8. How local government associations can help improve the local debt legislation and credit market
Local government associations are voluntary membership organizations, which comprise local governments from within a country or region, acting as an effective and authoritative advocate on members’ behalf in relation to central government, the parliament, potential investors and other stakeholders. With regard to local public debt local government associations should aim to (i) create and/or improve appropriate legislation, (ii) monitor the impact of relevant legislation, (iii) provide information and statistics to potential lenders, central government and other stakeholders and (iv) assist member local governments to develop and improve debt management plans and operations. To these ends, local government associations will concentrate their actions as follows:
A. In relation to lenders mediating communication and information flows between local governments and potential investors
B. in relation to member local governments providing assistance to members in structuring and financing investment; maintaining ongoing communication with member local governments to set/develop best practices in accordance with international standards
C. in relation to central governments and parliaments to lobby and campaign for changes in policy, legislation and funding on behalf of its members.
8.1. In relation to lenders
As outlined in earlier chapters, local credit markets in emerging economies lack the functionality of developed economies; financial institutions’ willingness and capacity to finance local governments is reduced by the low degree of knowledge and transparency of local finances. In this context, associations can play a crucial role in bridging this information gap and thus may contribute to a better understanding by lenders of local economics.
Local government associations should centralize and disclose publicly, if possible on a website, information about member local governments, which would help financial institutions identify potential lending targets based on their internal credit risk policy. Data should be updated regularly and presented in a standardized format that would enable comparison and benchmarking analysis across member local governments. Information should also be provided about important data that could be of interest to potential investors – e.g. statistics on local economy of each LG, list of projects to be financed, financial figures or political structure of the LG decision taking body.
Information about geographical positioning, natural resources demography as well as the dynamics and structure of local economy would enable potential investors/ lenders to have an accurate overview over a local government’s medium and long term revenue generation potential and implicitly over its indebtedness capacity.
Detailed financial statements of individual local governments should be compiled and published regularly on the associations’ website. They should include consolidated budgetary executions, balance-sheet data as well as information on arrears and off-balance sheet items (e.g. contingent liabilities). A historical outcome (at least 3-5 years) of each local government’s financial position should also be made available. Legislation on local public debt has to be well understood by lenders. Legal provisions for the purpose and tenor of loans as well as limits on maximum indebtedness level should be clearly identified and outlined on the associations’ website. Lenders could correlate such information with current indebtedness as well as other financial indicators to determine the additional indebtedness space for individual local governments.
Associations should centralize and market to potential lenders major investment projects for which member local governments seek external financing. To this end they should also collect and disclose the latters’ capital investment strategies. A solution to increase accessibility and transparency could be the development of an electronic platform where members could upload a detailed description of their future investment projects over a longer time horizon (3-5 years), prioritized by their importance and financing requirements. Thus, interested investors/ credit institutions would find out about thelocal governments’ investment plans in advance and would have time to analyze and decide when and where to allocate their resources. Eventually, the associations could bring together member local governments and financial institutions in discussion forums, where the former would present their capital investment strategy and outline/ describe the most important projects.
Initiatives to increase awareness on local finances among lenders should also be priorities of local government associations in relationship with potential investors. Organizing seminars focused on issues related to the functioning of local public finances would increase investors’ knowledge and could result in more willingness to finance this sector.
Local government associations may get involved in the development of local credit markets by lobbying at the central government level and international financial institutions for the creation of market enhancement mechanisms. As described in Chapter 5, the existence of municipal guarantee funds, the establishment of state-owned banks specialized in municipal lending or the founding of municipal development funds can stimulate the development of credit markets in their early stages.
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.
8.3. In relation to central governments
The relationship between local government associations and central governments in the design of legislation regarding local public finance and debt is decisive. Local governments should make every effort to develop and consolidate a cooperative relationship with central governments as a first necessary step in the pursuit of their aims.
The relationship may be institutionalized or ad-hoc. In the former case, a national regulation should provide that draft legislation influencing local governments must be separately discussed and debated with representative associations. The names of the associations should be clearly stated. In addition, a procedure should be laid out dealing with at least the following issues:
the type of draft legislation to be consulted with local government associations (laws, government resolutions, emergency ordinances/ legislation, minister orders etc);
the areas of legislation to be consulted separately with local government associations (anything that influences the operation of local governments or a limited number of areas finance, allocation of expenditure responsibilities, human resources etc);
the phase(s) when the consultation takes place (before the final approval decision, before or after the first draft is completed, before endorsement by the initiating central government institution etc);
the forms of consultation (written communication, meetings, conferences etc);
the deadlines for written communications (for instance, the line ministry would expect feedback from the associations in 10 days from communication and 3 days in emergency situations);
the report on the consultation procedure and the associations’ points of view should be included in the description documentation accompanying the draft legislation to the decision-makers;
the sanctions for non-compliance with the consultation procedure (challenges to the administrative/ constitutional courts, fines etc).
The ad-hoc relationship does not require special consultation with local government associations. This can be carried out as part of the general public consultations. Special local government consultations take place only if the central government deems necessary. In certain situations, central governments may deliberately seek to avoid discussing to local government associations and stick to the minimum legal requirement for transparency. As a result of this approach the message of local government associations may dilute into a melting pot or may not be heard at all.
Consequently, it is wise for local governments to push for an institutionalized relationship with central governments as a prerequisite for successful influence on national legislation.
In practice the procedure has been fairly well observed, but it does not compel the central government to accept the associations’ proposals. At times, the consultation is not conducted at all, but such cases are rare. Local governments have challenged to the administrative court government decisions approved without consultations, but to no avail. Finally, the quarterly reporting requirement from the associations and to the government on the conduct of consultations is not met by any stakeholder. As a conclusion, the consultation procedure has improved considerably the relationship and the influence of local government associations over central government legislation. Currently, whenever draft pieces of legislation are developed the ministries approach the associations by default. However, there are still situations when the consultation is not properly carried out. Also, sometimes the associations are overwhelmed by the multitude of feedback requests and fail to answer appropriately if at all.
Central governments may not always know the demands and grievances of local communities. Hence, the heads of the associations should seek to meet the members of the government and other decision-makers as often as possible. Also, local government associations should develop the habit of regularly informing the government and line ministries about their status and most pressing problems. Such reports should be send regularly and include tangible and reasonable solutions; the associations should be aware that no ministry gives attention to radical or unrealistic proposals. Finally, local governments could invite central government experts to visit their premises and experience firsthand how the legislation is implemented and what problems are encountered.
8.4. In relation to central Parliaments
Local government lobbying for better regulation on local public debt must not stop once the draft piece of legislation is developed and endorsed. In the case of laws, local government associations should continue to their work within the parliaments. Although parliaments do not practically draft much of the legislation they approve all laws and emergency ordinances put forward by central governments. In effect, members of parliament (MPs) have the last word on any draft which is set to become law. Hence, local governments associations must devote time and appropriate expertise in lobbying parliaments to ensure that approved legislation meets their objective.
Parliaments work in special committees and general assemblies. Most debates take place in committees; in this context, stakeholders can be invited to take part. Committee debates do not usually have a detailed technical content; MPs are more concerned with political objectives of the draft laws and particular situations arising from their constituencies. The central government representatives take part in the committee hearings by default. Local governments should also make sure their voice is heard especially if they are seeking specific aims. If invited, the associations should not send only technical staff, but also local elected officials wielding political influence in their parties, such as mayors of big municipalities. They are more likely than central governments to convince the MPs because they are credible representatives of local communities.
In parallel, local government associations must seek to develop a permanent relationship with the MPs and technical staff from specialist parliamentary committees in a similar way to that with central government experts and decision-makers. Such a relationship greatly enhances the associations’ powers of persuasion and also allows them to by-pass the central government if needed.
As regards the legislation on local public debt, local government associations should pursue the same specific goals outlined above making sure the content of draft laws is not altered against their wishes.
8.5. In relation to donors and international financial institutions
The scarcity of resources which the local government associations can draw from their members should prompt them to look for alternative funding. To this end, donors represent the the most likely source of funds. The European Union, the United States Agency for International Development and the likes may provide much needed technical assistance and funding to the associations’ projects. Donor aid can materialize in direct support to member local governments. In the case of local public debt, the associations could draw technical assistance for development of analyses, handbooks, draft legislation, local debt strategies and even carrying out credit ratings.
As regards international financial institutions, the associations could play a role in facilitating contact to member local governments and promoting local credit market enhancement mechanisms, such as development funds or guarantee funds. Such examples are already present in South-Eastern Europe, as already described through the paper.