Sub-national Finance

1
Sub-national Finance
Financing Regional and Local Governments and
Enterprises Mozambique
31 May 2007
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IFC, IBRD and the World Bank Group
IFC is owned by its 178 member countries, which
collectively determine policies.
International Bank for Reconstruction and
Development, 1945
International Finance Corporation, 1956
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Sub-national Finance Initiative
a joint World Bank/IFC initiative seeks to help
fill this gap by structuring and investing in
sub-sovereign projects in emerging markets
IFC credit assessment skills
WB capacity building experience
WB public policy experience
IFC market expertise
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Sub-national Public Sector The Market Context

• Decentralization
• Huge investment in infrastructure
• Not all done by private investment
• Local level finance is core solution
• Decision making better informed, leading to
  superior outcomes
• Sovereign guarantees being used more
  selectively
• Uninhabited space
• Limited global experience in market
• Application of existing models not always
  appropriate

World Bank
IFC
Central Government
Private Sector
SOE
Local Governments
Infrastructure needs
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Objectives

• Finance local development projects
• Assist sub-national entities to gain access to
  financial markets
• Promote commercialization of sub-national
  utilities
• Support decentralization reform
• Deepen financial markets

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Scope of Sub-national Finance

• Eligible Partners
• State, Municipal, Provincial, or Regional
  Governments and their entities (including local
  utilities)
• Selective National or State owned enterprises
  (SOEs)
• Financial Intermediaries
• Sector Coverage
• Water and wastewater
• Transportation
• Solid waste
• Social infrastructure (i.e. health and education)
• Power
• Essential public services
• Various forms of Public Private Partnerships
  (PPPs)

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State-Owned Enterprises

• Sub-national Finance Criteria for State-Owned
  Enterprises
• Operating in infrastructure sectors with natural
  monopoly characteristics
• Investment promotes private sector growth
• Does not displace viable private provision or
  financing alternatives
• Line up with the Banks efforts in the relevant
  sector and countries

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Investment Products

• All products provided without sovereign guarantee
  and may be available in local currency
• Pricing is based on credit risk of
  borrower/investee.
• Seek to catalyze local investment

• Lending Instruments
• Senior loans
• Subordinated loans
• Convertible loans
• Pooled loans/bonds

• Credit Enhancement
• Partial credit guarantees
• Risk sharing facilities
• Securitizations

• Equity/ Quasi Equity
• Long-term capital
• Convertible debentures
• Warrants, other hybrid instruments

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Investment Criteria

• Financial
• Predictability of cash flows to service debt
  without sovereign guarantee
• Debt Capacity
• Socio-economic
• Robust economic base
• Institutional
• Operational Efficiency
• Regulatory
• Market sophistication
• Degree of decentralization
• Development Impact
• Essentiality of Investment
• Strong economic and social benefit

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Market-Based Approach

• Speed
• Transactions can be processed quickly 3 to 6
  months
• Faster if projects are already well developed
• Flexibility
• Operating in different market requires this
• Specific investments are tailored to client needs
• Pricing
• Commercial approach
• Pricing is based on credit risk of
  borrower/investee, lower risk credits will pay
  less
• Catalyze local investment
• Seek to maximize local investment component of
  financing

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Subnational Technical Assistance Facility

• Limited grant resources are available to assist
  with
• Financial Improvement Plans
• Capacity Building
• Feasibility Studies
• Independent reviews of existing feasibility and
  engineering studies
• Communication, public information, and
  stakeholder consultation
• Financial advisory services for project
  structuring
• Obtaining credit ratings

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Transactions committed
Russia Chuvash Republic (bond guarantee,
general infra, US8.3)
Hungary OTP (risk sharing facility, energy
efficiency, US130 m)
China Guangzhou (domestic currency loan,
power, US50 m)
México Tlalnepantla (bond guarantee, water,
US3 m)
Philippines PNOC EDC (equity, geothermal power
SOE, US50 m)
Guatemala City (risk-sharing facility, busway,
US6.6 m)
South Africa Johannesburg (bond guarantee,
general infra, US30 m) Buffalo City (loan
guarantee, general infra, US6.4 m)
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Subnational Finance

• Case Studies

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Mexico - Tlalnepantla Water Company

• Bonds were sold successfully (US9MM)
• First bond issue without intercept of federal
  transfers
• Direct municipal risk covered
• PCG resulted in improved local rating from AA to
  AAA

Trustee
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City of Johannesburg, South Africa

• ZAR 1bn (US153 million) 12-year bond issue by
  the CoJ
• Partial Credit Guarantee for 40 of principal
  shared equally by IFC and DBSA
• Achieved a national scale rating of AA-, three
  rating levels above its stand-alone rating

12 Year, triple amortizing, unsecured Bond with a
coupon of 11.9 and 40 guarantee
800
600
400
Debt Service
Years
8
9
1
2
10
11
12
3
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The Philippines - PNOC-EDC

• IFC made an equity investment of US49 million
  (5 of voting shares) in PNOC-EDC, a state-owned
  geothermal company in the Philippines with
  installed generation capacity of 1,150 MW.
• IFC, as one of cornerstone investors, had engaged
  with the Company prior to the IPO
• recommended improvements in PNOC-EDC's corporate
  governance practices in the context of continuous
  majority ownership by the state.
• IFC is now working with the Company and the
  Government of the Philippines on practical
  implementation of corporate governance practices.

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China Direct Loan to Municipal Enterprise
Guangzhou Development Industry Holdings

• Municipal-owned company in Guangzhou City, owning
  1,900 MW capacity of power generation
• Approximately 26 of its shares listed on the
  Shanghai Stock Exchange, operating without any
  financial support of municipal government
• Planning US440 million of additional investments
  in power generation, shipping, fuel logistics,
  and natural gas distribution
• IFC provided US50 million (RMB406 million) loan
  used for new investments and for improving GDIHs
  environmental compliance

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Guatemala - Municipality of Guatemala City

• IFC enabled a leading bank in Guatemala to enter
  the municipal financing business by providing a
  risk sharing facility for 70 of the banks
  exposure
• The project provided financing for critical urban
  transport infrastructure
• IFC to provide technical assistance to the
  Municipality with the objective of enhancing its
  financial management practices and diversifying
  its funding sources

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IFC Johannesburg
Robert Heffernan Investment OfficerMunicipal
Fund 14 Fricker Road, Illovo, 2196 P.O. Box
41283, Craighall 2024 Johannesburg, South
Africa Direct Line 27-(0)11-731-3140 Cellular
27-(0)83-275-1319 Email
rheffernan_at_ifc.org
Thank you