• Steven Dimitriyev, Private Sector Development Specialist ...


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  • Good Morning A pleasure to be here and have the opportunity to share with you some of our recent thoughts on infrastructure development, the financing gap and the need to rebuild the PPI model for better and more effective mobilization of private capital and management Excuses from Paati Ofosu-Amaah (our VP for Corporate Secretary) who had a conflicting meeting at the UN in NY.
  • PPI activity in 2004 only about half of that in south Asia (the other traditionally weak region). But investment level was exactly at the 6-year average ($5b/yr), while most other regions still in decline. PwC survey shows that lots of countries considering PPI. Despite the usual failures, some encouraging successes and even benefits from “mixed” successes. All of this adds up to positive momentum (if not much speed yet).
  • Countries should build up reserves to cover recurrent losses (e.g., 1-in-5 year). It is politically difficult to build up reserves above expected losses and financially too expensive to purchase insurance to cover frequent events (e.g., 1-in-10 years). Contingent loans can fill this gap. Insurance and other risk transfer instruments are usually efficient for less frequent events (e.g., 1-in-10 years). Tools include disaster reserve funds, traditional catastrophe insurance, disaster contingent loans and catastrophe bonds
  • Contingent loans, like the CAT DDO can fill the gap between reserves and risk transfer instruments like insurance. According to WB calculations, the CAT DDO is at least 25% less expensive than reinsurance for the working layers (“working layers” means "bottom layers" (in contrast with top layers). For top layers, insurance is the best instrument.) The CAT DDO provides a cheap source of immediate liquidity in the aftermath of a major natural disaster while other sources of funding are being mobilized. It disburses if a natural disaster occurs resulting in a declaration of a state of emergency. This means that money does not have to be taken from reallocations that would otherwise slow down ongoing development and poverty reduction programs. The 3-year drawdown period can be renewed up to 4 times, for a total drawdown period of up to 15 years . CAT DDO pricing is similar to that of standard IBRD loans: 0.25% front-end fee, and standard IBRD interest rate The DPL DDO can also be used for catastrophe risk. Catastrophe-linked-securities are risk financing instruments which allow buying insurance through the capital markets Catastrophe Bonds (or cat bonds) are the most common type of catastrophe-linked-securities. by raising funds from investors which are used to make payments against claims under the insurance contracts. Weather derivatives offer payouts to a country in the case of severe weather conditions, such as a drought, in exchange for a premium. Payouts are made when a pre-determined index measuring weather-related losses, hits a trigger and can be used by the country to counter market distortions caused by such losses.
  • • Steven Dimitriyev, Private Sector Development Specialist ...

    1. 1. Accessing Credit Ratings for Development of Sub-National Governments of Nigeria World Bank Engagement with Sub-National Entities ABUJA, NIGERIA March 2009 STEVEN DIMITRIYEV Senior Finance and Private Sector Development Specialist Nigeria Country Office Email: [email_address]
    2. 2. Political and fiscal decentralization <ul><li>Deepening of “DEMOCRATIZATION” pushes “DECENTRALIZATION” </li></ul><ul><ul><li>transfers taxing authority as well as investment responsibilities to local governments. </li></ul></ul><ul><ul><li>makes local public officials and administrations accountable for public service provision (infrastructure as well as social services). </li></ul></ul><ul><li>Today, 60% to 70% of infrastructure services in developing countries is provided at the sub-national level (by local governments or utilities) /1 . </li></ul>/1 World Bank staff estimates
    3. 3. Sub-national development challenges In order to fulfill their development role, sub-nationals will need to address fiscal, institutional and financial challenges. Challenges Limitations Shallow markets unable to respond to the needs of sub-nationals (maturities and interest rates) Development condition of local financial markets Reduced access to long-term funding for infrastructure investments Creditworthiness of sub-national Limited access of sub-nationals to domestic capital markets Legal and regulatory frameworks for sub-national borrowing Competition for funds (i.e. safety networks and security) and reduction of counter-guarantees available to sub-nationals Fiscal constraints at the central government level
    4. 4. Sub-national infrastructure service provision dilemma Decentralization without addressing the fiscal, institutional and financing challenges is creating a service provision dilemma. Central Government w/ fiscal constraints Sub-nationals with low creditworthiness Reduced CAPEX and maintenance expenses Non-willingness to pay from end-users Lack of growth / deterioration of service quality Poor service delivery Competition from other uses (social safety network, security, etc.) Less funding Unable to meet MDG Lack of access to financial markets
    5. 5. <ul><li>Public Financial Management (i.e., tax planning, tax collection and administration, revenue and expenditure management, information systems, asset management, debt management systems, etc.) </li></ul><ul><li>Infrastructure Regulatory Framework (i.e., tariff setting, tariff collection, subsidies policies, sector regulation, private sector role, investment planning, etc.) </li></ul><ul><li>Corporate Governance (i.e., procurement process, safeguards, monitoring and reporting systems, audited financial statements, credit ratings, etc.) </li></ul><ul><li>Financial Regulatory Framework (i.e., debt regulation for sub-national borrowing -- fiscal responsibility legislation, monitoring and reporting to central government, capital market regulation, bankruptcy and legal claims against sub-national entities, etc.) </li></ul><ul><li>Capacity Building (i.e., training, staffing, incentives, etc.) </li></ul>Breaking the infrastructure dilemma Must create FINANCIALLY INDEPENDENT SUB-NATIONAL ENTITIES capable of delivering infrastructure and public goods.
    6. 6. Sub-National Investment Climate <ul><li>WBG seeks REFORM SYNERGIES: </li></ul><ul><ul><li>Bank regulation, Sub-national credit market development, Pension reforms, Fiscal Responsibility Act… </li></ul></ul><ul><ul><li>Investment Climate Program (ICP), FSS2020, PPPI…. </li></ul></ul><ul><li>CREDIT RATING impacts on the cost of capital borrowed, </li></ul><ul><ul><li>On economic viability of INVESTMENT PROJECTS </li></ul></ul><ul><ul><li>On assessment of INVESTMENT CLIMATE </li></ul></ul>
    7. 7. Current WBG sub-national efforts <ul><li>IBRD / IDA requires a sovereign guarantee – or lends to the central government which on-lends to sub-nationals </li></ul><ul><ul><li>Two types of loans: </li></ul></ul><ul><ul><ul><li>Investment (e.g. PPP, public works…) </li></ul></ul></ul><ul><ul><ul><li>Budget Support (policy development/implementation, debt reduction…) </li></ul></ul></ul><ul><ul><li>For IBRD loans, a Credit Rating is also normally expected </li></ul></ul><ul><li>IFC – can lend without sovereign guaranteee but mainly to private sector, or to mobilize additional private capital (e.g. via guarantees). </li></ul><ul><li>High focus on improving the Sub-national Investment Climate in Nigeria </li></ul>The World Bank and IFC lends to sub-nationals for infrastructure investment under two different approaches.
    8. 8. IFC sub-national experience The Municipal Fund has effectively mobilized additional private capital financing for its sub-national clients. Selected IFC Transactions – Exposure and leverage 6 43.0 6.5 Local Government Guatemala City /1 Equity related product 5 570.0 100.0 Total 20 50.0 2.5 Financial Intermediary Protego SOFOL /1 6 288.0 50.0 Provincial utility Guangzhou Development Industry Holdings 3 9.0 3.0 Municipal water utility Tlalnepaltla, Mexico 3 30.0 8.0 Local government Buffalo City, SA 5 150.0 30.0 Local government City of Johannesburg, SA Leverage Ratio Total Financing Exposure Type Project
    9. 9. Sub-National Entities – Transition to Market Access <ul><li>Three main market segments: </li></ul><ul><ul><li>States, Provinces and other political subdivisions </li></ul></ul><ul><ul><li>Infrastructure parastatals and utilities </li></ul></ul><ul><ul><li>Development finance institutions and other financial intermediaries that are financing sub-national entities </li></ul></ul>World Bank IBRD/IDA Lending and Capacity Building (with Sovereign Guarantee) Sub-National Lending (without Sovereign Guarantee) Private Capital Market Access (on own Credit) Time Creditworthiness
    10. 10. Sub-national Entities – 4 Tiers (Goal is raise from lower to higher tiers) <ul><li>Local Governments </li></ul><ul><li>Public Utilities </li></ul><ul><li>DFIS </li></ul>Tier 2: Market Access with Credit Support Tier 1: Market Access on Own Credit Tier 4: Limited Financial Transparency Tier 3: Audited Financials IDA countries w/ weak legal and regulatory frameworks IDA and middle income countries w/ strong legal / regulatory frameworks Middle income countries with strong legal and regulatory frameworks and developed local capital markets
    11. 11. Sub-National Clients: India (for illustration) <ul><li>India requires US$ 25 bn a year to fund its infrastructure needs. Commercial bank lending to infrastructure in 2003 was US$ 5.9 bn. The annual funding requirements for urban infrastructure alone amount to US$ 8.3 bn of which only US$ 1.1 bn is covered through Central Plan outlays </li></ul><ul><li>Of the approx. 3,700 Urban Local Bodies, only 50 are creditworthy enough to access domestic capital markets. Government transfers finance more than 40 percent of consolidated local expenditures. 10 municipalities have accessed capital markets through 13 bond issues o/w 10 have been placed without govt. guarantees at interest rates of 7% to 14% </li></ul><ul><li>Pooled finance mechanisms being created to fund small and medium city infrastructure projects e.g TNUDF, KUIDFC . 35 of 3,700 ULBs, 100 parastatals, 7 of 21 of State Industrial Development Corps., and 2 of 18 State Financial Corps. have local currency credit ratings </li></ul>Urban Local Bodies = 10 DFIs = 4 State Financial Corporations = 2 State Ind. Devt.Corporations = 7 Parastatals = 100 Urban Local Bodies = 3 Infra. Parastatals = 13 Market Access with Credit Support Market Access on Own Credit Limited financial transparency Audited Financials Municipalities = 10 bond issues Urban Local Bodies = 3,690 State Financial Corporations = 16 State Ind.l Dev.t Corp = 21 Specialized Finance Institutions = 4 Parastatals = 141 Range of Sub-National Clients
    12. 12. <ul><li>Mexico began to implement major decentralization reforms in the late 1990s </li></ul><ul><ul><li>Made national/ subnational transfer system more transparent and predictable </li></ul></ul><ul><li>In 1999, Mexican government wanted to address the problem of subnational bailouts: </li></ul><ul><ul><li>Cause: use of national/subnational automatic transfers ( mandatos ) as loan guarantees </li></ul></ul><ul><ul><ul><li>Mandato guarantees made loans to subnationals virtually risk free </li></ul></ul></ul><ul><ul><ul><ul><li>moral hazard for banks </li></ul></ul></ul></ul><ul><ul><ul><ul><li>over borrowing by subnationals </li></ul></ul></ul></ul><ul><ul><ul><ul><li>bailouts </li></ul></ul></ul></ul><ul><ul><li>Ineffective national government controls on subnational borrowing </li></ul></ul>Mexico: Decentralization
    13. 13. <ul><li>To address these issues, the Mexican Government asked for assistance in developing a market based system </li></ul><ul><ul><li>This led to the World Bank’s Decentralization Adjustment Loan of about US$600 million </li></ul></ul><ul><ul><li>Dexia Credit Local participated in the loan’s preparation </li></ul></ul><ul><ul><ul><li>Focus on modernizing the regulatory framework for subnational lending </li></ul></ul></ul><ul><li>Some key reforms : </li></ul><ul><ul><li>Elimination of the mandatos </li></ul></ul><ul><ul><li>Requirement for credit ratings for all subnationals for bank borrowing </li></ul></ul>Mexico: Decentralization Adjustment Loan
    14. 14. Mexico: What the Credit Ratings Revealed <ul><li>The credit ratings revealed that there are many creditworthy borrowers at the subnational level </li></ul><ul><ul><li>30 out of 31 states are already rated by S&P, Moody’s or Fitch (29 above investment grade on the local scale) </li></ul></ul><ul><ul><li>Over 60 municipalities and decentralized entities already been rated </li></ul></ul><ul><ul><ul><li>Of a total of 75 states and municipalities rated by S & P, 50 received a rating of A or above on the local scale </li></ul></ul></ul><ul><li>Ratings have also created a healthy competition among states and municipalities </li></ul><ul><ul><li>Mayors and governors pride themselves on having better ratings </li></ul></ul>
    15. 15. Mexico: Factors Influencing Supply of Credit <ul><li>Demand for local currency, fixed-income paper growing rapidly due to : </li></ul><ul><ul><li>Macroeconomic stability </li></ul></ul><ul><ul><li>Mutual funds </li></ul></ul><ul><ul><li>Pension reform of 1997 </li></ul></ul><ul><li>The 1997 pension reform created the private managers of mandatory pension funds: Afores </li></ul><ul><ul><li>In five years, these Afores : </li></ul></ul><ul><ul><ul><li>Have accumulated assets in excess of 8% of GDP (US$34 billion as of April 2003) </li></ul></ul></ul><ul><ul><ul><li>Are expected to reach 20% of GDP by 2015 </li></ul></ul></ul>
    16. 16. Two Windows – To strengthen institutional capacities and independent access to private financial markets (financial support via co-lending or guarantees). Technical Assistance Window Financing Window Technical assistance to strengthen sub-national financial and operational management and governance systems (with other reforms (ICP, FSS2020, PPPI…) Financial support to facilitate development of local markets and mobilize private capital for infrastructure financing ( leverage 5:1) Loans in local currency (subject to market conditions cross-border financing may be provided); use of guarantees Use of guarantees and derivatives to leverage local financial markets Capacity strengthening technical assistance Upstream transactions and market development Project facilitation Project facilitation Tier 4 Tier 3 Tier 2 Tier 1
    17. 17. Public Private Infrastructure Facility (PPIAF) <ul><li>Multi-donor facility with 14 donors </li></ul><ul><li>Established 1999 </li></ul><ul><li>Annual budget of $20 million </li></ul><ul><li>50% of portfolio is in Africa </li></ul><ul><li>Total Portfolio Value of $115 million </li></ul><ul><li>Provides grants (not loans) to support upstream work with Governments to facilitate access to private sector financing and the creation of public private partnerships </li></ul><ul><li>Investments are used to support infrastructure development </li></ul><ul><li>Recently opened a new Sub-National Grant Facility to specifically assist local authorities to access domestic credit </li></ul><ul><li>Can also work with State Owned Enterprises and Municipal Utilities </li></ul><ul><li>Managed by the World Bank </li></ul>
    18. 18. PPIAF Operating Characteristics <ul><li>Demand-driven model. Local Authorities apply for grant resources. </li></ul><ul><li>Application and draft Terms of Reference for Assistance is all that is required </li></ul><ul><li>Focus on infrastructure, but includes municipal financing </li></ul><ul><li>Activities not tied to specific financiers or financing options </li></ul><ul><li>50% of grants under $75,000 but can be higher </li></ul><ul><li>Approval process 3 to 8 weeks depending on size of grant </li></ul><ul><li>Website: www.ppiaf.org </li></ul><ul><li>Email: [email_address] </li></ul><ul><li>Contact Abuja office of World Bank (e.g. email shown on title page of this presentation) </li></ul>
    19. 19. <ul><li>Financial Management : credit ratings (shadow ratings, advisory services…), tax planning, tax collection and administration, revenue and expenditure management, information systems, asset management, debt management systems, etc. </li></ul><ul><li>Infrastructure Management : tariff setting, tariff collection, subsidies policies, sector regulation, private sector role, investment planning, etc. </li></ul><ul><li>Corporate Governance : procurement process, monitoring and reporting systems, audited financial statements, etc. </li></ul><ul><li>Regulatory Frameworks : debt regulation for sub-national borrowing -- fiscal responsibility legislation, monitoring and reporting to central government, capital market regulation, bankruptcy and legal claims against sub-national entities, etc. </li></ul><ul><li>HR issues : training, staffing, incentives, etc. </li></ul>Examples of Types of Activities under PPIAF Sub-National Program
    20. 20. Examples of Approved Grants <ul><li>Swaziland ($320,000): Assistance to help two cities borrow from local banks to fund slum upgrading and related infrastructure improvements. </li></ul><ul><li>Africa Regional ($315,000): TA to assist 6-8 water utilities obtain shadow credit rating; creditworthy utilities may go on to formal ratings and financings. </li></ul><ul><li>Ningbo City, China ($75,000): In-country training on municipal financing options. Ningbo first city in China authorized to borrow on own account </li></ul><ul><li>Philippines ($45,000): Assistance to small water providers and potential lenders to bring them together on specific financing transactions. </li></ul>
    21. 21. LGU Financing Framework in the Philippines Kamran M. Khan Infrastructure Finance Advisor East Asia and the Pacific Region, the World Bank October 11, 2008
    22. 22. Agenda 1. LGU segmentation by credit quality 2. Financing options for Tier 1 LGUs 3. Innovative financing of tier 2-3 LGUs via GFI 4. Performance grants and tier 4 LGUs 5. Disaster Risk Management for LGUs
    23. 23. LGU segmentation by credit quality Credit Quality LGU Income Class Key Financing Options Grant / MDFO MDFO/GFI Bonds, Pvt Credit Credit-worthy and able to tap the market Credit-worthy but unable to tap the market Marginally Credit-worthy Not Credit-worthy Financially Weakest 6 th Income Class Financially Strongest 1 st Income Class Tier 4 Tier 3 Tier 2 Tier 1 30% 20% 45% 5% Source: World Bank Estimates
    24. 24. Tier 1 LGUs should be encouraged to tap the market Pilot transitions are necessary to jump-start the private financing market <ul><li>Credit Rating Program for LGUs </li></ul><ul><li>WBG to establish the model for lending to LGUs based on the strength of their credit (i.e., without guarantees) </li></ul><ul><li>Pilot transaction involving a direct WBG fixed rate, local currency loan to Marikina City + TA on financial planning </li></ul><ul><li>Focus on showing the way to the private banks and GFI to engage in credit-based lending to LGUs </li></ul><ul><ul><li>Establish benchmarks for LGU credit </li></ul></ul><ul><ul><li>Quezon, Baguio, Naga and many others have expressed interest </li></ul></ul><ul><li>WBG open to co-financing with private banks and GFIs </li></ul><ul><li>World Bank and LCP Partnership financed with WB and PPIAF SNT support </li></ul><ul><li>Credit Rating of 8 LGUs (FY’09 -Phase I) </li></ul><ul><ul><li>Global and local benchmarks </li></ul></ul><ul><ul><li>Extended FM Assessment </li></ul></ul><ul><li>Standard and Poor’s selected; work to commence next week (October 2008) </li></ul><ul><li>Participating LGUs to pay for the renewal of the rating for at least 1 year </li></ul><ul><li>Showcase the results at the Annual Conference of the WB – ASEAN Infrastructure Finance Network </li></ul>World Bank Group Sub-national Finance
    25. 25. WB and GFIs can explore innovative models for financing tier 2-3 LGUs <ul><li>GFI-based World Bank funded facility designed to buy loans made by private banks to credit-worthy LGUs </li></ul><ul><ul><li>Bridge the gap between GFIs and private banks </li></ul></ul><ul><ul><li>Provide liquidity to private banks for LGU financing </li></ul></ul><ul><li>LGU financing of municipal infrastructure PPPs </li></ul><ul><ul><li>GFI-based WB funds used for the public sector contribution to PPPs </li></ul></ul><ul><ul><li>Associated TA fund to help LGUs prepare bankable projects </li></ul></ul><ul><li>Credit enhancement to help GFI securitize their LGU loan portfolio </li></ul><ul><ul><li>Provide liquidity to the GFIs </li></ul></ul><ul><ul><li>Benchmark GFI credit analysis capacity </li></ul></ul>
    26. 26. Performance incentives are the key to the reform of tier 4 LGUs Source : East Asia Energy Unit, The World Bank <ul><li>Incentive payments for pre-defined measurable performance improvements </li></ul><ul><ul><li>Financial performance </li></ul></ul><ul><ul><li>Operational performance </li></ul></ul><ul><ul><li>Planning and budgeting </li></ul></ul><ul><li>LGU must meet the basic performance targets to remain in the program </li></ul><ul><ul><li>Better use of IRA and OSA thorugh improved LGU performance </li></ul></ul><ul><li>Link with the GOP LGU performance systems, e.g., Local Government Performance Monitoring System, Bureau of Local Government Finance indicators </li></ul>… and remained constant on a per capita basis IRA has declined slightly as a share of GNP …
    27. 27. Disaster Risk Management (DRM) remains a key priority for the LGUs <ul><li>Philipines faces a high degree of natural disaster risk </li></ul><ul><ul><li>Between 1990-1996 an estimated $480 mil in losses per year (0.5% of GDP) </li></ul></ul><ul><ul><li>Average of 1,009 lives are lost every year due to natural disasters </li></ul></ul><ul><li>Strategic, comprehensive approach to DRM </li></ul><ul><li>Map, quantify and model the risk </li></ul><ul><ul><li>Anticipate the low risk, high probablity events </li></ul></ul><ul><ul><li>Identify the high risk, low probability events </li></ul></ul><ul><li>Layer and match the risk + the mitigation strategy + financial instrument </li></ul><ul><ul><li>Technical Assistance available through WB and other donors </li></ul></ul><ul><li>Consider a comprehensive set of financial instruments </li></ul><ul><ul><li>Establish the framework for disbursing funds to “qualified” LGUs </li></ul></ul>
    28. 28. DRM financing framework Source: Financial and Private Sector Development/ Financial Markets Networks World Bank, 2008 Reserves Contingent Loans Insurance/ Reinsurance Insurance Linked Securities (e.g., CAT bonds) Retention Risk Transfer Probability Instrument Severity Low High High Low
    29. 29. DRM financing products <ul><li>The Catastrophe Risk DDO or CAT DDO provides immediate liquidity upon the occurrence of a natural catastrophe. They offer bridge financing while other sources of funding are being mobilized. </li></ul>Deferred Drawdown Option (DDO) Loans <ul><li>The World Bank Group is developing a multi-country catastrophe bond that would pool the risks of several countries and transfer it to capital markets.. </li></ul>Insurance-Linked Securities Risk Transfer Risk Retention Weather Derivatives <ul><li>The World Bank Group offers weather derivatives to provide risk management products to member countries, transferring the weather risk to the market. </li></ul>
    30. 30. Recent DRM financing transactions <ul><li>First CAT DDO (Costa Rica) approved in September 2008. </li></ul>Deferred Drawdown Option (DDO) Loans <ul><li>Platform for the multi-country catastrophe bond is under development. </li></ul>Insurance-Linked Securities Risk Transfer Risk Retention Weather Derivatives <ul><li>First weather derivative (Malawi) executed in October 2008. </li></ul>