PDF Ebook Banks or Bonds? Building a Municipal Credit Market
Asian cities cannot finance the infrastructure investments they need without accessing private domestic savings. Urban growth has multiplied demand for investment in water systems, wastewater collection and treatment, roads, and other facilities. At the same time, decentralization strategies have shifted much of the responsibility for this investment to local governments. Private financing can be attracted to urban infrastructure in different ways including direct private investment in income earning facilities but perhaps the most critical avenue will be the local credit market. In a world of decentralized governance, domestic credit markets must be capable of generating long-term financing for cities and their infrastructure agencies.
Two models of municipal credit markets are considered here: (i) bank lending, which financed municipal investment in western Europe throughout most of the 20th century and is still the primary source of local credit financing there; and (ii) municipal bonds, which have been the foundation of municipal borrowing in North America. In designing local credit initiatives for Asia or other parts of the developing world, policy makers do not have to choose between these two systems, which are converging in their regions of origin. Countries now building or strengthening local credit markets would do well to select characteristics from both models and, even more, to encourage competition on a level playing field between bank lending and bond issuance.
Comparing the two models is instructive. Building reliable local credit markets where they did not exist before has proven more difficult than foreseen. The experience of multilateral institutions is filled with apparent paradoxes. Large-scale use of municipal development funds (MDFs), for example, began in Brazil 30 years ago. Several states in Brazil have subsequently instituted MDFs, with a record of success that is enviable, with very low rates of nonperforming municipal loans and successful completion of local investment projects. Yet Brazil today is as far away as ever from having a functioning local credit market. Municipal bond issues are prohibited. Municipalities must obtain case-by-case approval from the central bank and national Senate for other types of borrowing. No private banks will make intermediate or long-term loans to municipalities, even when it is legally permissible, because of the perceived riskiness of such lending.
The frequent failure of international onlending initiatives to build sustainable local credit markets stems in part from lack of clarity as to what elements a subnational credit market should possess. The precedents established by the initial institutions involved in local lending can as readily retard or jeopardize local credit market development as encourage it.
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PDF Ebook Banks or Bonds? Building a Municipal Credit Market
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