2.4. Local debt guarantees and pledges
Table 5: Type of allowed guarantees and collaterals:
Potential investors want, and need loan repayment pledges or guarantees. Depending
on the type of guarantee, costs of borrowing can be lower or higher. Local governments
can provide various types of loan repayment guarantees: they can pledge physical assets,
such as land or buildings, or general revenues from taxes and transfers, or projectgenerated
revenues from user fees or charges collected from the project's beneficiaries.
Pledging physical assets rather than revenues has certain disadvantages:
local governments may need to pledge physical assets that have a higher
value than the debt being secured,a pledge on land or building is prone to corruption,
municipalities might pledge assets that are needed for providing essential
public services
securing loans only with physical assets can lead to less concern with revenue
streams and cash flows, and whether they are sound enough to allow borrowing,
Revenue interception is a special form of pledge. It is an instrument that is particularly
credit enhancing since it is very effective in reducing credit risk.10 If local governments
are not able to meet their debt obligations, revenue interceptions authorize the creditor
to collect debt repayments directly from higher levels of government. Revenue interceptions
are therefore usually taken from intergovernmental transfers.
Local governments may also provide guarantees for third party debt repayments, such
as those of local public enterprises. If allowed, such guarantees should be:
Authorized in the same manner as sub-national debt,Restricted to projects in the public interest
Limited to third parties created or controlled by the local government.
Allowed
Allowed
Own revenues
Albania, Bulgaria, Croatia, Kosovo,
Macedonia, Moldova, Montenegro, Republika
Srpska, Romania, Slovenia, Turkey
Physical property
Albania, Bulgaria, Kosovo, Macedonia
(partly), Montenegro, Slovenia, TurkeyCroatia, Moldova, Republika
Srpska, Romania
Reserve funds
Albania, Croatia, Kosovo, Macedonia,
Montenegro, Turkey
Bulgaria, Moldova, Republika
Srpska, Romania,
Slovenia
Private insurance
Slovenia
Bulgaria, Croatia, Kosovo,
Moldova, Republika Srpska,
Romania
Others
Macedonia: Credit enhancements (guarantees
by USAID through Development
Credit Authority)