1. FINANCING URBAN INFRASTRUCTURE THROUGH FINANCIAL INTERMEDIARY
Taimur Samad
Sr. Urban Economist, World Bank Jakarta

2. Outline Urban Infrastructure Needs and Sources of Finance
Intermediation
International Experience
Country Example – Tamilnadu, India
Questions for discussion: Indonesia

3. I. Urban Infrastructure Needs and Sources of Finances
Indonesia has urbanized rapidly and continues to do so. Understanding the dynamics of urbanization is a critical starting point.
There was a 39 percent increase in Indonesia’s urban population between and 2005 (4.2 % per annum), outpacing other East Asian nations.
Indonesia has an urban population share of 49 percent in 2010, projected to increase to 68 percent by In 2010, 74% of total GDP was produced in the cities.
Indonesia has yet to achieve the economic returns to urbanization (per 1% urbanization, 2% GDP growth in Indonesia, as compared to 6% for China, 8% for Vietnam and 10% for Thailand).

4. Urban Infrastructure Needs
Limited and poor quality urban infrastructure is a constraint on poverty reduction and growth.
In 2009, 50% of urban population has access to safe water
Sewerage coverage only exists in 11 cities, with 2% of urban population has access to centralized sanitation system
District road length has increased since 2001, but quality has deteriorated
On average, subnational government’s investment on capital infrastructure was only 0.72% of GDRP ( )

5. Financing Urban Infrastructure
Different sources of financing to answer to city’s different infrastructure investment needs
Commercial Infrastructure e.g. markets, toll roads, etc. Source: PPP
Total urban infrastructure needs
Large cities/ provinces with strong finances. Source: Direct Market Borrowing
Small, medium and large cities: Larger, multi-year investments, e.g. water, sanitation, solid waste management. Source: Intermediary
Small cities, basic services: e.g. internal city roads, parks, street lights, etc. Source: Local Government Budget

6. II. Intermediation Why intermediation?
Huge infrastructure backlog in environment amenities - water, sanitation and solid waste management.
Capital intensive and lumpy investments, needing longer term debt so as to address these deficits with scale
Difficult to finance through National Government grants/loans
Developing Countries – market access may be difficult in the short term
Open access, criteria-based lending builds up credit history as and when domestic commercial sources open up
Lending through Intermediation reduces transactions costs and allows gradual blending of multilateral credit with domestic sources
Why intermediation?

7. Where We are Today: Global Trends
Cities across the developing world are coping with three historical trends:
First, globalization, requiring quality infrastructure to attract investment, stimulate growth and employment.
Second, decentralization, but often with unfunded mandates and lack of devolved authority to enter into contracts, set rates…
Third, the continued growth of urban areas and flow of poor people into slums with limited titles and little access to infrastructure

8. Key National Decisions
If city infrastructure needs debt, who should provide it
National governments through multilateral borrowings?
Utility companies or parastatals?
In case of city governments, what powers facilitate LG borrowing - powers to set rates, enter into contracts, powers to leverage grants?
On the supply side, what are the sources of finance and is intermediation necessary?
If intermediation, what are the choices:
Ownership, Government (US, Europe) Private (INCA, South Africa) Public – Private (TNUDF, India)
Security Mechanisms – Escrows, Intercepts, Guarantees

9. Urban Finance Framework
Type 1 – The domestic debt markets are yet to mature and the devolution framework weak – Assist cities in loan-grant blends while improving the devolution system- Nepal , Andhra Pradesh, Bangladesh
Type 2 – Debt markets are pre-empted by borrowings from higher levels of government, but devolution more secure-work with domestic financial institutions to lengthen maturities and reduce transaction costs-Vietnam, Philippines
Type 3 – Markets begun to mature, and devolution secure, provide instruments to link city financing with domestic markets, especially for small and medium cities- Mexico, South Africa
A Suggested Typology

10. Can We Begin with an Agenda?
Given these trends :
Need for cities to develop urban infrastructure based on demands and borrowing capacities rather than tied grants.
This transformation requires empowerment - authority to raise resources, create and maintain infrastructure and pay for costs over time.
Urban reform agenda should include:
City level Investment plans with authority to set rates, raise deposits for individual connections such as water and sewerage
Stable and predictable devolution so that cities can plan their borrowing
Sustainable financial structures which link domestic capital markets with city financing needs.

11. III. International Experience
Traditional Financing:
City get debt/grants from governments/government owned financial institutions/Multilaterals on basis of guarantees.
Project Implementation by Parastatals/Cities with no clear duties and responsibilities for servicing debt or asset maintenance.
User charges rarely covering even O&M.
Usually resulting in:
Drying up of institutional sources based on state guarantees on account of ceilings on national liabilities.
Limited low cost / equity / grant type funds.
Little impact on growth or urban poverty.

12. Recent Innovations – Linking Cities with Domestic Commercial Finance
Since the 1990’s innovations for sustainable financing by leveraging domestic capital:
Larger cities with medium-term investment plans have repeatedly accessed local markets, establishing a credit relationship with the private sector, but use intermediaries for smaller financings
Johannesburg, Ahmedabad, Ho Chi Minh City, Chennai
Smaller and medium cities mobilized domestic capital through intermediaries
South Africa-INCA; India-TNUDF; Colombia-Findeter
Serious efforts to provide a greater domestic market orientation for municipal intermediaries – CAIXA-Brazil, MDFO-Philippines

13. Lessons Learnt
Viable urban financing strategies usually need:
Rational and predictable devolution largely formula based as in South Africa, Zambia. Tamilnadu Maharashtra
Legal frameworks for borrowing, such as The Municipal Finance Management Act (MFMA) in SA, Urban Local Bodies Act (Tamilnadu), Master Trust Structure (Mexico)
Strong domestic financial intermediaries working with cities such as DBSA, INCA in S. Africa, TNUDF in India

14. Intermediation – Some Examples
INCA - South Africa, privately owned, strong legal recourse to courts, faces competition from state owned DBSA
FINDETER – Colombia, refinances commercial bank loans, needs to strengthen resource raising
LDIF – Vietnam, facility for private sector, unutilized
BMDF – Bangladesh, largely grants and not sustainable
DFV – Shanghai China, limited by lack of Liscense and bar on municipal lending

15. IV. Country Example – Tamilnadu, India
Municipals subsistence level institutions, headed by bureaucrats dependant on state for capital grants, usually tied.
Majority of the debt from State raised on guarantees, debt passed on to municipals but projects executed by parastatals – huge defaults – INR 5000 million had to be written off
However since for eight years , a Municipal Fund (MUDF) located in government lent to municipals based on principles of open access and clear lending criteria. Lent INR 2000 million with high repayment rates
1996- Government introduced major reforms – rational devolution, elections
Also restructured MUDF into a corporate entity TNUDF, in partnership with three major Financial Institutions, with objective of lending and raising resources for municipal infrastructure
Pre- and Post- 1996

16. TNUDF – Lending and Resources
Over 380 sub-projects with US$ 500 million in lending
Profitable with high (100%) ULB loan repayment till date
Raised nearly US$ 140 million in
private finance
Focus on financial sustainability,
entity based appraisals and escrow
as securities
Transactions: municipal PPPs, first pooled bond issue, capital contributions from beneficiaries, Sewerage DBOTs, etc.
TNUDP-III (US $ 300 million) focused on sewerage compared to roads in TNUDP-II (US 60 million)

17. TNUDF – Enabling Factors
Eight years ( ) of successful credit history, of lending based on municipal financial operating plans
Accompanied by major reforms transferring authority to municipalities and backed by statutory devolutions
15 years of partnering with WB, allowing gradual blending of longer term finance with domestic sources
Technical support from WB, DCA

18. Systematic Access for Small and Medium Cities
An example from Tamilnadu
Umbrella Credit
Enhancements
Central
Govt
Grant
Central Govt.
Transfer
Payments
MLA
WSPF
Reserve
Account
Revenue
Intercept
Partial Credit Guarantee
Technical Assistance
Investors
Bonds
Trustee
Local
Govt.
Project
Funds
Market Rate
Long term
Principal & Interest payments
If necessary

19. Water and Sanitation Pooled Fund: Lessons Learnt
What does Commercial Finance Assess?
Stable Revenue Streams from devolution and own sources
Demand driven Medium term Investment Plan, Commitment by cities to tariff and collections
Strength of the Credit Enhancement
What do Cities and National Governments Get?
Systemic Access to Commercial Finance
Leveraging of scarce state grants
Maintenance of Assets built into budgets
Disclosure of Investments and Pricing
The Role of Development Partners
The use of a DCA Partial Credit Guarantee as a market making tool

20. The Pooled Bond
The terms of the issue:

21. The Cities and the Investments

22. The Investors
Water and sanitation pooled fund

23. Beginnings of a New Market
WSPF bonds have created an active secondary market
Bonds sold by original holders to mainly private pension

24. V. Questions and Discussions
Indonesian context
Com Bank Approach or Capital Market?
Ownership – Government, Private or PPP?
Loans and Grants: Tied or Untied?

25. Capital, Assets, Management
Capitalization – Existing loan assets or Greenfield?
Lending Policies, Pricing and Security
Management
Partnerships with Multilaterals – Integrate in the new line of credit?

26. THANK YOU