22 May 2006
Following is a short summary and assessment of a World Bank report titled “"Sub-National Development Program," by Aldo Caliari of the Center of Concern.
The program raises concerns about its potential to encourage further privatization and high levels of indebtedness by sub-national entities. It is not clear that, in spite of the lack of national government guarantee this guarantee will not have to be provided in the case of a default (for example, direct lending by the private sector to Argentinean provinces had to be assumed by the National Government after the 2001 crisis). Further concerns are raised by the fact that some FTAs currently under negotiation, such as the Colombia–US, make rules protecting foreign investors applicable not only to sovereign debt, but also to sub-national sovereign debt.
For an explanation of problems raised by these rules please see
Sub National Development Program
The Sub-National Development Program being proposed by the World Bank Group is an effort aimed at boosting direct engagement at the state/municipal level, and is intended to build on the IFC Municipal Fund, initiated in 2003. Other arguments provided are along the lines of the increased responsibility of sub-national authorities for providing public goods and their limited financial (and related technical) capability to fulfill this role. The nub of the projected program is the provision of technical assistance and financing for sub-national entities without sovereign guarantees, and preferably in local currency. Though the program’s actual structure is yet unsettled, it would be an IBRD-IFC risk-sharing venture, formulated to avoid violating the IBRD’s constitutional limitation on lending directly to sub-nationals.
The report notes as justification the Group’s historical support for increased decentralization, but lack of a tool combining policy advice with financial support directly at the sub-national level. Demand for non-sovereign borrowing products has furthermore been rising, with several regional development banks extensively and successfully involved in the sector; it is thus apposite the Bank ‘consolidate and scale up’ financial support and institution building, so as to create ‘viable and fiscally responsible sub-national entities’.
Integral to the plan is the strengthening and deepening of domestic resource mobilization through the development of local financial markets; it is envisioned, as a result, that infrastructure services – the focus of efforts – would be able to be better delivered in terms of access, quality and affordability. In time, it is projected, this strategy would lead to entities’ self-sufficiency through their increased access to private finance; as such, the technical assistance side of the program (see below) is key. It should be noted the proposal targets public utilities as well as municipal/state authorities. Financing – either guarantees (preferred) or loans – would be provided under market-based conditions.
The aim of the technical assistance side of the program would be to strengthen financial management, build institutional capacity, improve investment planning, support policy analysis and reform, augment the legal and regulatory environment, advise on specific transactions and prepare projects for financial support. While privatization is not mentioned as such, this appears the clear direction of the project as references to expanding the relevant entities’ operations, mobilizing local financial markets, improving operational management tend to be associated, in Bank’s speech, with increased private sector participation in operations. The possibility of linking the program to existing technical assistance facilities like the PPIAF confirms this proposition.
The proposal notes focus would be on middle-income countries who have progressed with decentralization and capital market development, and ‘seek further assistance to reduce … dependence on central government financing’, a recurrent theme throughout the paper. Countries examined in the preliminary survey leading to formulation of the proposal include Brazil, China, India, Mexico, Poland, Russia and South Africa; these form a good representation of the sort of markets that would be targeted by the program. The report further notes that levels of institutional preparedness and creditworthiness of potential clients would limit actual engagement relative to potential market size.
As regards the specific mechanism for ‘renewal and modernization’ of these entities, the report notes that where large regional and local governments exist, such as in Russia or Brazil, scope lies for direct Bank engagement. In other cases, it is more appropriate to work through ‘sound, well-managed’ development finance institutions (DFIs). Though not specifically articulated, the same approach presumably applies to public utilities also. The report notes a mixed record working with DFIs, critical where a strategic approach to developing capital finance markets was absent or preferential access to public funding existed.
An important feature of the program would be integration of the technical and financial sides of operation. It appears activities carried out under the former would be framed as a pre-requisite for use of resources under the latter. The report suggests that depending on country circumstances, program activities could be linked with other Bank instruments; technical assistance, indeed, is explicitly mentioned as complementing existing Bank programs. Further to those mentioned above, limiting tariff regulation/subsidies, bettering collection/treasury systems, and refining capital market regulation/prudential supervision are all listed as possible technical assistance activities.
An important principle of the program is the requirement for sovereign consent before country deployment. It should be noted consent would be sought generally, with each sub-national entity chosen by the Bank independently. It is stressed, furthermore, that the legal and regulatory environments must be conducive to success; only those entities with the best prospects for ‘improved financial viability and sustained development’ would be supported. Again, it should be pointed out these characteristics tend to be associated, in the Bank’s track record, with the de-regulation and adoption of market-based principles and practices. The report notes that, in terms of loan preparation, the program is likely to be less cost-efficient than other programs.
In terms of structure, it is expected the program would involve effective integration of IBRD and IFC sub-national operations. The technical assistance funds provided by the Bank would come from the IBRD’s DGF (Development Grant Facility) and an IFC Facility. The program’s financial transactions would be subject to review and approval by the IFC Board of Directors. Close working relationships would also sought to be built with MDBs and bilateral agencies – the report notes donor contribution, possibly including MICs, is expected; it is hoped Bank funding will gradually decrease over time in relative importance.
Performance indicators would include the number of clients reforming existing policies or procedures, and obtaining/improving credit ratings. A secondary measurement would be the ability of clients to translate improved financial management into greater levels of financing from non-governmental sources. It is hoped approval for the project can be obtained in time for the program to commence on July 1, 2006.