivités locales rurales avec moins de revenus d’impôts et moins de dotations. En outre, c’est un défi de trouver la main-d’œuvre pour la production des services publics nécessaires.

En plus de ces défis, nous assistons actuellement à l’un des plus grands flux de réfugiés vers l’Europe de l’époque contemporaine.

La capacité de trouver des remèdes aux problèmes auxquels nos sociétés sont confrontées dépend de la croissance économique en Europe et ailleurs.

Au centre du débat sur la croissance, nous trouvons la nécessité de rétablir le niveau de l’investissement là où il était avant les crises de 2008-09, quand il était à un niveau 15% supérieur à celui d’aujourd’hui. Il est maintenant un fait reconnu que les investissements d’infrastructures sont le moyen le plus important pour obtenir une économie prospère mondiale. Cela est vérifié par le plan d’investissement du président de la Commission européenne Monsieur Junker et par les publications récentes du FMI. Mais le problème va plus loin que les faibles niveaux d’investissement dans de nouvelles infrastructures, la qualité des actifs publics existants se détériore aussi. L’Europe, et d’autres parties du monde ont besoin de nouveaux investissements mais également de maintenir leurs patrimoines.

Les collectivités locales jouent un rôle crucial dans l’économie. En France, les collectivités locales sont responsables de plus de 70 pour cent de tous les investissements publics, alors qu’en Suède, ce chiffre est légèrement inférieur. Il est donc évident que la question des investissements publics est étroitement liée aux collectivités locales et leurs possibilités pour ces entités de maintenir une taille suffisante des programmes d’investissement. L’une des questions clés est le financement.

En Suède, l’agence de financement des collectivités locales Kommuninvest a été créée en 1986 et a joué un rôle important dans la fourniture de crédits pour les investissements des collectivités locales suédoises. Kommuninvest a réduit sensiblement le coût de l’emprunt pour les collectivités locales et a donc contribué à renforcer le niveau des investissements locaux.

L’Agence France Locale a été créée en Octobre 2013, en utilisant l’inspiration de l’agence scandinave ajustée à la réalité française. Dans un temps très court, plus d’une centaine de collectivités locales françaises sont devenues membres de l’Agence France Locale. Récemment, l’agence a lancé avec succès sa première émission obligataire et, aussi, ses premiers prêts aux collectivités locales. Le 30 septembre, le conseil d’administration a décidé d’une nouvelle augmentation de capital et ce sont 12 collectivités supplémentaires qui intègreront l’AFL.

Les agences de financement des collectivités locales appuient la croissance et c’est important de trouver des moyens pour améliorer leurs possibilités de servir les collectivités locales dans leur quête de réaliser les programmes d’investissement.

La question fondamentale est comment les collectivités locales et les agences de financement peuvent appuyer la croissance et quels sont les défis pour ces agences aujourd’hui et demain?

Lars M Andersson

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Expert Panel on Alternative Metropolitan Municipal Financing Models

It is with much excitement that I have accepted to be one of the experts on a panel involved with the project of proposing alternative municipal financing models for metropolitan cities in South Africa. The project is led by South African Cities Network (SACN) in partnership with the City of Tshwane.

The background of the project is described as follows by its originators:

”In a context of decentralisation coupled with rapid urbanisation which is characterised by growing levels of poverty and informality, metropolitan municipalities’ are increasingly concerned about their capacity to deliver on their expanding functions and demands. While on the one hand cities are increasingly focal and acknowledged as important engines of growth and development, they also find themselves under extreme financial pressure which jeopardizes their mission. And while there is legitimate pressure for cities to improve their own efficiencies and maximise their revenue generating capacity, it is also increasingly evident that the current metropolitan municipal financial model is inadequate and unsustainable, using a grant system intended to plug unplanned deficits as a crutch for a financing model that is itself increasingly deficient, and also requiring creative rethinking about the kinds of appropriate innovations that could place metros on a more sustainable path to delivering development for the present as well as the future.”

The first meeting of the expert panel took place at the Rockefeller Foundation’s Bellagio Conference Center at the Como Lake in Italy during September 23 – 25. Among the participants were representatives from SALGA, the Financial and Fiscal Commission, the City of EThekwini, UN Habitat, FMDV, Japan International Cooperation Agency, and from the organisers: SACN and City of Tshwane. It was three days of intense work that laid a good foundation for the continuation of this worthwhile project.

bellagioimage

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Paris and London

Last week, Agence France Locale had their first Conseil d’orientation stratégique in Paris. The agenda included discussions about ethics and accountability, communication, studies and training in financial matters, and international cooperation. Mme Lebranchu, Minister for Decentralisation and the Civil Service joined us in the closing of the meeting and expressed her support for the agency. She said: “You have not only managed to create this Agency in record time, but you also helped restore the image of local authorities. This Agency is a tool for trust between the state and the local authorities.”

Jacques Pélissard, former Chairman of the Association des Maires de France and one of the founding members of Agence France Locale, Mme Lebranchu, Minister for Decentralization and Civil Service and Lars M Andersson

Jacques Pélissard, former Chairman of the Association des Maires de France and one of the founding members of Agence France Locale, Mme Lebranchu, Minister for Decentralisation and Civil Service and Lars M Andersson

From Paris I went to London for meeting with, among others, Commonwealth Local Government Forum and Local Government Association. Furthermore, I met with Sir Merrick Cockell, Chairman of the Board, and Aidan Brady, CEO of UK Municipal Bond Agency. They gave me an update of the activities of the agency and showed me their new offices.

UK Municipal Bond Agency's offices located next to Westminster Abbey

UK Municipal Bond Agency’s offices located next to Westminster Abbey

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Pooled financing an option for South African cities?

I have completed my IFC assignment to do a pre-feasibility study about the possibilities to introduce pooled financing mechanisms (PFM) in South Africa. My conclusion is that many of the prerequisites for PFM are present. It could be a way forward to further expand the cities’ financing activities on the capital market and add increased flexibility and diversification in the funding operations for creditworthy municipalities such as metros and some secondary cities. For other municipalities to become a part of PFM intense efforts must be made to increase their creditworthiness and management capacity.

The executive summary can be found here.

For more information: send me a mail to lars.m.andersson[at]maproductions.se

Lars M Andersson

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An investment plan for Europe – without those who really matters

European investment has decrease significantly since the years of the financial crises. This much is evident in the EU Commission’s “An Investment Plan for Europe”, published in November last year. It is, they argue, now crucial that get investments back on track and reverse a, post 2007, a 15 percent downturn of investments. The aim has to be economic recovery, job creation, long-term growth and competitiveness. One could not agree more.

IMF’s World Economic Outlook (Oct. 2014) is in line the reasoning of the EU Commission. The authors of the outlook argue that there is a huge need for public investments, and that now is the time for action. Disconcertingly, public investments have fallen over the past three decades. But the problem reaches further than low investment levels in new infrastructure, the quality of existing public asset are deteriorating. Europe, and other parts of the world need to ramp up both new investments and maintain old ones.

Something needs to be done, but who shall do it? The EU Commission’s Investment Plan for Europe has no mention of the role of local authorities, beyond one or two fleeting references to regional authorities having a role to play. It is as though cities and municipalities have been erased from the world of investments. This despite the fact that they totally determine the level of public investments in Europe. In a recent study of the OECD local government are responsible for close to 70% of all public investments.

This omission would have been more understandable if the situation for investments on the local level were back on track. But this is not the case. In many European countries, local authorities are reliant on commercial banks for the financing of local infrastructure investments. With the up-coming Basel III rules this market is changing. Banks will be required to strengthen their capital base and, in order to keep their profitability, they will need to focus on higher yielding asset than municipal loans on their books. We have already seen that banks have significantly raised margins and shortened maturities on loans to local authorities. This does not stimulate local long-term investments.

The answer from local authorities in more and more countries is to finance local infrastructure investment through their own agencies. These agencies pool the financing needs and by that reaching sufficient volumes to raise money in the capital markets with the use of bond issues. The Scandinavian and Dutch local governments funding agencies have already for a long time successfully supplied local authorities with cost-efficient financing. Now, two new agencies exist in Europe: Agence France Locale in France and Local Capital Finance Company in the UK

But now these local government agencies that have served its members so well are subject to deliberations if they should be subject to high capital claims within the Basel III rules. The major part of these agencies has guarantees signed by their members in place. Still, the regulators are looking for these agencies to have a 3% so-called leverage ratio, which would force many to substantially increase their capital. One wonders why, since the both guarantees and stable end borrowers ensures sustainable business models. If the proposed level of capital is finally established, it will means overcapitalised agencies that need to invest the increased capital in financial assets, which at times have proven risky. It would also tie up more public capital that otherwise could be used for investments in local infrastructure.

A real push for infrastructure investments should focus on the role of local authorities and their role to build growth from the foundation. It should also support the local government funding agencies and provide them with long-term beneficial working conditions. In the Commission’s Investment plan for Europe it is stated it is “necessary to improve the regulatory environment for investment”. Why don’t they start with the local government funding agencies?

 

Lars M Andersson

 

 

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Agence France Locale’s first bond issue

logga AFLThe French local government funding agency, Agence France Locale, has successfully launched its first bond issue. The transaction of €750m was quickly oversubscribed; firm interest of over € 1.3bn was shown within the first hours after the launch. The bonds have a maturity of 7 years with a spread of OAT+22bp. The proceeds of this transaction will be on-lent to French local authorities for the financing of local infrastructure investments.

See the press release here.

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