PPIAF

An interview with James Leigland, Team Leader, SNTA

Since the launch in July 2007, PPIAF has received many questions about its new Sub-National Technical Assistance Program—how it differs from PPIAF’s existing program and what its objectives are. James Leigland, program leader, responds.

What is the Sub-National Technical Assistance Program?

It’s a new, three-year pilot program that provides technical assistance grants to sub-national government entities like municipalities and publicly owned utilities to help them improve their ability to borrow to meet their infrastructure investment needs without relying on sovereign guarantees.

How is this different from traditional PPIAF activities?

In the past, PPIAF has worked only on activities related to public-private partnerships, or PPPs. These are arrangements for engaging private companies in some aspect of infrastructure service provision—often involving financing of public infrastructure by these private companies. PPIAF’s new sub-national program aims to help local governments and utilities raise their own financing for infrastructure investment without necessarily involving a private partner.

So the new program does not assist with public-private partnerships?

Not in the traditional sense of concessions, management contracts, or other public-private contractual arrangements. The infrastructure finance that the program will facilitate will be from private sources, like banks, investment funds, and bond markets. But the sub-national entities we help will access this money directly on their own account, without the intervention of private partners or guarantees from national governments.

Does the term “sub-national” denote a change in PPIAF’s focus?

By “sub-national” we simply mean government entities other than national governments. PPIAF has always worked on PPPs with sub-national government entities as well as with national governments. This program works only with sub-nationals. We use the term to include cities, states, provinces, and other forms of local and regional government as well as publicly owned utilities, boards, funds, agencies, authorities, and just about any other kind of non national government entity you can imagine. We even include state-owned companies that have nationwide operations as long as they work in infrastructure and are a corporate entity with a legal identity separate from that of the national government.

Why do you limit the scope of this new program to sub-nationals?

The point of this new program is to support decentralization of government responsibilities for managing and financing infrastructure. The default position in many developing countries is for the national government to finance and control infrastructure services. In many cases it would be more cost-effective for these services to be managed and financed by government entities closer to the ultimate users or beneficiaries of the services. For example, local officials often can do a better, more responsive job of planning, expanding, and delivering a service like water supply than can officials in a centralized national government office hundreds or even thousands of miles away from the ultimate users of the service.

And if these local officials are able to raise their own funding for capital improvements, the investments can be more effectively targeted. Perhaps most important, users as well as lenders know precisely who is responsible for capital programs. We make a point of emphasizing that the goal of the new program is to help sub-nationals borrow without guarantees by the national government. We are aiming for situations where sub-national governments are responsible for their own debts.

Is this kind of direct access a practical option for many government entities in developing countries?

As with PPPs, it will work in some countries and not in others. It is worth noting that in many developed countries, like the United States for example, most of the municipal infrastructure was built over the past century using money lent directly to municipalities and other local governments by banks and bond markets. That sort of direct involvement with lenders and investors seems to help professionalize the financial management in sub-national governments. The local officials have people outside government to whom they must be accountable if they want to keep borrowing. And lenders and investors often have much stricter expectations about capital planning and financial management than central governments do.

In many developing countries, however, most sub-national government entities are not permitted to borrow on their own account. In these countries national officials feel they must maintain direct control over infrastructure finance to ensure prudent use of debt. There may be good reasons to maintain that kind of centralized control in many countries. But local officials are not getting a chance to learn how to manage their own affairs in a professional manner. And local customers probably are not getting the kind of government responsiveness and service quality they need.

But many other countries are moving toward decentralizing responsibilities for financing infrastructure. Our aim is to help facilitate the decentralization process in these countries.

What kinds of characteristics help sub-national entities gain direct access to capital?

Like any borrower, these entities must be seen as creditworthy by potential lenders. In other words, it must be clear to lenders that these entities are willing and able to repay the loans in full and on time. The first thing any lender looks at is cash flow: if you subtract all of a potential borrower’s normal expenditures from its normal revenues, will there be enough left over to comfortably repay the requested loan.

That’s it? If cash flow is strong enough, a loan is possible?

Current cash flows are very important, but they’re just the start. For long-term loans, lenders will want to know how cash flows will change over time. For a city that relies on tax revenues for debt repayment, lenders will want to know whether those revenues will increase or decrease over time as residents and businesses move into or out of the city. Lenders will also want to know something about the ability of city planners and financial managers to meet financial challenges that are likely to occur over time and make competing demands on resources.
 
But even good information about current and future cash flows is not enough in many developing countries. The biggest risks faced by lenders in many of these economies are often related to larger systemic problems and uncertainties in the different infrastructure sectors like water, transport, or energy. These are the more intractable problems that must be addressed by policy reforms rather than adjustments to cash flows or financial reporting procedures.  All of PPIAF’s work, including the new sub-national program, stresses the need for government policies that promote economic development and poverty reduction on a long-term basis. So the sub-national work will also be sensitive to these broader reform issues as they affect the financial sustainability and developmental quality of specific borrowing projects.

What kind of assistance does the program support?

PPIAF’s program targets sub-national entities that, with relatively modest assistance and in a reasonably short time, can access market-based finance for infrastructure investment. Given PPIAF’s funding levels, administrative capacity, and three-year time frame, it would not be cost-effective for us to tackle long-term assistance needs—and of course many sub-nationals in the developing world need a good deal of basic training as well as assistance in improving systems and strengthening management before they can even think about borrowing on their own account. Sub-nationals requiring that much help should get it from bilateral donor programs and other basic capacity-building facilities.

PPIAF’s program can help where needs for improvement are clear and relatively minor—for example, strengthening discrete aspects of financial management, planning, reporting, and the like. PPIAF can help conceptualize and structure a debt-financed project. PPIAF can also help identify and fix problems by supporting preparations for credit ratings by recognized credit rating agencies. Ratings can help identify the discrete needs for improvement, and PPIAF can follow up with additional assistance to help make the improvements. Finally, we can also help with upstream legal and regulatory reforms as long as they are relatively minor and facilitate actual borrowings. Situations requiring massive policy change are mostly beyond the capabilities of this new program. We would prefer not to try to facilitate sub-national financing deals in environments that present too many sector systemic risks for lenders.

Once a sub-national client is ready to borrow, does it have a choice of types and techniques of borrowing, or must it accept what you have recommended?

As with all of PPIAF’s support, our clients are free to do whatever they want after the technical assistance we fund is completed, even if that means doing nothing.

What about sources of finance or guarantees? If a PPIAF client decides to borrow, is it in any way obligated to do so from a particular lender?

Our sub-national clients can borrow from any source they want; PPIAF’s funding comes with absolutely no strings or conditions. PPIAF’s assistance is not tied to the use of any program, instrument, or advisor. In fact, PPIAF has recently begun to survey the kinds of financing sources and financial guarantee programs that are available to our clients. There’s a vast landscape of public and private facilities. That kind of information already is available to anyone who visits our Web site. 

Can you describe the application process? How does it differ from the traditional PPIAF process?

The application process for the sub-national program is almost the same as the normal PPIAF application process. The application form is slightly different, but the rest of the application package and the review process are exactly the same. The full application package requires a completed form, terms of reference describing the services to be provided by consultants paid out of the requested grant, a budget for the work, and an endorsement note from a responsible government official in the country where the assistance will take place.

But it is also very important to note that PPIAF always prefers to discuss a concept with a potential client before they invest time in filling out forms. We are happy to get an informal email describing a possible activity, as a way of starting a dialogue that can result in a completed application package.

For more information on how to apply, click here.

James Leigland is the program leader for PPIAF’s Sub-National Technical Assistance Program. James moved to Washington, DC, from Nairobi, where he was PPIAF’s regional team leader for East and southern Africa from 2005 to mid-2007.

James has more than 20 years of experience in municipal finance. Before joining PPIAF, he was a senior municipal infrastructure advisor and the acting chief executive officer of South Africa’s Municipal Infrastructure Investment Unit. Previously he was senior urban policy advisor for Southeast Asia at the U.S. Agency for International Development. If you have additional questions, please feel free to contact James at snta@ppiaf.org