IFI governance


World Bank Group’s sub-national lending

13 February 2013 | Inside the institutions

The World Bank and the International Finance Corporation (IFC, the Bank’s private sector arm) are jointly encouraging sub-national lending to states or provinces, aimed at boosting direct engagement at the state or municipal level. The goal is “to enable sub-national entities to improve and expand their infrastructure and other public services via the strengthening of their institutional capacities and their independent access to private financial markets (financial support via co-lending or guarantees)”.

The Bank’s articles of agreement initially prevented direct lending to subnational entities, stipulating that national governments have to provide sovereign guarantees or equivalent for a sub-national loan. In 2003 the IFC and Bank created a Municipal Fund which was used to lend to municipalities. The fund lent from the IFC’s balance sheet without a sovereign guarantee. In 2006, a three-year pilot of the Sub-national Development Program (SND) was launched to further experiment with lending to sub-nationals without guarantees. The SND created a joint World Bank-IFC department which would work to coordinate their activities. As with the Municipal Fund, non-sovereign-guaranteed lending was done on the IFC’s balance sheet. In 2009, as the IFC decentralised, the SND programme was incorporated into the IFC’s regional infrastructure finance departments. Access to sub-national finance was expanded at this time.

There are three main markets for sub-national lending: states, provinces and other sub-divisions; infrastructure parastatals and utilities, and development finance institutions and other financial intermediates that are financing sub-national entities. Sub-national finance from the IFC comprise a full range of IFC non-sovereign-guarantee products, including syndications, loans, equity and credit guarantees.

On its side, the public sector arms of the Bank Group bring certain types of financing, skills and contacts to the joint effort. First they support political and fiscal decentralisation through technical assistance and by lending to the central governments which can then lend on to sub-nationals. They can also lend directly to sub-national entities with a sovereign guarantee. They promote fiscal responsibility laws governing sub-national debt, which require the budgets of sub-national entities to be balanced. The Bank also oversees the communication and relationships with clients, provides decentralisation capacity building and technical assistance expertise, and is informed on the infrastructure sector. The IFC is supposed to bring relationships with investors and banks, its transaction execution expertise, and understanding of local business environments and financial markets.

Criteria for the IFC’s non-sovereign-guaranteed lending to states and provinces include the following: fiscal health, commitment to reform, public sector management impact, sustainable growth impact, poverty levels and the impact of proposed interventions. Additional criteria for lending to municipalities include: clustering, strategic intervention and appropriate lending in local currency. Sovereign consent for sub-national lending, even if no guarantees are involved, is only required by some countries, in which case the sub-national entity is usually responsible for acquiring the consent. The IFC notifies national governments of sub-national agreements, as it does with all investments. Sub-national lending is mainly aimed at middle-income countries including Brazil, India, Russia and Turkey. This does not exclude low-income countries, however. The Bank says that only those entities with the best prospects for improved financial viability and sustained development will be supported.

From fiscal year 2009, the IFC has invested in 30 sub-national projects with commitments of $1.2 billion. As of September 2012, the IFC’s committed portfolio of sub-national investments was about equally distributed between three regions: Europe, Middle East and North Africa; Latin America; and Asia. Figures available in 2011 showed that almost half of the IFC’s sub-national commitments were to state-owned enterprises and municipal companies, followed by local government units (30 per cent); sub-national financial institutions and public-private partnerships each represented 11 per cent. By sector, almost a quarter of commitments were for ports, followed by urban infrastructure and utilities (19 per cent), water and wastewater, roads and power represented 16 per cent each, followed by urban transport with 11 per cent.

Concerns about sub-national lending include the potential to encourage privatisation, unfunded decentralisation and the risk of over-indebtedness in sub-national entities.