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Turkey: Fiscal Management of Local Administrations Forum
Market-Based Financingof the Turkish Municipal Infrastructure
Some Insights from the Turkey Urbanization Review
Stephen Karam & Mihaly Kopanyi
Sustainable Development Sector Leader & Sr. Municipal Finance Specialist
The World Bank
November 24-25, 2012
Market-based Financing Outline
Definition
Demand side issues
Supply side issues
Options moving forward
Market-based financing context
Channeling funds for infrastructure development from domestic financial and
capital market
Current Municipal situation: Capital Investments 2/3 budget, 1/3 debt on
average High volatility, short maturity Debt stock 120%of budget revenues
Muni Enterprises borrow from market?
Demand side
The Demand side is very diverseA. Municipal Affiliated Entities – Municipal enterprises
B. Municipal Entities Metro municipalities, district municipalities, and fist-tier
municipalities within jurisdiction; Non-metropolitan provincial municipalities; Small other municipalities (Towns, boroughs)
C. Megacities, large cities
Very different capacities in infrastructure finance, management, and revenue base
HIGH NEED, LOW DEMAND
Debt capacity Factors Predictable transfers
Stable current balance
Debt stock=121% of Total Revenues
Substantial overdue debt (TL7.5 billion owed to Treasury, TL3.6 billion reconciliation)
Hard budget constraints in operating revenues, but soft in debt service?
Largest cities have capacity and experiences with large scale projects and large foreign borrowing
Budget situationOUTLOOK
Good outlookbecause of shared tax
Own revenues low Low property tax rateTr 1‰, EU 1% (10x)
Metro Municipalities Have no Property Tax Room for borrowingmore
Snapshot of debt stock Metro Municipalities take the lion’s share of
foreign debt, which is growing fast Long-term bank credit is steadily growing The bulk of Municipal liabilities is due to public
entities
Supply Side #1- Apparent Municipal Market
Vast majority of current financing is non-market. Of the total TL29 billon debt stock: 84% of finances via or with guarantees by public entities(including Iller Bank); ¼ of Total debt is overdue
Foreign exposure 73% Foreign Borrowing 20%
Supply side #2 Turkish private sector finances and
implements large projects in volume of several100 million dollars (energy, manufacturing, tourism)
There is good financing and management capacity to finance large municipal projects.
Time to test domestic Capital Market funds for municipal infrastructure carefully and gradually
Start with Tailored Instruments
Untested Instruments Domestic Bonds
Syndicate Loans
Project-based financing
PPP
Land-based Financing
Guarantee instruments
Conservative Scenario for the next 5 years developmentMarket based Debt financing has a role to play, domestic debt could grow to TRL 2 billion per year.(Today TRL 0.9 bn. short term loan)
Investments and Debt Annual Financing composition
Conditions for Market FinancingEx ante rules by Government
Transparency and reliable financial accounts Credit ratings Hard budget constraints, borrowing limitsEx post regulation
Refrain from present practice of repeated “debt resolutions” (2002, 2005, 2010)
Adopt Framework for municipal insolvency Protect customers Protect creditors Framework for debt restructuring,
How the World Bank Can HelpPhase I: Technical Assistance Pilots – PPIAF Funding (Jan-Dec 2013)
Prepare up to 5 Shadow Credit Ratings for Municipalities Support Selected Municipalities (5) in Preparing Municipal Financial Self-
Assessment (with Guide and Consultant Support) Provide Credit-Worthiness Enhancement Capacity Building (one)
Phase II: Sustainable Cities Investment Operation
(Jan 2014-Dec 2018) Expand Coverage through Rollout of Phase I to participating municipalities Explore possibility of establishing a systems approach and performance-based
policy instrument to improve, e.g. municipal own-source revenue collection, debt management and debt service, accessing capital markets
Expand financial services of Iller Bank: Financial Intermediation: Pooling of Municipal Finance Demand & Bond Structuring Expand use of Guarantee Instrument Test syndicate-based financing with domestic entities