EXECUTIVE SUMMARY
investments through grants and borrowing as commercial banks see insolvent or weak local governments as too risky. It is very rare for local governments to issue bonds.61 The role of intermediate financing institutions
61
Paulais (2012).
For Africa, Paulais (2012, pp.162-164) makes the following distinction: SFIs’ main focus is lending in middle-income countries; MDFs’ purpose is to channel resources from central governments and donors to local governments in low-income countries. The lending activities of this last group are more restricted and require a trusteeship agreement from central government. 62
GOLD II; Paulais (2012) p. 164. 63
Paulais argues that in Africa, a paradigm shift is needed. This could also be applied to other regions. 64
Latin American Chapter and GOLD II Report. USD 2 billion between 20062012. 65
Camdessus et al (2012). Despite the global financial crisis, the total amount of development aid for water and sanitation has risen at an average annual rate of 5% in real terms from 2001 to 2009 (though it did fall in 2010). 66
Global Environment Facility (GEF), Carbon Partnership Facility (CPF), Climate change fund (ACF-ADB), Carbon Market Initiative, Clean Energy Financing Partnership Facility (CEFPF), Global Climate Partnership Fund. 67
Municipal Development Funds (MDFs) or Specialized Financing Institutions (SFIs) have been set up in more than 60 low- and middle-income countries to support lending to local governments and services providers.62 They are generally state owned, though some have a para-public or private status (e.g. the INCA in South Africa). Inspired by the specialized public banks or funds in high-income countries that provide financing to cities at reasonable costs, these institutions have had disappointing results, associated with the politicization of lending decisions, problematic loan designs, market narrowness or professional weakness.63 However, there have been success stories (Findeter in Colombia and FEC in Morocco; local development banks such as BNDES and CEF in Brazil). Despite their shortcomings, SFIs play an important role in the credit enhancement of sub-national governments and utilities. The capacity of local governments and utilities to access lending in order to improve basic services remains an issue. It is clear is that ‘business as usual’ cannot continue. Investment in urban development requires empowered local governments, an enabling environment to mobilize endogenous financing, and the bolstering of local investment tools to access domestic loans and capital markets.64 Other international sources International and regional development banks already play an important role in financing urban basic service infrastruc-
ture. In Asia and Latin America, they have increased the number of loans in recent years.65 However, these banks lend to national governments and the private sector, hardly ever granting credits directly to local governments. In order to overcome institutional barriers other options should be explored (e.g. innovative guarantees for sub-national loans to reduce foreign exchange risks). Donors continue to play a significant role in financing infrastructure investments in some low-income countries. In 2009-10, annual average aid commitments for water and sanitation amounted to USD 8.3 billion, 7% of total aid.66 There are concerns about the distribution of this aid for water however (around 45% goes to just 10, mostly middle-income, countries). South-South cooperation has a growing role – investments by China and India in Africa rose from almost nothing in the early 2000s, to about USD 2.6 billion annually between 2001 and 2006. In most cases, they provide funds to central governments or to ad hoc financial intermediaries; only a very limited part is then reassigned to local governments. There are very few examples of donors making sub-sovereign loans. In the framework of the Kyoto Protocol, some innovative sustainable development mechanisms are also contributing to financing specific projects. The Clean Development Mechanism (for reduction of greenhouse gas emissions and clean technology investments) has supported several waste management and transportation projects, but its current resources are limited (USD 70 million in 2012) and approved projects have been concentrated in a small group of sectors and countries (China, India and Brazil). Other mechanisms to finance climate change adaptation exist, but access for local governments is restricted.67