Local borrowing project

climbmoujeanteaSoftware and s/w Development

Dec 13, 2013 (3 years and 3 months ago)

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1


Local borrowing project

Analysis of the questionnaires gathered from the countries
represented in NALAS


Local experts:



Mehmet Onur Partal


Union of Municipalities of the Marmara



Aleksandar Bucic


Standing Conference of Towns and Municipalities



Zyher B
eci


Association of Albanian Municipalities



Cvijeta Tanasic


Association of Towns and Municipalities of the Republik of Srpska



Vladimir Seset


Association of Municipalities of the Republic of Croatia



Carolina Furdui


Congress of local Authorities from
the Republic of Moldova



Osman Sadikaj


Association of Kosovo Municipalities



Zana Djukic


Union of Municipalities of Montenegro



Veselka Ivanova


National Association of Municipalities from the Republic of Bulgaria




Vilma Milunovic

-

Association of Munici
palities and Towns of Slovenia



Radu Comșa


Romania
n Association of Communes



Claudia Pamfil


Romania
n

Association of Communes



Gjorgji Josifov


Macedonia

General Financial Framework



Country,

Local
Government
Association

Local Government Revenues

Expenditures Assignment

Most impo
rtant
local taxes
/fees
and
average share in the
annual budget

Shared Taxes

Central Government
Transfers

Exclusive to Local
Governments

Shared Local with
Central Governments

Shared
Region with
Central

Governments

1

Albania,
Albanian
Association of
Municipa
lities
-

AAM

1.

Local tax on
small business


20,47%

2.

Real estate
transfer tax
including tax on
buildings and
1.

Personal
income tax

2.

Profit tax

(Have not been
applied yet))

1.

Unconditional
transfers (grant
s
and competitive
funds)

2.

Conditional
transfers

1.

Management of
the local road
infrastructure

2.

Water supply

3.

Sewage, waste
and pluvial water
1.

Urban planning

2.

Social services

3.

Environmental
protection



2


agricultural
land


12,4%

3.

Vehicles
registration tax


5,45%

3.

Transfers from
the Regional
Development
Fund

treatment

4.

Public lighting

5.

Sanitation/waste
collection

6.

Local public
transpor
tation

7.

Social housing,
houses for youth
and social
welfare

8.

Urban planning

9.

LED

2

Bulgaria,
National
Association of
Municipalities in
the Republic of
Bulgaria
-

NAMRB

1.

Waste taxes


11,79%

2.

Property tax



9,53%

3.

Property
revenues


4,64%

1.

Personal
income tax



50%

1.

General
complementary
subsidies

(for
financing
delegated state
competences)

2.

General
adjustment
subsidies



equalization
subsidy

(for
financing local
activities)

3.

Target subsidies
(for financing
ca
pital
investments)

1.

Management of
the local road
infrastructure

2.

Sewage, waste
and pluvial water
treatment

3.

Public lighting

4.

Sanitation/waste
collection

5.

Local public
transportation

1.

Water supply

2.

Social housing as
well as houses for
youth

1.

District heating
supply

2.

Management of
local interest
airports

3

Croatia,
Association of the
Municipalities of
the Republic of
Croatia
-

AoM

1.

Income tax and
surtax on
income tax

2.

Income from
non
-
financial
asset

3.

Property tax

1.

Income tax

(34%

until
2006; 52% as
of 2007
)

2.

Profit tax
(2
0%

until
2006; 0% as
of 2007
)

3.

Tax on real
estate

(60%)

1.

Transfers for
decentralized
functions


primary
education;
secondary
education; health
care; social
welfare and fire
protection

2.

Equalization
grants


for
1.

Manag
ement of
the local road
infrastructure

2.

Water supply

3.

Sewage, waste
and pluvial water
treatment

4.

Public lighting

5.

Sanitation/waste
collection

6.

Local public
1.

Energy saving
projects

1.

Social housing as
well as houses for
youth
(exclusive
competence of
regional
government)

2.

Management of
local interest
airports (exclusive
competence of
regional
government)

3


general purposes
and for capital
purposes

transportation

7.

District heating
supply

4

Macedonia,
Association of the
Municipalities in
the Republic of
Macedonia
-

ZELS

1.

Property tax


6%

2.

Real estate
transfer tax



17%

3.

Communal fee


29%

There is one
type
of shared tax
revenues


part of
personal income
tax (PIT).
Local
governments
receive 3% of PIT
and are
autonomous in
spending the
shared revenues.


T
he LLGF foresees
the following
transfers: 1) a general
purpose

transfer from
VAT, 2)
earmarked/block
grants for the areas of
education, culture,
social policy and
child protection, 3)
capital grants, and 4)
funds received for
delegated
competencies.

1.

Management of
the local road
infrastructure

2.

Water supply

3.

Sewage, was
te
and pluvial water
treatment

4.

Public lighting

5.

Sanitation/waste
collection

6.

Local public
transportation


1.

Social housing as
well as houses for
youth


5


Moldova,
Congress of Local
Authorities from
Moldova


C
LAM

1.

R
eal estate

transfer tax

2.

Tax on territory
pla
nning

3.

Tax on natural
resources

For communes
and municipalities
established by
rayon councils in
the frame of 0
-
100%

1.

Tax on
income of
legal entities

2.

Tax on
income of
physical
persons


1.

The management
of the local road
infrastructure

2.

Water supply

3.

Public light
ing

4.

Sanitation/waste
collection

5.

Local public
transportation

6.

District heating
supply

(Only for
Chisinau and
Balti)

7.

Social housing

8.

Management of
local interest
airports (Only
for Chisinau and
Balti)

1.

Social housing and
houses for youth

1.

The management
of the l
ocal road
infrastructure

6

Montenegro,
Union of
Municipalities of
Montenegro
-

1.

Utility fees

2.

Real estate
transfer tax

3.

Surtax on
1.

Personal
income tax


10%

2.

Real estate
1.

E
qualization
grants (comprise
11% of personal
income tax and
1.

Management of
the local road
infrastructure

2.

Water supply



4


UoM

income tax

transfer tax


50%

3.

Concessions
and fees for
using natural
resources


30%

20% of real
estate transfer
tax)

2.

Conditional
grants


for
financing
investment
projects

3.

Sewage, waste
and pluvial water
treatment

4.

Public l
ighting

5.

Sanitation/waste
collection

6.

Local public
transportation

7.

Social housing


social welfare

7

Republika Srpska
-

BiH,
Association of
Municipalities
and Towns of
Republika Srpska
-

A
MT
RS

1.

Property tax


up to 35%

2.

Turnover tax


up to 20%

3.

Rent


up to
15%



1.

Management of
the local road
infrastructure

2.

Water supply

3.

Sewage, waste
and pluvial water
treatment

4.

Sanitation/waste
collection

5.

Local public
transportation

1.

Sewage, waste and
pluvial treatment

2.

Public lighting

3.

District heating
supply

4.

Building of social
houses as well as
houses for youth


8

Romania,

Romanian
Association of
Communes
-

ACo
R

1.

Property tax
(building and
land)

2.

Motor Tax

3.

Royalties and
rents

1.

Income Tax
(
shared up to
82% in
various
degrees; and
accounts a
third of all
LGs)

1.

Earmarked
recurrent
tr
ansfers

2.

Earmarked
capital

transfers

3.

Block grants

4.

General purpose
grants
(equalization)

(
Transferred to both
counties and
municipalities.
Make
for about half of all
LGs)

1.

The management
of the local road
infrastructure

2.

Water supply

3.

Sewage, waste
and pluvial

water
treatment

4.

Public lighting

5.

Sanitation/waste
collection

6.

Local public
transportation

7.

Social housing

1.

District heating
supply


thermal
retrofitting

2.

Education (LGs
maintain the
infrastructure)

1.

Education (LGs
maintain the
infrastructure)

9

Slovenia,
Asso
ciation of
Slovenian
Municipalities
-

SOS

1.

Fee on the use
of construction
land

2.

Real estate
1.

Personal
Income Tax


50% assigned
for
municipalities
1.

General grants


assigned to
municipalities by
formula as the
equalization
1.

The management
of the local road
infrastructure

2.

Water supply

1.

Local public
transportation

2.

Subsidies to the
economic and

5


transfer tax

3.

Fee on the use
of public space

from which
70% to each
municipality
and 30%
shared
through the
solid
arity
fund for
poorer LGs.

grant

2.

Earmarked
grants


assigned
for co
-
financing
investment
projects

3.

Special grants


for co
-
financing
minority rights

3.

Sewage, waste
and pluvial water
treatment

4.

Public lighting

5.

Sanitation/waste
collection

6.

Building of
social houses

7.

Management of
local interest
airports

8.

Tourism

9.

Primary
healthcare and
pharmacy
services

10.

Social care

11.

Management of
cul
tural and sport
facilities

12.

Fire protection

13.

Public order and
peace


agriculture sector,
primary schools

1
0

Serbia,
Standing
Conference of
Towns and
Municipalities in
Serbia
-

SKGO

1.

Construction
land

development
charge


8%

2.

Construction
land use charge


6%

3.

Property tax


5%

1.

Income tax


40% share

2.

Tax on
inheritance
and gift


100% share

3.

Property
transfer tax


100% share

1.

Non
-
Earmarked
transfers
(equalization
transfers;
compensation
transfers;
transit
ional
transfer
1
; general
transfers)

2.

Earmarked
transfers (block
transfers;
categorical
transfers in a
1.

The management
of the local road
infrastructure

2.

Water supply

3.

Sewage, waste
and pluvial water
treatment

4.

Public lighting

5.

Sanitation/waste
colle
ction

6.

Local public
transportation

1.

Management of
local interest
airports

2.

Building of social
houses and houses
for the youth


N/A




1

Only for first 3 years of implementation of the Law on Local Gov
ernment Finance

6


narrow sense)

7.

District heating
supply

8.

Pre
-
school
education (all
costs related)

9.

Investment costs
of primary
schools and
primary healtg
care centres

1
1

Turkey, Union of
Municipalities of
Marmara

-

UMM

1.

Advertisement
and Publicity
tax 1
-
5%

2.

Entertainment
tax 1
-
5%

3.

Fire insurance
tax 1
-
5%

5% of all nation
-
wide taxes are
allocated to Local
Governments. The
main taxes stem
from VAT and
Special
Consumpt
ion
Taxes

All shares allocated
from the tax income
of the general budget
are considered as
Central Government
Transfers. They ar
eplaced in the
budgets of both
Ministry of Finance
and other ministries
in purpose of Grants
to Local Government.

1.

The managemen
t
of the local road
infrastructure

2.

Water supply

3.

Sewage, waste
and pluvial
water treatment

4.

Public lighting

5.

Sanitation/waste
collection

6.

Local public
transportation


1.

District heating
supply

2.

Building of social
houses and houses
for the youth

1.

Management of
loca
l interest
airports



7


Municipal Borrowing


Country, Local
Government
Association

Central Government
Approval for local
debt issue

Total outstanding
Debt and Debt
Service Capacity

Debt Instruments
foreseen in the Law

Types of projects
allowed to be long
-
t
erm financed

Allowed Guarantees/

Local Government
Guarantees for Public
Enterprise Loans

State Guarantees

1

Albania, AAM

Municipal loan must
be approved by the
Ministry of F
i
nance
.
There are two
different procedures
for loan
authorization 1)

when municipa
lity
borrows
domestically and 2)
on the international
credit market.

The MoF verifies the
procedural
compliance with the
law as well as
reevaluates the
increased risk of
borrowing.

Maximum level of
the final stock of
the long term debt
must not exceed
the
ratio of 1.3:1 of
the total recurrent
revenues (own
resources, the
shared taxes and
the unconditional
transfers).

The debt service
capacity can not
exceed 20% of the
average total actual
revenues of the
local government
from unconditional
transfers, shared

taxes and local
taxes and fees of
the previous three
fiscal years.

1.

Loans

2.

Bonds

1.

Capital
investments

2.

Refinancing
of
an existing long
term loan

Local governments can
offer guarantees in assets
(immovable properties) or
can offer its revenue
stream as general

obligation debt; specific
revenue guarantees;
reserve fund;
financing
interception; real property
guarantees and other types
of guarantees.


Local governments can
release guaranties on long
term loans taken from a
juridical entity separate
from the local

government
itself, when the local
government controls more
than 50% of the stocks of
that entity.


Local borrowing in
all of its forms,
regardless of the
purpose, is not
guaranteed by the
state. Even the
approval of the MoF
neither constitutes a
guarantee

nor
establishes

a
n
obligation

for the
central government to
repay the loan.

It is only an
obligation of the
Local Government
that issued a debt.

2

Bulgaria,
NAMRB

No, but according to
Municipal Debt Act
stipulates that a
Central Municipal
Debt Register m
ust
be established at the
MoF with individual
records for each

local government.
The register is
reported to the MoF
every month. The
register has
three
The annual debt
service capacity
must not exceed
25% of the own
-
source revenues
and equalization
subsidy from the
previous audited
report and the
nominal value of
the municipal
guarantees issued
must not exceed
1.

Loans

2.

Bonds

3.

Leasing

1.

Capital
investment
projects

Local borrowing in
Bulgaria may be secured
by either own source
revenue raising ability or
rarely by physical assets.

It is not allowed to secure
loans by any functional
and essential municipal
property.

Local Governments are
allowed to provide
guarantees of repayment
for borrowing by local
No state guarantees
can be envisaged or
called upon. An
exception is the
financing of the Sofia
subway which is
guaranteed by the
State.

8


sub
-
registers on for

loan
s,
bond
s and
guarantees features
(lender, principal,
interest rate, fees,
and
maturity)
.

5% of the same
amount.

The Municip
al
Debt Act does not
contain any
provision on total
outstanding debt
but municipal debt
is included in the
central government
debt which must
not exceed 60% of
GDP.

public
enterprises.

3

Croatia, AoM

According to the
Budget Law the
local governments
can take on

debt
pursuant to the
decisio
n of the
representative body
of the LGU with the

prior consent of the
Government of the
Republic of Croatia.

The annual
borrowing limit is
20% of the actual
revenues from the
previous year. It
comprises
the
amount of the
average annual
annuities on loans,
guarantees given
from the previous
years, and short
-
term outstanding
liabilities. T
he
additional limit
introduced in 2003
is that overall LG’s
debt can’t exceed
3% of the total
recurrent revenues
of all LGUs in
Croatia.

1.

Loans

2.

Bonds

3.

Leasing


financial and
operational

1.

Capital
investment
projects

2.

Reconstruction

3.

Development
projects

4.

Refinancing of
an existing loan

Local government units in
Croatia are allowed to
secure their loans by own
source revenues or reserve
funds. The assets or
physical property can’t b
e
used as a guarantee.

Local governments may
issue guarantees for
borrowing by public
institutions (for example
school or kindergarten) or
public utility companies
founded by LGUs. The
guarantees are calculated
in the limits of the annual
borrowing capacit
y of
local government
.

Based on the
proposal of the
Ministry of Finance
the Central
Government can issue
a guarantee.

4

Macedonia,
ZELS

Municipalities
may
borrow from the
country and abroad
only upon prior
consent by the
Government of
Macedonia, on the
ba
sis of an opinion
The total
outstanding long
-
term borrowing of
the municipality
including all
guarantees shall
not exceed the total
amount of revenues


Loans (short
and long
-
term)



Municipal
bonds

(
Municipal
bonds may be
revenue
-
generating and
Pursuant to the
Public Debt Law, a
priority shall be
given to the projects
that me
et the
following:

are part of the
strategic priorities of
Local go
vernments can
offer guarantees to lenders
in own source revenues;
reserve funds and partly
physical property which is
not essential for providing
public services.

With decision from the
The Government of
the Republic of
Macedonia may
guarantee and take
liabilities which may
derive from the long
-
term debts of the
Municipality,
9


by the Ministry of
Finance. Any
initiative, pursuant to
the Public Debt Law
on beginning
negotiations for
conclusion of loan
agreement should be
started upon prior
consent by the
Government of
Macedonia. This
initiative should
mandatorily

contain
positive opinion by
the MoF.

in the current
operational budget
of the municipality
in the preceding
year.

The tota
l amount of
the annual debt
-
service capacity
from the long
-
term
borrowing in one
fiscal year can
amount up to 30%
of the
recurrent
revenues of the
municipality in the
preceding fiscal
year.

Recurrent revenues
comprise
all tax
and non
-
tax
revenues +
revenue
s from the
concessions and
construction land
sale + VAT
transfers.

general bonds)


the Republic of
Macedonia;

generate revenues
and are creditworthy;
and/or

have project
implementation units
having institutional
capacity to realize
the project or teams
assigned therefore.

council the municipality
may guarantee and
undertake obligations
which

arise out of long
-
termed loans of the public
enterprises founded by the
municipality.

Public enterprises
established by the
municipality
can borrow
upon prior issued
guarantee
by the
Municipal Council, for
which the Council shall
adopt a decision.

The gua
rantees affect the
borrowing capacity by
deducting them from the
debt service capacity of
the municipality. When a
municipality issues a
guarantee for a public
company, the municipality
must reserve in the budget
the costs for possible
payment of the guara
ntee.

including also the
municipal public
services founded by
the municipality, only
in cases when
liabilities are

undertaken according
to law

on issuance of
a sovereign
guarantee
.

The Minister of
Finance signs the
agreement on
issuance of a
sovereign guarantee
on behalf of the
Republic of
Macedonia.

5

Moldova, CLAM

No


According to
the Law on public
debt local auth
orities
only report to MoF
the level of debt and
the guarantees issued

Short
-
term
borrowing


5% of
total revenues

Long
-
term
borrowing for
capital investments


20% of total
annual revenues

1.

Loans

2.

Bonds

3.

Financial
leasing

1.

Capital
investments

Second level of
local
authorities (rayons) have
the right to issue
guarantees for first level
local authorities
(communes and
municipalities) as well as
municipal enterprises for
long
-
term loans (own
revenues only)


6

Montenegro,
UoM

Yes


According to
the Law on Local
G
overnment Finance
municipalities need
Central Government
approval for
borrowing

Debt service
capacity must not
exceed 10% of the
actual recurrent
revenues from the
previous year

1.

Loans

2.

Bonds

1.

Financing
infrastructure
projects

2.

Purchasing of
capital assets in

compliance with
According to the Budget
Law local governments
are allowed to issue
guarantees upon prior
approval of the Municipal
Assembly for the
enterprises founded by the
T
he

G
o
v
ern
m
en
t

can

m
a
k
e

decisi
o
n

w
it
h

regar
d

t
o

b
orro
w
ing
s

a
n
d

i
ssu
e

of
guara
n
t
ee
s

i
n

a
ccordanc
e

w
i
t
h

the
an
n
ua
l

b
u
dge
t

la
w
.

10


the approved
Capital
Investment Plan

municipalities (own
revenues, physical
prop
erty, reserve funds).

The guarantees issued by
local authorities for public
enterprises’ borrowing
affect the municipal debt
service capacity.

E
nd
-
u
s
e
r

o
f

gu
a
rant
e
e

shal
l

pa
y

ri
s
k

fee
,

i
n

th
e

a
m
oun
t

o
f

0.
5
%

of
the

a
m
ount

o
f

the

g
u
a
rantee. The
Government haven’t
issued any guarantees
for LGs for the time
being.

7

Republika Srpska
-

BiH, AMTRS

The National
Assembly of
Repulika Srpska
g
ives an approval for
municipal borrowing
based on Central
Government
proposal. Ministry of
Finance is
responsible for
implementation of
the respective
activities in case
proposal for local
debt issue is
approved.






8

Romania, A
CoR

Yes


Commission
on l
ocal government
debt authorization
(MoF based
committee)

30% of own
revenues (local
taxes and fees and
shared income tax)

1.

Loans

2.

Bonds

3.

Supplier credit

4.

Financial
leasing

N/A

For loans related to EU
funded road an public
utility infrastructure
projects (Natio
nal Fund
for Loan Guarantees to
SME)

Upon a lender demand
LGs can issue a guarantee
for public enterprises.
They account for the LG
debt limitation.

N/A

9

Slovenia, SOS

Municipality must
receive an approval
for borrowing from
the Ministry of
Finance and t
he
decision for
Debt service
capacity is settled
up to 8% of the
own
revenues of
the previous year

1.

Loans

2.

Bonds

3.

Leasing

Long
-
term
borrowing is allowed
only for capital
investment purposes.

The property used

for
providing the mandatory
public services is
excluded of using as a
guarantee;

all other
property can be used as
No state guarantees
for the municipal debt
repayment

11


borrowing has to be
included in the
annual budget.

collateral
.

Municipalities can provide
guarantees to public
enterprises and this
amount is included in the
debt limit of the
municipality. T
he
municipal council has an
authority to take decision
on guarantee issuing and
it
should be integral part of
the municipal budget.

1
0

Serbia, SKGO

Ministry of Finance
provides opinion on
the local gove
rnment
request for
borrowing

50% of total
recurrent revenues
from the previous
year and

15% of total
recurrent revenues
from the previous
year

1.

Loans

2.

Bonds sold to
the Republic
of Serbia or
financial
institutions
exclusively

Public investments
which are in
line
with the adopted
mid
-
term plan of LG

Local Governments are
restricted to issue any kind
of guaranties according to
the Law on Public Debt

Central Government
has the right to issue
guarantee and to
refund principle,
interest and other
expenditures
occu
rred if the
requirements are not
met by the local
government. Central
Government recover
these funds by
suspension of the
rights of LGs on
share of
taxes/transfers

11

Turkey, UMM

Local governments
do not need approval
from the national
government. For
loc
al debt issuance
local governments
must stay within the
borrowing limits
only.

Domestic
Borrowing is
limited to an
amount of 10% of
previous year’s
realized revenues
modified with the
revaluation rate.


Annual external
indebtedness
cannot exceed the
revalu
ated amount
of the latest annual
budget. (1.5 times
1.

Domestic
Loans

2.

Municipal
Bonds

3.

Foreign Loans
via Project
Financing
(through
Export Credit
Agencies
-
Eximbanks)

4.

Program
Loans
used for
filling current
year’s
Municipalities are
allowed to incur
external borrowing
only for high
-
tech
projects; i.e. metro
projects, fire trucks.

Infrastructure
investments which
require advanced

technology and
considerable amount
of financial
resources, the
borrowings for the
projects approved by
Municipalities are
allowed to issue
guaranties to municipal
affiliates and subsidiaries
(own revenues, physical
property, reserve funds).

By law, municipal
affiliates are financially
guaranteed by
municipalities, where the
financing type does not
m
atter. These institutions
are public entities.

Municipal subsidiaries,
which are considered as
Undersecretariat of
Treasury is
authorized to issue
state guarantees for
specific projects and
they are mostly
concentrated on basic
infrastructure
projects; i.e. subway
projects, solid waste
ma
nagement projects.

12


for metropolitan
municipalities.

financing gap.

5.

Supplier
Credits

6.

Financial
Leasing

7.

Guarantees to
Municipal
Affiliates and
Subsidiaries

the Council of
Ministers upon
request of the
Undersecreteriat of
State Planning
Organization (SPO)
may not be
considered in
calculation of the
debt limi
tation.

private entities whose
shares more than 50% are
owned by a specific
municipality, are
financially not guaranteed
by law. These guarantees
can only be provided
th
rough loan agreements,
with the discretion of
municipalities.




13


Local Government Borrowing Regulations


Country, Local
Government Association

Pr
ovisions for Long
-
Term Borrowing regarding purposes and
terms of borrowing

Provisions for Short
-
Term Borrowing

regarding purposes
and terms of borrowing

1

Albania, AAM

Since February 2008 Local Governments in Albania can
borrow from the domestic and/or international financial
markets to satisfy their capital investments needs.

The maximum amount of debt a LG can afford is 1.3 times of
its revenues genera
ted in the last fiscal year.

The LGs must respect the following limitations when consider
borrowing:

• The ratio between the operative surplus of the previous year
(calculated as the difference between the operative revenues,
from its own sources, the divi
ded taxes and unconditional

transfers and the LGs unconditional operational expenditures)
and the debt service due in any year of all the long term, must
be no less than 1.4: 1.

• The amount of debt service due in each year of the long term
loan cannot exc
eed 20% of the average total actual revenues
of the local government from the unconditional transfer,
shared taxes, and local taxes and fees of the previous three
fiscal years.

Law on Local Government Borrowing grants the LGs a right
to borrow a short term

loan, which matures and is totally
repaid
on or before the last day of November of the same
fiscal year,
and cannot be object of refinance or extension of
the maturation period beyond this date.


By means of a short term loan, the LGs can get a loan to
co
ver the temporary shortage of liquidity to a

maximum of 10% of the actual revenues collected from
taxes, local fees and revenues from shared

taxes from the last
fiscal year.

2

Bulgaria, NAMRB

Long term borrowing may be carried out
to finance capital
inves
tment projects, debt refinancing, and to meet payments
made under municipal guarantees that have become due.

The municipal council
makes

decision on borrowing. The
decision of the Municipal Council requests the mayor to carry
out the procedure for choosing

a financial institution to
provide the necessary funding for the project or the financial
intermediary in the issuance of municipal securities.

Municipal debt comprises:

1) issues of municipal bonds, 2)
debt incurred by municipal loan contracts, 3) debt i
ncurred by
municipal owned enterprises, 4) issued municipal guarantees,
5) central government interest free loans including those for
co
-
financing EU projects, and 6) obligations under
commercial credit and financial leasing for a period exceeding
two year
s

Short
-
term debt may be incurred in order to finance current
expenditures and has to be repaid before the end of the
budget year.

The municipality may take short
-
term debt to finance:

1.

delivery of public services in a temporary shortage
of funds occurred
during the execution of the
budget;

2.

capital expenditures, capital to be provided within
the budget year or contract entered into long
-
term
debt;

3.

emergency expenses to prevent and mitigate the
effects of force majeure;

4.

required payments on municipal secu
rities.

3

Croatia, AoM

All local government units (municipalities, cities and
counties) can take long
-
term debt by taking out

loans on the
money and capital market, exclusively for a capital
investment project, for reconstruction and development,
financed

from their budgets.

Short
-
term borrowing of LGUs is possible for the

financing of the regular activities of the body and the
spending agencies of their budgets, only when the

revenue of
the budget does not come in evenly all through the year

14


4

Macedonia,

ZELS

The loans of the municipalities from abroad need to have a
prior agreement of the Government of Macedonia based on
the Ministry of Finance positive opinion. LLGF stipulates that
the Government of Macedonia cannot guarantee and
undertake obligations t
hat come from the debts of the
municipalities, including the municipal public services, except
in cases when the obligation has been undertaken by law. The
municipality can have longer
-
term loans for financing capital
means and investments only if the repa
yment of the debt is
done in equal or decreasing annual installments. The decision
for long
-
term borrowing is made by the Municipal Council.
The total amount of the annual repayment of the debt for a
long
-
term loan must not exceed 30% of the total revenue
of
the current operational budget of the municipality in the
previous fiscal year.

In June 2009 the Government of Macedonia issued a
Rulebook for methods and procedures for short term lending
for the municipalities from the Government that is from the
Budg
et of the Republic of Macedonia, a so called “on
-
lending”. The Rulebook stipulates that this is short term
lending with no interest calculated which should be repaid
within a fiscal year and can be used only for resolving the
liquidity problems. In order t
o apply for this kind of a loan,
the municipalities need to submit an application with the
information on the requested amount of denars, explanation
for the reasons behind the borrowing, amortization plan,
outstanding loans for the current year and calcul
ation if the
total annual short term borrowing exceeds 30% from the
realized current
-
operational revenues from the previous fiscal
year.

5

Moldova, CLAM

Local public authorities of level I (communes and
municipalities) and level II (rayons)

based on a dec
ision of
respective Councils, have the right to sign long
-
term loan
agreements for capital investments with domestic and
international financial institutions/lenders.

Local public authorities of level I (communes and
municipalities) are allowed to issue s
hort
-
term debt for
financing current expenditures, with payback period by the
end of the fiscal year, from the budget of second level
territorial
-
administrative units (rayons).

Additionally, local authorities of both levels are allowed to
take loans for f
inancing current expenditures from domestic
and international financial institutions.

6

Montenegro, UoM

Law on Financing of Local Self
-
Government

prescribes that a
municipality may take long
-
term loans only for the purposes
of financing infrastructure pro
jects or for the purchasing of
major capital assets, in compliance with approved Capital
Investment Plan.

Law on Financing of Local Self
-
Government

prescribes that
Municipalities may take short
-
term loans intended for
satisfying short
-
term needs for liquid
ity. Short
-
term loan has
to be paid back in 12 months.

7

Republika Srpska
-

BiH,
AMTRS



8

Romania, A
Co
R

Mid
-
term and long term borrowing may be carried out only
for capital investment and debt refinancing.

A loan from the State Treasury

for

LG cash shor
tages to be
repaid by the end of the same fiscal year. Short term
borrowing from commercial banks is carried out for capital
investment (pre
-
financing of EU
-
funded projects) and debt
refinancing.

9

Slovenia, SOS

The municipal council is authorized to appr
ove long
-
term
borrowing along with the Ministry of Finance approval and
the amount of the debt should be included in the annual
budget.

According to the
Public Finance Act
each

local government
borrowing
from the international credit market must be
Short
-
term borrowing is limited to 5 % of the annual budget
and should be repaid within the budget y
ear. No other
special provisions or regulations are settled for entering in
short
-
term borrowing. Municipalities are only obliged to
report on debt and debt repayment on a quarterly basis. The
decision for short
-
term borrowing is the mayor's competence.

15


permitt
ed by the law.

Municipalities are also allowed to take long
-
term loans to co
-
finance EU funded projects and it doesn’t affect municipal
borrowing capacity.

1
0

Serbia, SKGO

Local government cannot enter into long
-
term debt, except
when it comes to financing or re
-
financing capital investment
expenditures planed in the local budget.

Local government can borrow for financing current deficit,
which occurred as a
consequence of unbalance of public
revenues and expenditures.

Short
-
term
loan

must be repaid by the end of the fiscal year,
and shall not be re
-
financed or transferred to the next fiscal
year.

Borrowing for financing short
-
term deficit must not exceed
5% o
f total amount of revenues generated in the previous
budget year.

11

Turkey, UMM

The Municipality may undertake obligations and issue
debentures according to the following principles and
procedures in order meet the expenses required to be made for
perfor
mance of duties and services;



Within the frame of the provisions of the Law Nr.
4749 Related to Public Finance and Management of
Debts, foreign borrowings may be provided only for
financing of the projects defined in the investment
program of the Municipal
ity.



The Municipality using investment credit and cash
credit from Iller Bank shall be obliged to present the
payment plan to this bank. Iller bank shall be entitled
to reject the loan request of the municipality where
the re
-
payment plan is found insuffic
ient.



Issuance of debentures may be considered only for
the financing of the projects defined in the
investment program and shall be realized according
to the provisions of the relevant law
.

Local authorities are allowed to get any kind of short
-
term
debt
from Bank of Provinces (İller Bankası), whose shares
are being held by local authorities.

Additionally, local authorities are free to debt refinance or
get domestic loans from public and private commercial banks
provided that a municipal council resolutio
n is taken and in
effect.

Short
-
term borrowings in Turkey are widely being processed
via domestic banks in Turkish Lira, varying from 1 to 5
years.


16


Financial Market


Country,
Local
Government
Association

Lending Institutions

Average Interest Rate

as of
December 2009

Credit
Enhancement
Mechanisms

Credit Rating for
Local
Governments

Procedures for
Contracting Debt

Municipal Bond
Issuance

Creditors (Banks
and Funds)

International
Financial
Institutions

National
Currency

Foreign
Currency

1

Albania,
A
AM

1.

Private
commercial
banks

2.

State
development
funds
(Albanian
Development
Fund,
Highland
Areas
Developemnt
Fund)

1.

KfW

2.

World Bank

3.

EBRD

4.

CEB

6 months
prime rate
of treasury
bonds
(7%)
+0.5
-
3%


N/A

N/A

Once the LG inform
the MoF that they
intend to take a
long
-
term loan, the
LG can open the
process of
requesting the
expression of
interest by the
financial
institutions
. After
that the LG
establish a
Committee in
charge of the
evaluation of the
banks’ offers.
Municipality starts
the negotiation with
the bank which

has
submitted the best
technical/financial
offer. Upon the
completion of the
negotiation the loan
agreement can be
drafted which has to
be presented to the
City Council for
approval. City
Council decision
and draft Loan
Agreement must be
submitted to the
MoF for final
approval.

The last
step is the signing
N/A

17


the contract with the
Bank.

2

Bulgaria,
NAMRB

1.

Private
commercial
banks

2.

State
-
owned
commercial
bank

3.

Fund for
Local
Authorities
and
Governments
FLAG

1.

EBRD

2.

EIB

Basic
interest
rate
+1.4%
BGN


The USAID
Guarantee
Mechanism
-

Development
Credit
Authority
(DCA)
provides
guarantees for
municipalities
as borrowers
to United
Bulgarian
Bank
guaranteeing
50% of the
loans. 13
municipalities
have used this
instrument so
far.

There is a
Bulgarian Credit
Rating Agen
cy,
but also the
worldwide rating
agencies assign
ratings for
municipalities
and securities. In
1999 S&P rated
Sofia bonds issue
and in 2000
Varna bonds
issue has been
rated by
Moody’s.

Public tender

after
meeting certain
conditions

F
requently used
debt
in
strument in the
past years


Sofia,
Varna, Svishtov,
Sliven, Dupniza,
Dobrich, Varna,
Shumen, Svilengrad,
Stara Zagora
.

According to
statistics of March
2010 total local
government
securities issues
amounted 64,154
million BGN.

3

Croatia, AoM

1.

Private
com
mercial
banks

2.

State
-
owned
commercial
bank
(HBOR)

1.

World Bank

2.

EIB

3.

EBRD


4.2%


N/A

Only City of
Zagreb obtained
a credit rating so
far by Moody’s.

In accordance with
the provisions of the

Public Procurement
Act

and the
Law on
Amendments to the
Law on Public
P
rocurement
.

Debt instrument
used by bigger cities
like Opatija,
Koprivnica, Osijek,
Rijeka, Split.

4

Macedonia,
ZELS

1.

Private
commercial
banks


1.

World Bank

2.

EBRD

3.

KfW

7,25
-
9%

6 months
LIBOR

In 2007
USAID/Maced
onia has
introduced
Development
Credit
Authority
(
DCA) Loan
Portfolio
Guarantee
facilities of
approximately
US$10 million
There was not a
rated
municipality
until 2009 when
USAID
Macedonia Local
Government
Activity
(MLGA)
established
cooperation with
Macedonian
Financial
Before any
borrowing
procedure public
debt issuers are
required to contact
the financial
institution so as to
obtain draft terms
and conditions for
borrowing t
hat are
submitted to the
MoF along with the
Request for
N/A

18


to the
Macedonian
financial
market. Under
these facilities
USAID offers
partial loan
guarantees to
private sector
lenders.

This guarantee
covers 50% of
the loan and
consequently
reduc
es the
bank risk and
the collateral
requirements

Excellence
Center (MFEC)
and Moody’s
Investor Service.
S
ince then two
municipalities
Strumica and
Veles as well as
the City of
Skopje have
been rated.


obtaining an
approval for
borrowing.

Once the approval
is obtained the
public debt issuer is
obliged to procure
the financial service
pursuant to the
provision of the
Public Procurement
Law

and the
re
spective bylaws.

5

Moldova,
CLAM

1.

Private
commercial
banks

2.

State
-
owned
commercial
banks

3.

State
-
funded
development
funds

4.

International
Association
for
Development


20%

5
-
6%

N/A

N/A

???

N/A

6

Montenegro,
UoM

1.

Private
commercial
banks

2.

State
-
funded
developm
ent
funds

1.

EIB

2.

KfW

3.

EBRD

4.

World Bank

10%; 5%
-
Investmen
t
Developm
ent Fund

N/A

N/A

N/A

Direct negotiation
with one or more
potential lenders

M
unicipalities are
issuing bonds, but
the
municipal
bonds
market is not
developed at the
desirable extent.

This is due t
o the
fact that the primary
market is controlled
by the Investment
Development Fund
of Montenegro and
19


the secondary
market does not
exist.

7

Republika
Srpska
-

BiH,
AMTRS









8

Romania,
A
Co
R

1.

Private
commercial
banks

2.

State
-
owned
commercial
banks

1.

EBRD

2.

EIB

ROBOR
3M +
2,75%
-
5,5%

EUROBO
R 3M +
5,5%

N/A

Yes


on IFIs
demand or prior
to international
bond issues
(Bucharest 2006


Fitch, Oradea
2009


Fitch)

Public tender




Request for
offers (value of
the loan below
100.000 euro)



Open auction
or open
negotiati
ons
(above 100.000
euro)


Very frequently used
instrument for large
scale projects
(Bucharest 2005


500 mln. Euro
issued at London
Stock Exchange)

9

Slovenia, SOS

1.

Private
commercial
banks

2.

State
-
funded
development
funds
(Slovenian
Environment
Fund,
Sloven
ian
Regional
Development
Fund)


Euribor
+2
-
3.5%


N/A

Not yet

Public tender

Once LG received
MoF approval for
borrowing they can
announce a tender
for selection of a
financial advisor
and for choosing the
lender (bank).

Then
the
m
unicipality
request
s

an

agr
eement

for
borrowi
ng by
presenting to the
MoF the

report
of
the

financ
ial

advis
o
r
for choosing the
best

offer out of

three valid
bank
offers

an
d the draft
contract with the
chosen bank.

A
fter getting an
agreement

by the
There is no LG
issued municipal
bonds so far

20





MoF

the
Municipality can
enter into
the
contract with the
bank.

1
0

Serbia, SKGO

1.

Private
commercial
banks

2.

State
-
funded
development
funds

1.

EBRD

2.

EIB

3.

KfW

4.

World Bank

5.

Council of
Europe

Developme
nt
Bank


EUR,
Fixed:
6.75%

EUR,
Floating:
Euribor
3M+5%

N/A

Three cities have
been assigned
with credit
ratings
in June
2010
by
Moody’s.
噡汪敶o 慮d
䭲慬a敶o
ob瑡楮敤 B1 慮d
瑨攠City of 乯v椠
卡p B愳
.

Th攠
捲敤楴⁲慴楮g
pro捥ss w慳a
suppor瑥t by
啓Af䐠䵅dA
.

mub汩挠 瑥td敲


楮v楴慴楯n 瑯
fin慮捩c氠lns瑩瑵t楯ns
for 捯l
汥捴楮g b楤s

丯A



Turkey, 啍j



Private
commercial
banks

6.

State
-
owned
commercial
banks

7.

State
-
funded
development
funds

1.

World Bank

2.

EBRD

3.

EIB

TR
-
Libor
Apprx.9%
p.a.

Euribor
+2%p.a.

Libor
+2.5%
p.a.

N/A

Most
metropolitan
municipalities
are being rated
by S&P,
M
oody’s and
䙩c捨. Th攠r慴楮g
r数or瑳 g敮敲慬ay
r敦汥捴l捵rr敮琠
fin慮捩c氠
捯nd楴楯ns of
汯捡氠
gov敲nmen瑳㬠
mor敯v敲, 瑨楳
瑲慮sp慲敮cy
捲敡瑥猠愠pos楴楶攠
imp慣琠tn
汥ld敲s.

mub汩挠瑥td敲;

䑩a散琠t敧o瑩t瑩tn
w楴h on攠or mor攠
汥ld敲s
-

fn som攠
捡s敳Ⱐb慮ks mi
gh琠
b攠r敬e捴慮琠tbou琠
汥ld楮g 瑯 汯捡氠
慵瑨or楴楥s,
敳e散楡汬y for som攠
sp散楦楣ir敡sons. fn
瑨楳 捡s攬 only 愠few
汥ld敲s may b攠
w楬汩lg 瑯 汥ld 瑯
mun楣楰慬a瑩敳㬠
瑨敲敦or攬 瑨is
s楴ia瑩tn may 汥慤
瑯 d楲散琠
n敧o瑩慴楯ns.

Th敲攠h慳⁢敥n only
on攠慴瑥mpt

in
Turk楳h io捡氠
䝯v敲nm敮瑳 慢ou琠
楳suing bonds. Th楳
慴瑥mp琠w慳⁡
捯mp汥瑥lf慩aur攻e
h敮捥, th攠Tr敡sury
楳 r敬e捴cn琠瑯 giv攠
慰prov慬afor bond
楳su慮捥 by 汯捡氠
gov敲nmen瑳.

21


Financial Distress and Insolvency

over the last years



Financial Distres
s

Local Government Insolvency

Debt Management Strategy

1

Albania, AAM

An Event of Financial Distress shall have
occurred whenever:

a.

Accounts payable that are overdue by
more than 90 days at the end of any
quarter of the fiscal year are in
excess of
30%

of
the budget for such
quarter; or

b.

Short
-
term Debt has not been paid in
full prior to the last day of November
of the fiscal year in which it was
issued


The Ministry of Finance upon receipt of the
notice that a financial distress event has
occurred from the
local government, or when
it determines itself that the event has occurred,
shall make a notation in the Ledger of Local
Government Debt that identifies the local
government as being in default.

Upon the notice the financially distressed
local government u
nit is subject to financial
oversight by the M
oF

and may not:


i.

Take any decision that may led to an
increase of its financial obligations;

ii.

Establish new public services, new
public enterprises or any other
institutions;

iii.

Meet any payments obligations
incu
rred prior to the initiation of the
special procedure, except for the
obligations expressly approved in the
Recovery Plan for resolving the
financial d
istress of the Local
Government;

iv.

Borrow without the appr
oval of the
MoF


Within 60 business days from the

Notice
Event of Financial Distress, the local council
shall be required to adopt a Recovery Plan,
and submits it for approval to the
MoF
. The
An Event of Insolvency shall have
occurred if:

a. A Local Government has defaulted in
the payment of principal or interest on
any deb
t obligation or financial guarantee
issued and recognized by it, or subject to
a binding court decree, and such default
has continued for a period of sixty (60)
days; and such amount in default exceeds
thirty percent (30%) of the Local
Governments own sour
ce revenues and
unconditional transfer received in the
prior fiscal year; or

b. A Local Government has outstanding
accounts payable in an amount greater
than thirty percent (30%) of its budget for
a period of ninety (90) consecutive days,
and there has bee
n a material adverse
impact on the essential services provided
by the Local Government



22


Recovery Plan shall be prepared by the Mayor
with assistance from the M
oF
.

In the event the local government unit

fails to
submit a Recovery Plan within the deadline,
the
MoF

shall prepare the Recovery Plan.

Implementation of the recovery Plan shall be
mandatory for the local government unit. The
local government shall submit to the
MoF

detailed reports on the implem
entation of the
measures and activities foreseen in the
Recovery Plan upon request of the
MoF
, and
at least once a month.

2

Bulgaria, NAMRB

The national government adopted an
ordinance

“Law on Municipalities in Financial
Distress”

in 2006, setting out the procedures
for dealing with muni
cipalities in financial
distress. It included criteria to define financial
distress, the procedure for responding to
declarations of distress, the procedure for
developing a recovery plan, and financial
assistance from the central government.

There is a tw
o
-
stage strategy that defines
a first stage of financial distress that
precedes the second stage of outright
insolvency. This two
-
stage approach has
the advantage of identifying early the
municipalities that are in trouble before
they reach the point of in
solvency.


3

Croatia, AoM

N/A

N/A


4

Macedonia, ZELS

The Law on Local Government Finance
regulates the municipal financial distress
situations. The law defines the following cases
as a financial distress:



The chief state auditor concludes that
there are
significant irregularities in
the financial work of the
municipality;



The municipality does not pay the
debt within 90 days of the day it
matures;



The municipal account is
continuously blocked in a period of
30 calendar days or 45 days with
breaks within 6
0 calendar days, and



The municipality surpasses the
maximum limitations for debts in
accordance with this law.

In this case, the Ministry of Finance
establishes a special commission for
overcoming the financial instability of the
municipality that is made
of representatives of

Currently the USAID Macedonia
Local Government Activity

(MLGA) is providing technical
assistance on development of a debt
management strategy to those
municipalities that entered or likely
to enter into the credit market.

23


competent government bodies and municipal
bodies. Since the date the procedure for
overcoming the financial instability has
started, the municipality cannot:



Make decisions that can increase the
financial claims;



Establish public serv
ices (public
enterprises and institutions);



Pay claims that are not in agreement
with the plan for resolving the
financial instability of the
municipality.

After the establishment of this commission,
the mayor prepares a rebalance of the budget
in the dire
ction of overcoming this situation,
which is adopted by the Municipal Council
after the approval of the commission. Based
on the budget rebalance, the Commission
prepares a Plan with Measures and Activities
to overcome the situation of financial
instabilit
y, whose implementation is
obligatory for the municipality. The
Commission is disbanded when it is estimated
that the reasons that led to financial instability
of the municipality have been resolved.

5

Moldova, CLAM


According to the Law on insolvency state,
territorial
-
administrative un
its and public
legal entities are not subject of
insolvency.

N/A

6

Montenegro, UoM



Deb
t

M
anag
e
m
en
t

Strateg
y

d
efin
es

fra
m
e
w
or
k

for
borro
w
in
g

f
o
r

three
y
e
a
r

p
eri
o
d
,

guidel
i
ne
s

f
o
r

risk
deter
m
i
n
atio
n,
guidelin
e
s

for debt
m
anage
m
en
t,
c
a
s
h management
,
g
uaran
te
e
s

a
n
d
borro
w
ing
s
an
d
oth
e
r
iss
u
e
s

important

fo
r

deb
t

m
anag
e
m
e
n
t
.


7

Republika Srpska
-

BiH, AMTRS




8

Romania, A
Co
R

Yes (More details are to come)

N/A

N/A

9

Slovenia, SOS

No special rules exist for municipal default
and insolvency

No special rules e
xist for municipal
default and insolvency

Only for restructuring a debt by
changing the repayment period or
changes in the loan terms used as a
24


tool for overcoming financial
distress of the municipalities.

1
0

Serbia, SKGO

N/A

N/A

Ordinance on debt managem
ent
developed by USAID MEGA
program and adopted by two cities
Vranje and Karagujevac.

11

Turkey, UMM

By the execution of the Municipal Law,
municipalities’ financial indicators have been
taken under control via the Article 68 of
Municipal Law No. 5393.

If

a default occurs despite the required limit,
central government is eligible to intervene
during default scenario or insolvency case.

With the effect of the debt limitation
through Municipal Law No. 5393 local
governments have not faced any serious
insolvency events over the last years.

By the designation of Public
Financial Management and Control
Law No. 5018, all the debt
strategies/po
licies to be followed
have been highlighted in a detailed
manner. Furthermore, the State
Audit Court officially has the power
to implement such audits about
these policies and strategies.