Guidelines on Local Government Borrowing and Recent Developments in South East Europe
6. How to find and select the lender?

Depending on which type of debt instrument (loans or bonds) a local government wants to issue, there are different specialized financial institutions which should be approached. Local government loans are originated by: (i) municipal banks, (ii) commercial banks, (iii) international financial institutions and (iv) municipal development funds. Bonds are intermediated by commercial/ investment banks or brokerage houses. The existence and availability of these financial institutions to finance local governments depends on the architecture (bank lending model or bond model) and development of the local credit market. Central and local authorities should promote specific measures aimed at supporting the development of sustainable credit markets by minimizing the risk of market failures.

Meeting lender's expectations will increase local governments' chances to borrow under good conditions. Local economic conditions, budgetary performance, financial and political flexibility, project management capacity, transparency and disclosure, the quality of the budgeting process, the existence of a debt management and capital investment strategy, available guarantees are all important aspects that influence a local government's borrowing capacity.

In the process of contracting new loans or issuing bonds local governments have to undergo tender procedures in order to select the lending/ underwriting financial institution. Thus it is essential for local governments to draft the tender documentation in a way which ensures (i) that eligible bidders have the adequate level of knowledge and experience for the project to be financed and (ii) that selection criteria used to assess lenders' offers enables local governments to obtain the most competitive loan structure in a transparent way.

Besides financial institutions, local governments in EU member and accession countries can tap on financial resources from grants offered by the European Union (EU). In member states such local government projects may frequently exceed 15 million EURO. The value of the projects put forward by local governments in accession countries is smaller, but the benefits of financing local capital investment through EU grants are unquestionable nevertheless.