1. Sub-national Finance
Financing Regional and Local Governments and Enterprises
Mozambique May 2007

2. IFC, IBRD and the World Bank Group
IFC is owned by its 178 member countries, which collectively determine policies.
International Finance Corporation, 1956
International Bank for Reconstruction and Development, 1945
International Development
Association, 1960
Multilateral Investment
Guarantee Agency, 1988
IFC is part of the World Bank Group, which consists of four separate institutions:
IBRD, established in 1945
International Finance Corporation, established in 1956
IDA, established in 1960
MIGA, established in 1988
IFC’s activities are coordinated with the other World Bank Group institutions
We are legally and financially independent with our own articles of agreement, shareholders, financial structure, management, and staff.
The president of the World Bank Group is also president of IFC.
IFC is owned by its 178 member countries who collectively guide policies and activities.
The five largest shareholders together control 45.8 percent of IFC’s shares. They are:
United States, 24.1 percent
Japan, 6.0 percent
Germany, 5.5 percent
France, 5.1 percent
United Kingdom, 5.1 percent.

3. Sub-national Finance Initiative
a joint World Bank/IFC initiative seeks to help fill this gap by structuring and investing in sub-sovereign projects in emerging markets
IFC credit assessment skills
WB capacity building experience
ABOUT SUBNATIONAL FINANCE
Originally established in May 2003 as The Municipal Fund, now a joint World Bank/IFC Department charged with investing in projects at the state and municipal level - without sovereign guarantees
Brings together IFC’s credit assessment and market expertise and the World Bank’s public policy and capacity building experience to address the needs of the municipal finance market and is additive to existing WBG products
We are staffed with sector experts from the World Bank and IFC as well as seconded staff from other institutions that have expertise in the sub-sovereign area
IFC sees initiative as collaborative WBG effort
WB public policy experience
IFC market expertise

4. Sub-national Public Sector: The Market Context
Decentralization
Huge investment in infrastructure
Not all done by private investment
Local level finance is core solution
Decision making better informed, leading to superior outcomes
Sovereign guarantees being used more selectively
Uninhabited space
Limited global experience in market
Application of existing models not always appropriate
World
Bank
IFC
Central
Government
Private
Sector
SOE
Local Governments
Infrastructure needs

5. Objectives Finance local development projects
Assist sub-national entities to gain access to financial markets
Promote commercialization of sub-national utilities
Support decentralization reform
Deepen financial markets
Additional Benefits of IFC’s involvement
IFC presence reassures
international investors
local partners
Governments
Reputation and standing to help negotiations (honest broker)
Measure of political risk cover
Catalyst for other investors and lenders

6. Scope of Sub-national Finance
Eligible Partners:
State, Municipal, Provincial, or Regional Governments and their entities (including local utilities)
Selective National or State owned enterprises (SOEs)
Financial Intermediaries
Sector Coverage:
Water and wastewater
Transportation
Solid waste
Social infrastructure (i.e. health and education)
Power
Essential public services
Various forms of Public Private Partnerships (PPPs)
Support investments made by a wide range of sub-national entities (local, provincial and state governments, enterprises, financial intermediaries)
Considers projects in a wide range of essential public services including: water, wastewater, transport, electricity, solid waste, district heating.
Typical size of investments US$5-50 million (larger and smaller investments considered depending on development impact).
Sub-national entities manage their investments directly or in the context of public-private partnerships.

7. State-Owned Enterprises
Sub-national Finance Criteria for State-Owned Enterprises:
Operating in infrastructure sectors with natural monopoly characteristics
Investment promotes private sector growth
Does not displace viable private provision or financing alternatives
Line up with the Bank’s efforts in the relevant sector and countries
Non-sovereign instruments (booked by IFC) may be most appropriate when the SOE becomes financially self-reliant and needs to affirm its managerial autonomy from Government
Appropriate when the Government (and the IMF) considers that the SOE’s borrowings should no longer use up fiscal space.
Appropriate sectors will vary across countries but may include
water and sanitation,
large hydropower,
roads,
landlord infrastructure in ports, and
in some country contexts power or gas networks.

8. Investment Products
All products provided without sovereign guarantee and may be available in local currency
Pricing is based on credit risk of borrower/investee.
Seek to catalyze local investment
Lending Instruments
Senior loans
Subordinated loans
Convertible loans
Pooled loans/bonds
Credit Enhancement
Partial credit guarantees
Risk sharing facilities
Securitizations
Equity/ Quasi Equity
Long-term capital
Convertible debentures
Warrants, other hybrid instruments

9. Investment Criteria Financial
Predictability of cash flows to service debt without sovereign guarantee
Debt Capacity
Socio-economic
Robust economic base
Institutional
Operational Efficiency
Regulatory
Market sophistication
Degree of decentralization
Development Impact
Essentiality of Investment
Strong economic and social benefit

10. Market-Based Approach
Speed:
Transactions can be processed quickly – 3 to 6 months
Faster if projects are already well developed
Flexibility:
Operating in different market requires this
Specific investments are tailored to client needs
Pricing:
Commercial approach
Pricing is based on credit risk of borrower/investee, lower risk credits will pay less
Catalyze local investment:
Seek to maximize local investment component of financing

11. Subnational Technical Assistance Facility
Limited grant resources are available to assist with:
Financial Improvement Plans
Capacity Building
Feasibility Studies
Independent reviews of existing feasibility and engineering studies
Communication, public information, and stakeholder consultation
Financial advisory services for project structuring
Obtaining credit ratings

12. Transactions committed
Russia –Chuvash Republic
(bond guarantee, general infra, US$8.3)
Hungary – OTP
(risk sharing facility, energy efficiency, US$130 m)
China – Guangzhou
(domestic currency loan, power, US$50 m)
México – Tlalnepantla
(bond guarantee, water, US$3 m)
Philippines – PNOC EDC
(equity, geothermal power SOE, US$50 m)
Guatemala City
(risk-sharing facility, busway, US$6.6 m)
Total Funds mobilized > US$800 million (IFC exposure – US$285 m)
20 New projects being appraised > US$500 million
January 2007, closed eight sub-national transactions catalyzing over US$800 million of infrastructure investments (total IFC exposure of US$285 million loan equivalent.)
Tlalnepantla Municipal Water Conservation Project (Mexico): Partial credit guarantee ($3m) for a local currency revenue bond supporting a water conservation and wastewater recycling project.
City of Johannesburg (South Africa): Partial credit guarantee ($30m) for a general-obligation local currency bond issued by the City to finance its capital expenditure program in water and wastewater, electricity and urban streets.
Guangzhou Development Industry Holdings (China): Local currency corporate loan ($50.1m equivalent) to support environmental investments by the Guangzhou municipal power company. The loan was funded from the proceeds of IFC’s first “panda bond”.
Buffalo City (South Africa): credit guarantee ($6.4m), freeing up resources for the City’s capital expenditure program by enabling the release of resources placed in escrow accounts for existing debt.
Guatemala City Project (Guatemala): Risk-sharing facility ($6.6m) enhancing a local currency bank loan, to help the Municipality finance a bus mass transit system.
Chuvash Republic (Russian Federation): Partial credit guarantee ($8.3m) for a ruble bond to finance the Republic’s investment program, mainly in the water and road sectors.
OTP Energy Efficiency program. Risk sharing ($130m) with a Hungarian bank for a program of energy efficiency improvements in Hungary’s municipal schools.
PNOC-EDC. Equity investment ($50m) supporting the IPO of a geothermal power development company majority-owned by the Government of the Philippines.
South Africa–
Johannesburg (bond guarantee, general infra, US$30 m)
Buffalo City (loan guarantee, general infra, US$6.4 m)

13. Subnational Finance
Case Studies

14. Mexico - Tlalnepantla Water Company
Bonds were sold successfully (US$9MM)
First bond issue without intercept of federal transfers
Direct municipal risk covered
PCG resulted in improved local rating from AA to AAA
Tlalnepantla Project:
Latin America
Municipal Finance
Of the Year
Local Government
Bond of the Year
Transaction Structure
Municipality/OPDM
CERTIFICATE HOLDERS 1 st
order
Beneficiary
Of the trust
DEXIA/IFC 2 nd
Beneficiary of the
trust 5 4
2) Trustee issues loan to
Municipality and water
Company and then transferred
the net funds to water company 3
1) The Trustee issues
certificates to investors.
5) Domestic investors buy certificates;
Debt service funded from water fees.
Certificates are enhanced by cash
reserves and Dexia/IFC guarantee
4) Issue guarantee to
cover P + I
3) Pledges proceeds from
Water fees for the payment
of the loan granted by the
Trust.
Trustee
Why a guarantee?
Tlalnepantla Water Company needed to raise financing for a new wastewater treatment plant
Structure and amount
A local currency partial credit guarantee with a US$3 million cap to a private Mexican trust, that will issue bonds in the local capital market and use bond proceeds to provide a loan to the Tlalnepantla Municipal Water Company (OPDM) and the Municipality
Dexia provided a letter of credit capped at US$5 million for the benefit of bondholders
Bond issue up to US$8.8 million equivalent in Pesos with a maturity of 10 years extendable by one year
Benefits for the local capital market
Development of a new asset class that matches long term savings with long gestation investment projects in essential infrastructure
Allows the diversification of longer terms investment opportunities for local institutional investors
Mitigation of foreign exchange risk in local currency based infrastructure projects
Increased fiscal management and accountability imposed by the market on the company and the Municipality
Results for the Municipality
Conservation of expensive potable water and provision of lower cost recycled wastewater for industry
Reduction of water losses and improvements in quality of service
IFC & Dexia gave efficient, partial guarantees improving local rating from AA to AAA

15. City of Johannesburg, South Africa
ZAR 1bn (US$153 million) 12-year bond issue by the CoJ
Partial Credit Guarantee for 40 % of principal shared equally by IFC and DBSA
Achieved a national scale rating of AA-, three rating levels above its stand-alone rating
12 Year, triple amortizing, unsecured Bond with a coupon of 11.9% and 40% guarantee
1000
200
Outstanding Principal
MM Rand
800
Guarantee amount of 400 mm Rand to year
Guarantee declines proportionately with bond years
600
400
Why a guarantee?
The City successfully issued a 6-year bullet bond in April 2004, without enhancement
However, the City was also looking for funding beyond 10 years -- but they could not issue beyond 6 or 7 years at an acceptable price without credit enhancement.
Structure and amount
Irrevocable guarantee of due and punctual payment of principal or interest up to the Guarantee Amount (“first pay-out” guarantee)
40% of Bond principal, reduces by the amounts paid by Guarantors, but can be reinstated on cure of default within 90 days
Issued by IFC (AAA international) and the Development Bank of Southern Africa (DBSA – AAA local)
Guarantee payout results in a 1 year loan between Guarantors and the City
Benefits for bondholders
Increased recovery given default
Decreased probability of default
Results for the City
Enhanced bond rated AA-.za (Fitch), a three notch upgrade from COJ’s stand-alone rating of A-.za.
Issue oversubscribed 2.3 times, showing strong market endorsement of both the issuer and the enhanced structure.
Strong investor demand allowed for tightening the spread (164 basis points above Treasury benchmark = 71 bp less than the non-guaranteed 6-year bond issued in April 2004 – in spite of the longer tenor)
Long tenor improves the City’s debt service profile
Debt Service
Years 1 2 3… …8 9 10 11 12

16. The Philippines - PNOC-EDC
IFC made an equity investment of US$49 million (5% of voting shares) in PNOC-EDC, a state-owned geothermal company in the Philippines with installed generation capacity of 1,150 MW.
IFC, as one of cornerstone investors, had engaged with the Company prior to the IPO
recommended improvements in PNOC-EDC's corporate governance practices in the context of continuous majority ownership by the state.
IFC is now working with the Company and the Government of the Philippines on practical implementation of corporate governance practices.
Investment was made during an IPO of 40% of government-owned shares.
IFC is now working with the Company and the Government of the Philippines on practical implementation of corporate governance practices, changes to the work process of the Board and its committees.

17. China – Direct Loan to Municipal Enterprise
Guangzhou Development Industry Holdings
Municipal-owned company in Guangzhou City, owning 1,900 MW capacity of power generation
Approximately 26% of its shares listed on the Shanghai Stock Exchange, operating without any financial support of municipal government
Planning US$440 million of additional investments in power generation, shipping, fuel logistics, and natural gas distribution
IFC provided US$50 million (RMB406 million) loan used for new investments and for improving GDIH’s environmental compliance

18. Guatemala - Municipality of Guatemala City
IFC enabled a leading bank in Guatemala to enter the municipal financing business by providing a risk sharing facility for 70% of the banks exposure
The project provided financing for critical urban transport infrastructure
IFC to provide technical assistance to the Municipality with the objective of enhancing its financial management practices and diversifying its funding sources
Banco G&T Continental
Municipality of Guatemala City
IFC
Debt Service
Q72 million Loan
Risk Sharing Guarantee
70% of exposure
Why a risk sharing facility?
The Municipality of Guatemala City intended to finance the first phase of a Q351 million (US$46.2 million equivalent) Trans Metro Mass Transport System project
A syndicate of local banks could only raise Q279 million (US$36.7 million equivalent) as each had reached their single obligor limits to the municipality
Banco G&T Continental would only lend Q72 million (US$9.5 million equivalent) with a credit enhancement
Structure and amount
A local currency partial credit enhancement to G&T through a risk sharing facility for 70% of G&T’s exposure (US$6.7 million equivalent)
Benefits for the Municipality
This instrument created additional capacity in the local municipal finance market with the participation of Banco G&T Continental, the third largest bank in Guatemala, that did not traditionally lend to municipalities
Results for the City
Improved public transportation system through development of a more efficient route structure
Replacement of the existing bus fleet with high capacity buses

19. IFC Johannesburg Thank you Robert Heffernan
Investment Officer Municipal Fund
14 Fricker Road, Illovo, 2196
P.O. Box 41283, Craighall 2024
Johannesburg, South Africa
Direct Line: +27-(0)
Cellular:: (0)
Investment Team
Vincent Gouarne
Martin Spicer
Sumeet Thakur
Viktor Kats
Gaetan Tiberghien
Navaid Qureshi
Carlos Clemente
Alejandro Perez
Inna Kushnarova
Thank you