Rethinking Borrowing and Promoting Leverage of European Funds

2014

Fonds mondial pour le développement des villes (FMDV)

To download : local_innovations_to_finance_cities_and_regions.pdf (1.5 MiB)

Are traditional resources vanishing?

Beginning in 2009, the economic and financial crisis caused a decrease in the budgets of local governments, and consequently in their capacity for local investment and for providing the basic services for which they are responsible. Alongside the decline in tax revenue ¹ and in national subsidies and grants ², local governments have encountered a drying up of bank loans, due to the diminished liquidity of commercial banks, but also to the collapse of specialised institutions ³, such as the Franco-Belgian bank Dexia, which estimated the lack of long-term financing for French local governments in 2012 at 6 billion euros ⁴. Though the situation varies from country to country, more difficult access to bank loans has forced local governments to accept increasingly high interest rates. In certain regions in Spain, for example, those rates reached 4.75% in 2010 ⁵. In Europe, while the share of EU funds in local public investment varies greatly from one area to another, they have nevertheless helped to offset some of the recent – sometimes drastic – reductions in financial transfers from central governments to local governments ⁶. But which European local governments have the ability to go looking for those funds? And how long will they be able to compensate for the lack of local resources? In fact, to overcome these financing difficulties and to diversify their resources, some local governments are innovating and deploying new funding strategies.

Diversifying resources, borrowing better and differently: the trending answer for European municipalities

While several European experiments show real potential (environmental taxes, land value capture), two innovations are particularly notable, though recent and as-yet little developed: • new borrowing strategies via the issuing of bonds, be they individual, bundled and/or green and socially responsible; • and the use of leveraged European financial instruments (FIs), in the context of the European Cohesion Policy. Each demonstrates in its own way a willingness to empower local governments, thanks to the acquisition and mobilisation of independent expertise and increased financial literacy. While new borrowing strategies highlight the ability of local governments to bring together access to financial markets and sustainable urban development policies, FIs offer the opportunity of a direct funding bridge between the European Union and local governments. In our case studies, the new borrowing strategies, via bond issues, are analysed through two of their variations: • Issues of non-bundled, targeted green and socially responsible bonds, (Case study: Eco-socially responsible bond issue by the Île-de-France region) • and issues of bundled but non-targeted bonds through the creation of Local Government Funding Agencies (Case study: Kommuninvest, Sweden) The use of European financial instruments itself is explored via one of the projects of the Joint European Support for Sustainable Investment in City Areas – JESSICA programme (Case Study: The London Green Fund). We have made a conscious choice to focus on funding outside the scope of local governments (from banks, markets, the European Union) and not on local taxation. Indeed, in the context of structural, economic and social crisis, it seems vital to find solutions that depend as little as possible on the direct resources of citizens or local economic actors, whose finances are also in difficulty. While FMDV recognises taxation as the foundation of solvability, funding, and the autonomy of local governments, the diversity and complexity of local tax systems in Europe calls for a review in itself, on a case-by-case basis. In the meantime, the exploration of these innovative financial mechanisms provides a possible answer to local budgetary needs, in a frame of reference better shared across the European Union. That is also the position of the CEMR in its report on local government funding ⁷. Furthermore, these examples were chosen for their innovation, the originality of proposed solutions and their potential for replication. The case studies specifically address modes of governance, functioning, and impacts in the local areas.

Lessons learned and outstanding issues

It is clear that these dynamics require financial expertise: the development of technical capacities within local governments is, therefore, a crucial issue for the diversification of financial resources. That being so, empowerment, even partial, will only be relative if it creates dependency on private investors. So it is clearly a question here of always seeking a balance between endogenous and exogenous resources, and of making maximum independence from market fluctuations a goal, an element of the responsible financial management of the municipality. Other questions can also be formulated: Can these mechanisms address the current needs of local governments in terms of financing, but also of long-term sustainable development? What kind of local development do these new methods of financing produce? Other points: the mechanisms described in the case studies do not all apply to all local governments. Issues relating to the size and economic dynamism of municipalities are fundamental. Small and medium-sized municipalities do not have the same strengths and expertise as larger and more powerful local governments. What connections and cooperation can be developed between them? As the case study of Kommuninvest shows, they must find alternative solutions, which often involve more in-depth and reassessed cooperation, both horizontal and vertical (strengthened interactions among actors of a given territory, new institutions and modes of relationships). Additionally, the criterion of solvability is an essential condition. Creating financial mechanisms adapted to each level of decentralised government can contribute to reduce the debt of local authorities and therefore of central governments (balance between local administrative capacities and development of the potential of territories). Finally, a real movement is emerging among municipalities in favour of increased transparency and cooperation, in order to guarantee stable and sustainable funding. Targeting of funds is a good example of a concrete solution that allows for the linking of mechanisms for raising funds to a model of sustainable development. Because, to conclude, we mustn’t forget that financing must not be disconnected from projects, but part of a political strategy. Financing is only viable if the projects it promotes fit into the citizens and territorial needs.