Guidelines on Local Government Borrowing and Recent Developments in South East Europe
8. How local government associations can help improve the local debt legislation and credit market

8.1. In relation to lenders

As outlined in earlier chapters, local credit markets in emerging economies lack the functionality of developed economies; financial institutions’ willingness and capacity to finance local governments is reduced by the low degree of knowledge and transparency of local finances. In this context, associations can play a crucial role in bridging this information gap and thus may contribute to a better understanding by lenders of local economics.

Local government associations should centralize and disclose publicly, if possible on a website, information about member local governments, which would help financial institutions identify potential lending targets based on their internal credit risk policy. Data should be updated regularly and presented in a standardized format that would enable comparison and benchmarking analysis across member local governments. Information should also be provided about important data that could be of interest to potential investors – e.g. statistics on local economy of each LG, list of projects to be financed, financial figures or political structure of the LG decision taking body.

Information about geographical positioning, natural resources demography as well as the dynamics and structure of local economy would enable potential investors/ lenders to have an accurate overview over a local government’s medium and long term revenue generation potential and implicitly over its indebtedness capacity.

Detailed financial statements of individual local governments should be compiled and published regularly on the associations’ website. They should include consolidated budgetary executions, balance-sheet data as well as information on arrears and off-balance sheet items (e.g. contingent liabilities). A historical outcome (at least 3-5 years) of each local government’s financial position should also be made available. Legislation on local public debt has to be well understood by lenders. Legal provisions for the purpose and tenor of loans as well as limits on maximum indebtedness level should be clearly identified and outlined on the associations’ website. Lenders could correlate such information with current indebtedness as well as other financial indicators to determine the additional indebtedness space for individual local governments.

Associations should centralize and market to potential lenders major investment projects for which member local governments seek external financing. To this end they should also collect and disclose the latters’ capital investment strategies. A solution to increase accessibility and transparency could be the development of an electronic platform where members could upload a detailed description of their future investment projects over a longer time horizon (3-5 years), prioritized by their importance and financing requirements. Thus, interested investors/ credit institutions would find out about thelocal governments’ investment plans in advance and would have time to analyze and decide when and where to allocate their resources. Eventually, the associations could bring together member local governments and financial institutions in discussion forums, where the former would present their capital investment strategy and outline/ describe the most important projects.

Initiatives to increase awareness on local finances among lenders should also be priorities of local government associations in relationship with potential investors. Organizing seminars focused on issues related to the functioning of local public finances would increase investors’ knowledge and could result in more willingness to finance this sector.

Local government associations may get involved in the development of local credit markets by lobbying at the central government level and international financial institutions for the creation of market enhancement mechanisms. As described in Chapter 5, the existence of municipal guarantee funds, the establishment of state-owned banks specialized in municipal lending or the founding of municipal development funds can stimulate the development of credit markets in their early stages.