and Policy Guides
Subnational government borrowing is not an end in itself. Ideally, it should be used to obtain long-term capital for expenditures that provide benefits that stretch into the future. Repaying debts represents the fulfilling of an intergenerational contract obligating those who benefit from improvements to pay their share of costs over time. Subnational governments are the legitimate parties to effectuate the obligation and the agents to see that its terms are fulfilled.
Successfully incurring and paying off debt—raising funds in capital markets, employing the funds in useful improvements, and repaying the debt according to the contract—is an affirmation that the subnational government is capable of planning for the future and fulfilling its obligations. Successful debt transactions are both products of financial prudence and foresight and installments toward financial independence (DeAngelis and Dunn 2002).
That said, the gap between the ideal and the real in subnational government borrowing in private financial markets is great. Subnational governments, as junior and often freshly minted government units, must find ways to enter financial markets that are themselves young and troubled in legal and economic environments that are often in transition.
Credit market access has been approached from various angles: the needs of potential borrowers, the organization and regulation of the securities market, likely investor groups and their regulation, the need for information to analyze credit, and the rating and private insuring of securities. This book examines, in particular, the tools that senior governments and donors might choose in developing markets, looking at forms of credit assistance and methods by which higher level governments monitor and, when necessary, intervene in the affairs of subnational governments.