The investment financing needs of municipalities in the South are massive, and could not be addressed alone by themselves, not even with the existing offers and services of domestic and external banks. In AFD’s experience, providing direct loans to municipalities remains a major challenge due to several factors such as, the difficulty to directly reach secondary cities, the cost and risk of currency exchange rates, and the regulatory restrictions for direct loans. In this context, several windows of opportunity are open with regards to providing support to municipal financing through guarantees:
- Subsidiarity and absence of State aid with regards to actors in the domestic financial system (banks, investors);
- Effect of primes and leverages that encourage the creation of a local lending market;
- An instrument allowing to potentially reach a larger public and more diverse municipalities (in terms of size, financial strength, etc.);
- An instrument or service to provide lenders expert knowledge on loans in local currency. However, guarantees as a financial instrument remains relatively underused due to several drawbacks, among them:
- Its complexity in terms of procedures, diligence, risk evaluation of the local public sector;
- It imply the management of a three-way partnership between municipalities, the investors, and the guarantor;
- Guarantees often appear to be “offer-driven”, without adequate knowledge of the actual demand of local and regional governments in the South.
This Policy Action Lab is geared towards exploring these questions deeper in order to identify the key issues and challenges to be overcome, and gain insight on the concrete implementation conditions of bi- and multi-lateral financial agencies, in view of promoting an innovative solution that is responsible and well-integrated in the local and national financial environments.
In order to share experiences and best practices in this topic, the Policy Action Lab will provide opportunity for discussion on municipal guarantees, in particular bank loans and bond issues.
It will be organised around an exchange between international actors working on these questions and issues of financial institutions, bilateral development agencies, private banks, investment funds, local and central governments, the French Treasury, rating agencies, and recognised experts.
The Policy Action Lab has the following objectives:
- Contribute to the operational reflection on guarantees offered to municipalities,
- Position itself among lenders as the leader in financial innovation for municipalities,
- Identify new ways of working with municipalities, while building on current practices
- Engage proactively with stakeholders in order to formalise joint mobilisations for an advocacy for action in the implementation of international agreements in 2015- 2016, and in particular their integration to national levels within the Global South.
Proposed Programme :
9 am Registration and Welcoming coffee
9: 15 - Introduction by Laurence Breton-Moyet, Head of Direction of Operations, AFD
9:30 – 10 am – State of the art on international debate/experience around guarantee mechanisms, challenges and issues, by Barbara Samuels, Executive Director of Global Clearinghouse for Development Finance (GlobalDF)
10 am – 10:10 am - AFD’s track record and knowledge sharing on subnational risk, by Bruno Anantharaman, Local Authorities and Urban Development Division, AFD
10:30am -12:30am – Guarantees for bank loans, moderated by Rajivan Krishnaswamy
Presentation by Lydia N. Orial, CEO Local Government Unit Guarantee Corporation – Philippines
2:00pm – 4:00pm – Guarantees for bond issues, moderated by Jean-Franc?ois Habeau, Executive Director, FMDV
Presentation by Michael Metzler, Director of Development Credit Authority, USAID ? Open discussion
4:00pm – 4:15pm – Break
4:15pm – 5:00pm – Synthesis by Konrad Von Ritter &amp; Conclusion by Carlos de Freitas, Director of Programs, FMDV, co-Secretariat of CCFLA.