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Kim, Panman, and Rodriguez
Market-based local government financial intermediaries. One way to foster market access and bridge the funding gap in the medium term for small and midsized cities is to consider market-based local government financial intermediaries (MLGFIs). MLGFIs can independently mobilize long-term debt on private markets for on-lending, with priority for local infrastructure investments. For a majority of the small and midsized cities, direct access to long-term credit markets is not feasible in the foreseeable future, since long-term efforts are needed to develop the necessary financial infrastructure. As an alternative to the municipal bond market, a number of cities have relied on the pooling capacities of financial institutions to set up workable MLGFIs and to reduce the transaction costs of accessing the credit market. Many European countries have established financial intermediaries—including Finland, France, Spain, and Sweden—while provincial municipal financial corporations predominate in Canada and state-level municipal bond banks operate in the United States. A successful example of an MLGFI in Colombia is Financiadora del Desarrollo Territorial S.A. (FINDETER), a government company created in 1989 to finance regional urban infrastructure projects. The national government owns 92.53 percent of the company and the departments own 7.47 percent. FINDETER provides resources to financial intermediaries who assign them to regional authorities. FINDETER has received funds from multilateral banks and has consistently received very high credit ratings. According to the most recent data in 2011, FINDETER has over 1,500 projects disbursed among over 140 municipalities in 28 departments. MLGFIs pool financial arrangements for local infrastructure investments and provide smaller local government borrowers with access to long-term debt markets. Lending products leverage the intermediary’s equity funds through bond issuance. MLGFIs may also offer nonlending products to local governments, including fee-based financial advisory services, although these tend to be directed toward larger local administrations. As the intermediary’s portfolio is diversified among a large number of local government borrowers, it provides good security for, and strength to, the credit quality of its debt issues. MLGFIs and municipal bond markets can provide complementary approaches to improving local government access to long-term credit for capital investments. Efficient municipal bond markets can provide an important source of funding for larger local governments, and can thereby help to reduce their claims on scarce national budgetary resources. This might, in