Subnational Capital Markets in Developing Countries: From Theory to Practice

By John Petersen; Mila Freire | Go to book overview

Chapter 4
Subnational Governments
as Borrowers

Subnational debt can be the obligation of a local, regional, provincial, or state government or of projects they sponsor through subsidies, partner- ships, or concessions with the private sector. Subnational governments en- ter into many types of legal and financial relationships, which can differ markedly among countries. In many places these relationships are evolv- ing, and even where they are established, they continue to be dynamic. Thus, policymakers and analysts must be prepared to examine a variety of factors and risk exposures when dealing with the debt transactions of sub- national governments.

Subnational government borrowers have much in common with other borrowers such as public utilities and private firms. But there are also some special features relating to the powers, structure, and operation of subna- tional governments. For example, most subnational governments deal ex- clusively in domestic currency for revenues and expenditures. Thus, except for certain types of facilities (electric power, ports, airports, telecommunica- tions), they have little access to foreign currency payments. For some ser- vices, governments have powers approaching monopoly status that may be enforced by regulation. Additionally, governments are site-specific and un- _ able to change the geographic locus of business or the fundamental nature of the services they provide. They rarely go out of business.1


Debt Classification

A fundamental distinction in classifying debt is whether the subnational government is the borrower, relying primarily on its taxing power and oth- er general governmental revenues to back the loan, or whether the govern- ment is just a party to the loan, as when the obligation is limited to a par-

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