Imagine a country faced with a dangerous fiscal crisis.
In an effort to rein in the national budget deficit, the government decrees across-the-board spending cuts, starting with a sharp reduction in federal transfers to municipalities. To sweeten this fiscal medicine, the government grants unprecedented political autonomy to municipalities: instead of being appointed, mayors will now be chosen through popular elections.
This move to decentralize prompts swift changes in the nation's capital city. Faced with high expectations from voters, the newly elected mayor privatizes municipal services, raises local taxes, slashes costs, enhances administrative efficiency and wins the confidence of investors. Finally, the city's financial managers decide to pay for new investments by issuing bonds on the international market, a fund-raising measure that has never before been available to municipalities.
It sounds like a description of recent events in a large Latin American "emerging economy." But in fact, the scenario described above took place in Italy in the 1990s, and the city is none other Rome, one of the cradles of Western civilization.
Linda Lanzillotta, Rome's commissioner for economic, financial and budgetary policy, spoke about how the city entered the bond market at a recent seminar at the IDB's Washington, D.C., headquarters. The seminar drew interested participants from a number of Latin American and Caribbean countries that have also been decentralizing political institutions, building up their capital markets, and testing the waters of municipal bond finance.
"Diversifying debt sources enabled Rome's municipal government to reduce the cost of funding without reducing the total amount of investment funds for infrastructure," Lanzillotta said of
the bond sales. Rome launched its first bond issue for a total of 100 billion liras (50 million euros) in 1996.
In addition to raising capital, Lanzillotta said the bond sales increased transparency and administrative efficiency in Rome's financial management. The simple fact that the city must now submit to annual credit evaluations conducted by independent rating agencies has had a healthy effect, she said, because it pressures the city to adopt sound economic policies. This kind of accountability has resulted in "a different mentality for the local administration, a true cultural revolution," she said. The bond issuing process has also led city officials to seek citizens' input in formulating spending priorities.
Kim Staking, a senior IDB financial specialist, told seminar participants that Rome's experience in putting into place the financial, legal, regulatory, and political framework necessary for a successful entry into the bond markets holds many lessons for countries in Latin America and the Caribbean.
"It is important to examine success stories," he said. In particular, he stressed the importance of market discipline in managing municipal financing and the need to reduce central government involvement in infrastructure activities. Staking also underscored the importance of proper supervision and clear rules and regulations in creating an environment where bond sales can work.
The IDB and the Multilateral Investment Fund, an independent fund administered by the IDB, have been active in recent years providing loans and grants to several Latin American and Caribbean nations that are working to broaden local capital markets, including bond markets.