Sub-Sovereign and Municipal Finance

Sub-sovereign public infrastructure entities (PIEs) are the principal operators and financiers of infrastructure projects, and their role is expected to grow as central governments are increasingly looking for means to devolve infrastructure development, finance, and service provision responsibilities to them in an effort to easy the central governments’ fiscal constraints and reduce competing expenditure demands. PIEs comprise a diverse group of firms and agencies, from publicly owned infrastructure firms to locally or municipally managed and/or owned utilities.

PIEs depend considerably on central government funding support to provide infrastructure services. But they also require direct access to finance to meet infrastructure financing and service delivery needs. To facility such access innovative mechanisms, such as Municipal Development Funds (MDFs) have been established. MDFs are parastatal financial intermediaries that provide credit to sub-sovereign governments and to other institutions investing in local infrastructure.

The access of PIEs to private finance, however, remains limited due to poor operational and financial performance, weak management, and the absence of information on the credit quality and financial condition of sub-sovereign PIEs. This lack of transparency also places a significant burden on central governments as continuous financiers and guarantors of sub-sovereign entities, and presents a serious obstacle to government’s fiscal decentralization efforts.

The World Bank plays an important role to enhance sub-sovereign PIEs’ access to private financial markets:

·          At the policy level, the World Bank Group focuses on assisting them in transiting to transparent and commercially oriented businesses, and similarly helping municipalities improve their financial management.  Furthermore, the World Bank emphasizes fostering the use of credit ratings to access bond markets which can provide long-term funding.

·          At the transaction level, the World Bank Group provides partial guarantees through the IFC-managed Municipal Fund.  A complementary facility to assist sub-sovereign entities in middle-income countries without sovereign guarantees is currently in the design phase.