PPT presented in Training of Trainers Workshops on Strengthening The Financial Foundation of Local Government Based on Local Government Financial Management Series of UN-HABITAT during June 4- 15 2007 - Nadi, Fiji
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Financing Capital Investment Planning (Capital Budget) of Local Government
1. Financing the Capital
Investment Plan of Local
Governments
Strengthening The Financial Foundation of
Local Government
Training of Trainers Workshop
June 4- 15 2007 Nadi, Fiji
Based on Financial Management Training Series- UNHSP
Dr Ravikant Joshi
2. Relationship of CIP with other aspects
Financial Policy Making
Financial Planning Policy
Citizens Participation Policy
Evaluating Financial Condition
Operating Budget Policy
Asset Management Policy
Performance Measurement Policy
Accounting Policy
Financing CIP
Capital Investment Plan Policy
Financing Op. Budget Policy
Procurement
When and how LG officials will be held accountable for use of resources
Help the LG determine future use of resources
Define when, where, why and how citizens should participate
When financial problems are beginning, an early warning system
How the LG will use current year resources
Evaluate ability of taxes, fees to fund the delivery of services
How LG officials will provide capital investment to community
Use of current and long term financing for capital investment
Foundation for accounting, reporting, finance and budgeting system
Determine how LG resources will be spent
Helps to determine best use of its Assets
3. “A capital investment plan is a multiyear
(usually 5-6 year) plan of capital investment
projects listed in priority order by year.”
“Capital Investment Plan”
Operating Budget Capital Budget
Strategic
Planning
Plan for proposed
capital improvements
projects and the
means of financing
them; a budget that
contains capital
projects included in
the first year of the
capital program.
Typically creates
layers of goals,
objectives, and
strategies that provide
a target path for the
operations of an
organization. These
should be integrated
into the operating
budget
An operating budget is
a clear, logical plan for
the allocation of
resources for day-to-
day operations of
essential public
service programs such
as transportation,
street and bridge
maintenance and
construction, etc
supporting a safe,
healthy, and pleasant
environment
4. Some Definitions
◼ Assets
◼ Property owned by a government that has monetary value.
◼ Bond
◼ A written promise to pay (debt) a specified sum of money (called
principal or face value) at a specified future date (called the maturity
date(s)) along with periodic interest paid at specified percentage of
the principal (rate). Bonds are typically used for long-term debt
◼ Debt policy
◼ A policy that establishes the guidelines for the use of debt by an
issuer. The policy covers the maximum amount of debt that can be
issued, the types of debt, the purposes for which debt can be and
the debt maturity schedule.
◼ General obligation bond
◼ A bond that is secured by the full faith, credit, and taxing power of
the issuer. The issuer pledges to levy taxes at whatever amount
necessary to repay the bonds.
5. Typical LG methods of financing
CIP
◼ Own source revenues
◼ Transfers and shared revenues from the central/ provincial
government
◼ Reserves
◼ Surplus
◼ Debt
◼ State grants and subsidies
◼ Sale of assets
◼ User fees
◼ Leasing
◼ Development fees
◼ Benefit assessments
◼ Public private partnerships and donations
6. Public Vs Private Sector Investment
Public Sector Private Sector
Builds for the Long-term
(50 – 100 Years)
Builds for the Short- to Medium-Term (7 –
25 Years)
Institutional Quality Variable Quality
Uses Tax or Bond Funds Uses Borrowed Funds
Long-term Stability of Investment Geared To Profit / Return on Investment
Life Cycle Costs Important Operational Costs May Not Have High
Priority
Will Renovate to Prolong Life / Use May demolish and start again
7. Debt
Short term debt
consists of maturity of one year or
less after the date of issuance. It
includes direct bank loans and others
types of debt issued through general
credit markets.
“Pay as You Go”
•Avoids interest cost of financing
debt; savings can be used to expand
services or reduce taxes.
•Provides greater flexibility to
finance operating costs
•Conserves debt capacity to enhance
creditworthiness
•Provides no chance for irresponsible
policy of incurring too much debt.
•Provides benefit for next generation
of taxpayers in the form of “paid for”
infrastructure.
“Pay as You Use” or Debt
Financing
•Size and cost of the project usually
limits the ability to pay from current
revenues.
•Over the life of the facility, users pay
as they benefit. As people move into
the community, they pay their fair
share of capital financing costs.
Long term debt
consists of a maturity of more than
one year after the date of issuance.
9. Short Term Financing
◼ Tax and revenue anticipation notes are used for cash
management purposes to even out cash flows.
◼ Bond anticipation notes are securities issued as a
bridge between the start of a project and its eventual
long-term financing.
◼ Commercial paper is issued similar to tax, revenue,
and bond anticipation notes, except the average
maturity of the paper very short—between 30-45
days.
10. Long Term Financing
◼ Commercial bank and saving institutions
◼ Government loans and international development
programs
◼ Local Government Bonds
11. Evaluating Financing Options
Financing
Types /
Sources
Legality Feature of
source
Adequacy
of funds
Community
impact
Economic
feasibility
Political
feasibility
Admini-
strative
feasibility
Own source
revenues
Surpluses
Transfers
Shared
Loans
Grants/Subsidies
Sale of assets
Leases
User fees
Notes
Bonds
Other
15. Credit Analysis of LG
Prepare
Statement of
Net Operating
Results
Prepare Base
Case
Scenario
Develop
Financial
Performance
Indicators
Use Indicators
to assess risk
Perform
Sensitivity
analysis
16. Short Term Borrowing
Assess current
circumstances
Develop a
plan
Determine
how much to
borrow
Maintain
relations with
bank
17. Guide for RFP
◼ Define the services needed by the LG in clear, precise language.
◼ Include request for information only items that will be used to evaluate responses
◼ Identify and describe the criteria that will be used to select the best proposal
◼ Make the selection criteria as objective as possible
◼ Assemble a selection committee to review the proposals and interview the firms.
◼ Provide each firm sufficient time to prepare a response to the Request for Proposal.
◼ Establish a deadline (date, time and place) for receipt of the proposal by the LG and
adhere to it.
◼ After the selection committee reviews all the proposals, develop a list of the 2 or 3
firms that have submitted the best proposal based on objective criteria.
◼ Interview the firms on this short list.
◼ Ask each of the firms to make a short presentation about the firm’s qualification.
A Request for Proposal (RFP) is a document prepared by the LG that outlines a specific scope of
work that needs to be accomplished and requests professional firms (such as engineering, legal,
accounting, financial advisor, underwriters or banks etc.) to respond to the proposal by describing
their qualifications and experience to provide the desired services and a schedule of fees.
19. Issuing Debt
Types
Private Placement
Competitive Bid
Negotiated Sale
Considerations
size and complexity of the
debt
credit quality of the issuer
investor’s familiarity with
the debt
market conditions.
22. Administering Debt
◼ Investing the proceeds if transferred to LG control;
◼ Paying the principal and interest of the loan or
bonds when due and maintaining debt records;
◼ Monitoring the credit market for refinancing
opportunities.
25. Benefits
◼ Establishes parameters that limit the power to borrow
money and avoid potential abuses.
◼ Provides a way to finance capital investments within the
LG’s capacity to repay the loans.
◼ Establishes sound debt management practices that support
creditworthiness.
◼ Saves money on interest charges by selecting appropriate
debt instruments and structures.
◼ Improves the image of LG in the eyes of the business
community and taxpayers for being fiscally responsible.
26. Obstacles
◼ Staff resistance
◼ Time required
◼ Political resistance
◼ Lack of knowledge
◼ Lack of benchmarks
◼ Legal restrictions
