• IDB pilot program aims to improve the creditworthiness of subnational governments (SNGs)—including their fiscal strength and project management capacity—while enhancing service delivery and infrastructure.
• "IDB for Cities and Regions" offers non-sovereign-guaranteed loans to cities and intermediate governments in Latin America and the Caribbean to invest in development projects, leveraging recent advances in subnational fiscal responsibility frameworks.
• The goal is to support SNGs in promoting local development through improved access to market financing.
In the late 1990s and early 2000s, certain countries in Latin America and the Caribbean had traumatic experiences with fiscal indiscipline and financial bailouts of subnational governments (SNGs), which understandably led to policies that limit their borrowing.
However, rising investment needs—SNGs carry out about one-third of public investment, a share that exceeds 50% in the region’s largest countries—together with recent reforms that strengthened subnational fiscal responsibility frameworks, notably in Colombia, have reignited the debate on subnational borrowing. Is it possible to learn from recent experience and support responsible borrowing by SNGs without being anchored to the negative episodes of the past?
To help answer this question and build on the region’s progress, the Inter-American Development Bank (IDB) recently approved a new pilot program, "IDB for Cities and Regions," which allows eligible SNGs—cities and intermediate governments—to access loans from the IDB without a guarantee from the central government.
The program seeks to strengthen the creditworthiness of SNGs, including their fiscal soundness and project management capacity, while improving service delivery and subnational infrastructure. Ultimately, it aims to promote local development through better access to market financing.
"IDB for Cities and Regions" has a five-year horizon and a $1 billion allocation outside the Bank’s regular programming, allowing it to provide investment loans and guarantees to eligible subnational governments.
The program complements the financing instruments the IDB already offers to SNGs. The Bank currently supports smaller SNGs and/or those with lower capacity through technical cooperation and national programs. For larger SNGs and/or those with greater capacity, the IDB can offer direct loans, or loans through the central government, development banks, or financial intermediaries. In these cases, financing is backed by a sovereign guarantee, meaning the central government commits to repaying the SNG’s debt in case of default.
The new pilot program takes this approach one step further: it seeks to make the SNG’s own creditworthiness the guarantee for loan repayment. The goal is to create a virtuous cycle that encourages SNGs to improve their creditworthiness so they can access market financing autonomously, responsibly, and under favorable financial conditions.
A key implication is that there should be no possibility of a financial bailout—or implicit guarantee—by the central government if an SNG becomes insolvent. This makes creditworthiness analysis critical: both to evaluate the SNG’s ability to repay its debts independently, and to identify areas for improvement that would strengthen its financial position and attract other potential investors.
“IDB for Cities and Regions” works closely with finance ministries across the region to strengthen public financial management and prevent SNGs from becoming a fiscal risk. Therefore, any loan to an SNG under the program must receive a non-objection from the central government.
Beyond strengthening SNG creditworthiness, the program also seeks to support central governments in improving fiscal relations across levels of government. This includes:
- strengthening subnational fiscal responsibility frameworks;
• better defining expenditure functions across levels of government; assigning SNGs their own sources of revenue;
• strengthening intergovernmental transfers based on objective and transparent criteria that compensate territorial disparities and incentivize better management, while minimizing discretionary transfers;
• improving fiscal transparency and accountability mechanisms; and
• providing technical assistance to SNGs, particularly those with lower capacity.
This more holistic and coordinated approach with the central government means that subnational debt is not viewed solely as a fiscal risk, but also as a development opportunity—one that expands the capacity of SNGs to finance their investment plans autonomously and responsibly.
Because of legal constraints and/or insufficient capacity, not all countries are yet ready to participate in the pilot. The Bank is therefore supporting the design of roadmaps so that interested countries and eligible SNGs can implement the necessary reforms and institutional strengthening to eventually “graduate” and responsibly access both this program and other market financing options.
"IDB for Cities and Regions" draws on international experience, especially the trajectory of the European Bank for Reconstruction and Development (EBRD), which has been lending to SNGs without sovereign guarantee in Eastern Europe, North Africa, and the Middle East for more than three decades. The EBRD has supported the implementation of development plans for many SNGs, attracted other market financiers, and avoided any financial bailout episodes.
Some of the IDB’s comparative advantages in implementing this pilot in Latin America and the Caribbean include:
1. Deep knowledge of the region’s subnational sector, evidenced by extensive operational experience; networks of good practices among central government authorities responsible for SNGs and the SNGs themselves; and flagship publications such as the Outlook of Fiscal Relations among Levels of Government, the Subnational Government Sector Framework, and the Subnational Fiscal Information Platform.
2. A strong emphasis on continuous monitoring and improved fiscal relations between levels of government, as well as on strengthening subnational creditworthiness. This ensures that SNGs can sustainably repay their debts while responsibly expanding access to debt markets.
3. Complementary support from the Bank through technical cooperation (grants) that enhances institutional capacity and creditworthiness, and funding for the preparation of pre-investment studies needed to structure high-quality projects.
4. A strong presence of qualified sector specialists across the region, enabling close technical support to eligible SNGs—both in monitoring their creditworthiness and in designing and implementing investments prioritized by the SNGs.
Last December, the Bank approved its first non-sovereign-guaranteed loan to a subnational government: the "Water, Sanitation, and Drainage Program for Cartagena de Indias" in Colombia, which includes a component to improve Cartagena's own revenue management.
This project marked the kickoff of "IDB for Cities and Regions," with the expectation that more eligible countries and SNGs will join over time. The design incorporates lessons from international experience, including continuous monitoring of subnational fiscal responsibility in coordination with the central government.
Grounded on the principle that a SNG’s best guarantee is its own creditworthiness, this pilot will strengthen solvency and promote sustainable access to market financing—helping boost local development and economic growth across the region and improving lives.