6.4. Securing liquidity for EU-funded projects'
implementation
6.4.1. Borrowing for implementation of EU-funded projects
However, securing and spending EU financing are no easy tasks. While project preparation
and contracting is not the realm of this paper, we will touch upon the instruments
available to local governments to ensure liquidity for project implementation. The EU
regulations and procedures require grant beneficiaries to contribute from their own resources
to the project's eligible (up to 50% in revenue-generating projects) and ineligible
expenditure. In addition, as a rule, the grant money is provided to the beneficiary local
government as reimbursement of legal eligible expenditure, which means that local budgets
have to cover fully the initial sets of invoices from local resources. Such requirements
may have a negative impact on the cash available for recurrent operations of local
governments and may cripple their capacity to provide other services. Hence, the need
to make use of credit to pay for all or part of local contribution to EU funded projects
without disturbing the other recurrent operations. Such a solution makes sense since
much of the principal repayment is secured from the reimbursed grant; interest and fees
will always be serviced by the borrower from its own resources.
Even traditional loans may undergo adjustments, usually under more favorable conditions
than in case of loans for investment projects financed from the local government
own resources. The existence of a Guarantee Fund, which can provide additional guarantees,
would provide further support to this type of lending. For instance, in Romania
numerous local governments, including rural ones, borrowed from banks to pre-finance23
or/and co-finance24 local capital projects with maturities ranging from 8 months to 2
years. Such practice is of course at variance with the recommendations of medium and
long-term borrowing for capital investments, but it is a rational behavior given the reimbursement
procedures and the scarcity of local budget cash at any given moment.
The actual pre-financing and co-financing needs may not be accurately estimated for a
variety of reasons; the reimbursement process is likely to be delayed by lengthy clearance
procedures or shortage of state budget resources; on the contrary, the payment of
invoices may coincide with an influx of tax collections which provides the local government
with enough cash in hand to meet all incurring commitments; or, the public procurement
can result in a lower price than the initial estimations. Hence, a creditworthy local
government may only want a credit line. The EU-funding for the project increases likelihood
to obtain the financing. Also, subsequent to project implementation the operation
of the investment can be financed by means of a working capital credit line.
In other cases, local governments which are more confident in meeting all project commitments
from local resources may still evaluate the need for a bank guarantee (or letter
of guarantee) from a bank or a guarantee fund for fear of unexpected inability to pay
invoices from suppliers at any given moment or as a prerequisite for advance payments.
The costs of a bank guarantee include usually a fixed commission paid periodically to the
issuing financial institution over the life of the guarantee and also additional guarantee
fees paid to a Guarantee Fund if the letter of guarantee is secured.
6.4.2. Legal incentives for debt aimed at local contribution to EU-funded projects
a) Simplify the debt approval process. Concrete measures could be:
Eliminate the need for central government approval orSimplify the bureaucratic requirement for the approval process
b) Ensure all local governments which benefit from EU funding are permitted or able to
take loans to ensure project liquidity. Specific tools could be:
Make exemptions from existing conditions and limits to borrowingProvide state guarantees for loans taken to implement EU-funded projects
by local governments or municipal enterprises which would otherwise not be
deemed creditworthy.
c) Provide resources from national budgets to meet liquidity needs until disbursements
are settled. To this end most obvious instrument is an advance payment of up to 30%-
50% of total eligible expenditure upon the conclusion of the financing agreement. The
advance payment allows the local government to pay the first invoices from suppliers,
but there are no guarantees it would suffice until disbursements begin in earnest. Moreover,
the disbursing authority will retain a certain amount of each disbursement to offset
the advance payment.
As noted, there are various options available to governments willing and able to encourage
local governments to meet EU-funded project liquidity needs through borrowing.
The choices are obviously a matter of political and macroeconomic considerations at
the same time. Countries seeking to cut budget deficits will not encourage borrowing,
but might put more emphasis on advance payments. Countries with less developed local
credit markets or with numerous small local governments may ponder the option of
guaranteeing the latter’s loans. Finally, countries trying to reduce the complexity and
involvement of central government into EU-funded project implementation will allow local
governments to borrow under privileged conditions.
6.4.3. Borrowing for EU-funded projects in South East Europe
As stated above, countries have a wide range of support instruments to choose from.
Bulgaria and Slovenia apparently chose a minimal approach, with only one type of incentive,
while Romania has adopted a few.
b. Local government or regional water & sewerage company loans related to EU-funded
road, water infrastructure, waste management, education and social assistance projects
may guaranteed by the state through the National Fund for Loan Guarantees to
Small and Medium Enterprises. The guarantees allow less creditworthy rural and town
governments to borrow at lower costs or to attract lenders at all. In turn, the Ministry
of Finance guarantees any lender the servicing of unpaid dues should any local government
default. Subsequently, the MoF withholds general purpose transfers from the
state budgets to the respective local government to recover the amounts it had paid to
the lender. Loans guaranteed under this scheme benefit from the provisions at point a).
c. Advance payment to EU-grant beneficiaries is also available, up to 30%-50% of project
eligible expenditure.
In Bulgaria, the central government provides local government with interest free loans
for co-financing EU-funded projects (also called bridge financing). No state guarantees
can be called upon.
Slovenian local government long-term loans secured to co-finance EU-funded projects
are exempt from the debt threshold.
Guidelines on Local Government Borrowing and Recent Developments in South East Europe
6. How to find and select the lender?
Example
Bank guarantees for EU grant-funded projects in Romanian rural infrastructure
In Romania, the rural local governments which obtain financing from the EU-funded
National Program for Rural Development (NPRD) may choose to receive advance payment
before project inception (after public procurements is finalized and confirmed as
legal) up to 50% of total eligible expenditure. The advance payment largely eliminates
the need for a loan or a line of credit. However, the NPRD requires the receivers of advance
payments to put forward a letter of guarantee from a bank or the state-owned
National Guarantee Fund for Small and Medium Enterprises or the Guarantee Fund for
Rural Credit. The letter of guarantee provides the management authority of the NPRD
the option to call on the bank/ guarantee fund resources if the local government does
not fulfill the requirement to repay the advance payment. The fee for the letter of
guarantee issued by the two state-owned funds is set by order of the minister of agriculture.
The guarantee may cover up to 110% of the advance payment. The collateral
for the issuance of the bank guarantee is the local government's local budget revenue
(i.e. revenue interception).
Example
Incentives to borrowing by local governments in European Union member
states for the implementation of EU-funded projects
a. Debt taken to provide local contribution to EU-funded projects is exempt from the
debt threshold and from the annual national threshold of contracting and disbursement.
However, central government approval is still required.
10