Infrastructure Finance in Developing Countries: The Potential of Sub Sovereign Bonds

Topics: Bond, Municipal bond, Bond market Pages: 53 (18800 words) Published: October 9, 2009
E c o n o m i c

& S o c i a l

DESA Working Paper No. 76 ST/ESA/2009/DWP/76 July 2009

A f f a i r s

Infrastructure finance in developing countries— the potential of sub-sovereign bonds Daniel Platz

Abstract This paper sets out to explore the potential of sub-sovereign bonds in financing infrastructure in developing countries. Taking into account the historical experience of the US, it develops a supply and demand side framework for analysis of the market for sub-sovereign bonded debt in developing countries and applies this framework to Mexico, India and South Africa. Finally, it draws lessons for countries seeking to promote markets for sub-sovereign bonds. Evidence suggests that the regulatory environment, a diversified financial sector and increased capacity for debt support and management matter most for the development of the sub-sovereign bond market. JEL Classification: H74 – State and Local Borrowing, H54 – Infrastructures; Other Public Investment and Capital Stock, H41 – Public Goods, H81 – Governmental Loans, Loan Guarantees, Credits, and Grants Keywords: Sub-sovereign bonds, infrastructure finance, issuers, investors, financial sector, municipal finance

Daniel Platz is an Economic Affairs Officer in the Financing for Development Office of the United Nations Department of Economic and Social Affairs. Comments should be addressed by e-mail to the author: platz@un.org

Contents
Introduction................................................................................................................................. The case for sub-sovereign bonds .................................................................................................. Global perspective on the current market for sub-sovereign bonds ............................................... Supply-side factors in sub-sovereign bond issuances in developing countries ................................ Demand-side factors in sub-sovereign bond issuances in developing countries ............................. Conclusion ................................................................................................................................... Bibliography ................................................................................................................................ Figures 1 2 3 Tables 1 2 3 4 5 6 7 8 Holders of U.S. Municipal Securities.................................................................................. Cumulative Historic Default Rates of municipal and corporate bonds in US ..................... International issuances of sub-sovereign bonds for 1990-1999 and 2000-2007 .................. Municipal bonds in India ................................................................................................... International issuances of sub-sovereign bonds from different income groups..................... Financial sector indicators in India, Mexico and South Africa ............................................ Distribution of savings in India .......................................................................................... Bank concentration in countries with sub-sovereign issuers ................................................ 4 4 6 8 19 20 21 26 Possible structure of a Municipal Development Fund ......................................................... Financial intermediaries by income group .......................................................................... Economies with rated subnational issuers ........................................................................... 17 20 23 1 1 3 8 19 28 30

UN/DESA Working Papers are preliminary documents circulated in a limited number of copies and posted on the DESA website at http://www.un.org/esa/desa/papers to stimulate discussion and critical comment. The views and opinions expressed herein are those of the author and do not necessarily reflect those of the United Nations Secretariat. The designations and terminology employed...

Bibliography: Beck, Thorsten, Asli Demirgüç-Kunt, Ross Levine and (2007)[2000], “A New Database on Financial Development and Structure,” World Bank Economic Review 14, 597-605 . Chandrasekaran, Pravin and Roy Katayama (2006), “Municipal bonds-Is India ready for more?” MPRA Paper No. 9807. Cutler, David and Grant Miller (2005), “Water, water everywhere: Municipal finance and water supply in American cities”, Harvard University; National Bureau of Economic Research (NBER), paper prepared for the National Bureau of Economics Research’s Corruption and Reform Conference (Salem , 30-31 July 2004 ) Daniels, Kenneth N., and Jayaraman Vijayakumar.(2002), “Municipal Bonds—International and Not Just U.S. Anymore.” Public Fund Digest 2 (1): 60–67. Dow Jones (2008),“Monoline insurer crisis spreads to European banks”. Financial News Online 4 February. Fitch Ratings (2009), Mexico Public Finance. Fitch Ratings.(2006), “International Rating Methodology for Local and Regional Governments”, Criteria report. Fitchratings. (2002), “International Special Report: Financing of Mexican States, Municipalities, and Agencies: Alternatives and Strategies”. Griffith-Jones, S. and AT Fuzzo de Lima.(2004),“Alternative Loan Guarantee Mechanisms and Project Finance for Infrastructure in Developing Countries,”Research Paper Globalisation Team International Finance, Institute of Development Studies, Sussex University. Guzman, Isaura.(2007), “The role of international credit ratings in financing utilities - The case of Mexico” paper presented to United Nations Expert Group Meeting on “Innovative Finance for Sustainable Development”, (United Nations Headquarters New York, 18-19 October 2007). Hall, David and Emanuel Lobina( 2006), “Pipe Dreams: The Failure of the Private Sector to Invest in Water Services in Developing Countries”, World Development Movement , Public Services International. Hillhouse A.M (1936), Municipal Bonds: A Century of Experience, Prentice-hall, New York. International Monetary Fund (2008), IMF Country Report No. 08/74, Washington DC. Kapur, Vikram (2007), ”Case Study from India – Tamil Nadu Urban Development Fund”, presented to “Expert Group Meeting : Innovative Finance for Sustainable Development” (United Nations Headquarters New York, 18-19 October 2007).
Infrastructure finance in developing countries ...
31
Kehew, Robert, Matsukawa, Tomoko and John Petersen, (2005), “Local Financing for Sub-Sovereign Infrastructure In Developing Countries: Case Studies of Innovative Domestic Credit Enhancement Entities and Techniques”, Discussion Paper No.1, Infrastructure, Economics and Finance Department, World Bank. Leigland, James and Cledan Mandri-Perrott.(2008), “Enhancing the creditworthiness of municipal bonds—Innovations from Mexico”, Grid Lines Note NO. 39, Public-Private Infrastructure Advisory Facility. Leigland, James (1997), “Accelerating Municipal Bond Market Development in Emerging Economies: An assessment of strategies and progress”, USAID, Jakarta. Martell Christine, Guess G.M.(2006), “Development of Local Government Debt Financing Markets: Application of a Market-Based Framework”, Public Budgeting & Finance, Volume 26 Issue 1, Blackwell Synergy. Martell, Christine R(2003), “Municipal Investment, Borrowing, and Pricing under Decentralization: The Brazilian Case” International Journal of Public Administration, v26 (2):173-196. Matsukawa, T., R. Sheppard, and J. Wright(2003), “Foreign Exchange Risk Mitigation for Power and Water Projects in Developing Countries,” Energy and Mining Sector Board Discussion Paper 9, Washington, DC: World Bank. Nayar, Vibhu (2006), “Democratisation of Water Management: The Tamil Nadu Experiment”, presentation prepared for Capacity Building Workshop on “Partnerships for Improving the Performance of Water Utilities in the Asia and Pacific Region,” 25-27 July 2006, Bangkok, Thailand. Palmer Development Group (2006), “Best Practice Case Study: The Municipal Bond Issue”. Peterson, George E and Patricia Clarke Annez(eds) (2007), Financing Cities: Fiscal Responsibility and Urban Infrastructure in Brazil, China, India, Poland and South Africa. Sage. Publications, New Dehli. Platz, Daniel (2008), “Municipal bonds and water”, Ph.D. thesis, New School University. Platz, Daniel and Schroeder, Frank (2008), “Moving Beyond the Privatization Debate Different Approaches to Financing Water and Electricity in Developing Countries”, ,FES Occasional Paper 34, Berlin. Pradhan, Hemanta K.(2003), “India”, in Kim, Y. H., Local Government Finance and Bond Markets. Asian Development Bank, Manila, Philippines. Prüss-Üstün, Annette, Robert Bos, Fiona Gore and Jamie Bartram.(2008), Safer Water, Better Health-Costs, benefits and sustainability of interventions to protect and promote health. World Health Organization. Unidad de Coordinación con Entidades Secretaría de Hacienda y Crédito Público, viewed 2008 . Shah, Anwar. (2004 ),”Fiscal decentralization in developing and transition economies: progress, problems, and the promise,” Policy Research Working Paper Series 3282, The World Bank. Smith, Adam.(1937), “The Wealth of Nations”, New York: Modern Library. Smoke, Paul. (2001) “Fiscal Decentralization in Developing Countries - A Review of Current Concepts and Practice” Democracy, Governance and Human Rights Programme Paper Number 2, United Nations Research Institute for Social Development. Sylla, Richard, (2002) “A Historical Primer on the Business of Credit Ratings”, in Levich, Richard M., Giovanni Majnoni and Carmen Reinhart. Ratings, Rating Agencies and the Global Financial System, Kluwer Academic Publishers. The Mc Graw-Hill, Standard and Poors, viewed 2008 >. Twelfth Finance Commission (2004), India’s Municipal Sector: A Study for the Twelfth Finance Commission. UNICEF (2005) Meeting the MDG Drinking Water and Sanitation Target, UNICEF. United Nations Population Division(2008), An overview of urbanization, internal migration, Population distribution and development in the world, United Nations. USAID, (2001) “USAID FIRE Project -Lessons Learned from the Ahmedabad Municipal Bond,” Project Note No. 25. Venkatachalam, Pritha (2005) “Innovative Approaches to Municipal Infrastructure Financing: A case study on Tamil Nadu, India”, Working Paper 68, DESTIN. Wilkins, M.(1989) The History of Foreign Investment in the United States to 1914. Cambridge, MA: Harvard University Press. World Bank( 2007), PPI Project Database, World Bank. World Bank(2007), Global Monitoring Report, World Bank. World Bank(2005), Financial Structure Dataset,World Bank.
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Essay about finance
  • Finance: Bonds Essay
  • Developing Countries Essay
  • An Overview of Project Finance and Infrastructure Essay
  • Developing countries Essay
  • Developing Country and Developed Country Essay
  • finance Essay
  • Bonds Essay

Become a StudyMode Member

Sign Up - It's Free