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

8.2. In relation to member local governments

The perception about financial markets among inexperienced local governments is usually incomplete, which leads to inefficiencies in terms of structuring, contracting and servicing financial debt aimed at funding investment projects. In this context, local government associations should assume a proactive role, by helping members to better understand the mechanics of credit markets and thus to be able to make the right decisions when they access debt financing.

Setting up a database with loans contracted by member local governments – including transaction details such as interest rates, commissions and fees, grace period, maturity, amortization schedule or refinancing options – would enable associations to have an extensive overview of the market’s activity. Moreover, they could carry out regular market surveys to collect lenders’ offers for standardized financing products. The results of the monitoring analysis could be compiled into a periodical bulletin and sent out to members.

Depending on market conditions, associations should advise members when to pursue debt financing. For example, at times of financial market distress, with low liquidity and high risk premiums – as it was the case during the recent global financial and economic crisis –, debt financing can be difficult and expensive. In such cases, associations could work out with local governments to prioritize investment expenditures and postpone them, if possible, until market conditions resume to normal.

Local government associations should issue recommendations, based on identified best practices, on how members should structure tender documentation when contracting loans or issuing bonds. Depending on the type of investment project and the financial position of the contracting local government, different requirements can be included in the public procurement documentation. Designing the criteria for identifying and selecting the best suited offer is also an important aspect that needs to be addressed by associations.