Subnational Capital Markets in Developing Countries: From Theory to Practice

By John Petersen; Mila Freire | Go to book overview

Chapter 12
Designing and
Implementing Credit
Assistance to Subnational
Governments

Chapter 3 identifies three groups of subnational governments based on their readiness to access private financial markets as indicated by their financial condition, managerial skills, and (to a certain extent) size. The first group includes jurisdictions that already have access but could enjoy more and better options given a more supportive regulatory and policy environment. The second group could achieve access with help, including credit assistance that complements the operation of credit markets. The third group cannot access financial markets, even through market-oriented intermediaries, because of inadequate revenue sources. Borrowing programs should not be created for these subnational governments because borrowing will not solve this problem and could even exacerbate it.

The question then is how to assist subnational governments that do not now have the resources to be self-financing, possibly because they do not have an adequate tax base. If the central government chooses to assist these jurisdictions by establishing a predictable and stable system of intergovernmental transfers, even smaller governments can have adequate local revenues. Revenue streams from both local sources and intergovernmental transfers can be used for capital investment, with or without borrowing.

Once a subnational government has reliable revenue streams, it has the potential to support debt. Access to borrowed capital should be available to the extent that the amount of borrowing represents an acceptable level of risk. Private markets still may not serve these jurisdictions because of the small size of their financing needs, their inability to conduct analysis and planning, or their inability to deal with capital markets concepts and prac-

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