Transcript Modernisation of budget system of local authorities in Europe

Modernisation of budget system of local authorities in Europe
Theory & Practice
Macroscale
Microscale
Grzegorz Orawiec
The polish economy ↔ public finance sector
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The polish economy ↔ public finance sector
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The Polish public sector & strategic planning
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Over 40 % share of the GDP generated by the new
European Union MSs
The final stage of economic & systemic transformation
Huge financial support from EU budget (Pl – 82 bil. €)
Looking for optimal medium & long-term strategic
framework (key planning documents)
Revision of strategic planning documents (before EU
membership: 406 documents → 2 + 9)
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Public finance sector
Legal basis in Poland
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Long-term Development Strategy Poland 2030
Medium-term Development Strategy Poland 2020
The Regional Development Act
Territorial Contract
Act on Public Finance – 2009
The Public Finance Discipline Act – 2004
The Public Procurement Act – 2009
The Self-Government Act – 1990
Polish Accounting Act – 1994
Polish Tax Act (VAT) – 2009
Act on Promotion of Employment and Labour Market
Institutions – 2004
Specific rules in strategic fields (e.g. Regional Development
Policy)
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The polish local municipalities – success story
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three-gradual system of administration (16 regions, 379
counties, 2478 local municipalities)
Dynamic economic development (GDP) & EU Member
Increasing status of regions (decentralization) & EU funds
More responsibility for local level
Huge financial needs
Risk of A, B, C division (East Wall)
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The polish local municipalities – building the budget
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2004 – Poland became the member of EU
2009 – New Public Finance Act
Projects supported from EU budget (ERDF / ESF) – but
”refund rule”
Polish goverment programmes (e.g. sport infrastructure, rural
development)
EURO 2012 projects
”Daily life” investments
Sharp debt limits for local municipalities (60% ^ 15%)
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Poland – Fiscal policy
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The Public Finance Act – public debt / GDP limits
- < 50% - no limits & sanctions
- ≥ 50% - relation: public deficit / public revenue can not be higher
than in the previous state budget (level of state budget)
- ≥ 55% - relation: public debt / GDP has to be lower in
comparison the previous state budget
- ≥ 60% - introduce a ban for new guarantees for loans ^ special
governmental sanative programme to come back below 60%
(detailed analysis ^ recovery actions ^ economic forecast – min. 3
years) ^ public spendings ≤ public revenue for next budget
(national ^ self-government levels)
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Poland – Fiscal policy
 Local self-government - The Public Finance Act – 2009
- the limited aims of loans & municipality bonds,
- debt limits – 15% (total amount of credit installments may not
exceed 15% of the planned revenues in the particular budgetary
year) e.g. 50 million € local budget → 8 million € of installments
- 60%(total debt may not exceed 60% of revenues in the particular
budgetary year)
- public debt/GDP ≥ 55% → local budget’s deficit only for EU
projects ^ only 12% limit for annual installments
- public debt/GDP ≥ 60% → no deficit at the local level
 List of task for medium term
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Debt / Revenue relation
Local self-government in Poland – new rules
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(1): Annual budget – since 2014 (art. 242)
Current expenditures ↔ Current revenue
Current expenditures (Wb) ≤ Current revenue (Db) +
budgetary surplus from previous years (Nb) + free sources
based on bonds, credits & loans from previous years (Wś)
Wbn  Dbn  Nbn  Wśn
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Exception: ≥ only for amount of current expenditures with
external funds if these external funds (art. 5) were not
transferred in current year
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Debt / Revenue relation (old rule – max 15%)
Local self-government in Poland – new rules
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Information since 2011 → obligation since 2014
Based on budgetary data from 3 previous years: <n-3 ; n>
Planned repayment of debt (credits, loans, bonds) → R
Planned repayment of interest → O
Total annual revenue → D
Current revenue → Db (e.g. property lease, services, advertisement)
Revenue from transfer (sale) of property → Sm (land, buildings)
Current expenditures → Wb (e.g. utility, salaries, events, interest)
Arithmetic mean for last three budgetary years
 R  O  1  Dbn1  Smn1  Wbn1   Dbn2  Smn2  Wbn2   Dbn3  Smn3  Wbn3 
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Dn1
Dn2
Dn3
 D n 3 
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Debt / Revenue relation
Local self-government in Poland
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Increasing debt possible only if:
surplus in current section of the budget (revenue ↔
expenditures) v revenue from sale of public
(council) property
no matter for free sources and surplus in property
section for last three budgetary years
 R  O  1  Dbn1  Smn1  Wbn1   Dbn2  Smn2  Wbn2   Dbn3  Smn3  Wbn3 
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Dn1
D
D
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Local Self-Government access to the capital
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Own financial resources (e.g. taxation, governmental
subsidy – BUT: ↑ tasks, ↓ budgetary revenue)
Private bank sector (credits) – BUT: ↑ cost of loans
(interest rates), ↓ access to capital (world financial crisis
& ”hot investments” time → increasing liabilities of
local municipalities)
Special governmental loans (e.g. EU projects) –
BUT: limited access
National capital market → the municipality bonds
market – …
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Municipal bonds – main characteristics
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A municipality bond - A debt security issued by a region,
municipality, or county, in order to finance its operations or
special projects such as construction of public facilities
(roads, sewerage systems, water-supply systems, sport
infrastructure etc).
Bonds bear interest at basic rate of interest + margin.
- general obligation bonds (supported by the taxing
power of the issuer → guaranteed by assets of the local
municipality)
- revenue bonds (supported by the income generated by
those projects)
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Municipal bond issued:
1929 by town Cracow (Poland) – 10 PL
1928 by town Hagen (Germany) – 2000 RM
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Local Self-Government – the Polish Story
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1989 – the change of the political system
1991 – Warsaw Stock Exchange
1993 – the first issue of municipality bonds
1998 – 2003 – the negotiations with European Union
1999 – the polish administrative reform
2004 – Poland became the member of EU
2009 – Local Self-Government full access to the
polish capital market
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Municipal bonds – legal framework
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The combination of important different aspects:
Capital market aspect
Self – government aspect
Public finance aspect
The legal levels:
Council of Europe level
EU level
National level
Local level
Special market regulations
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Municipal bonds – legal framework
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National level:
The Self-Government Act – 1990 (responsibilities = financing)
The Bonds Act – 1995 (the definicion and characteristics of bonds,
bond market regulations)
The Public Issue Act – 2005 (information obligations, the rules of
public issue)
The Public Finance Act – 2009 (the limited aims of loans &
municipality bonds, the supervision of RFO, debt limits – 15% % ^
60%)
Local level:
Local municipality resolution (the aim, type, value and schedule of
the issue, maturity, interest rate)
Special market regulations:
Resolution of the WSE Management Board
WSE „municipal bonds market” rules
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Municipality bonds – the access track
Financial analysis (+ ratings ?)
Resolution of Local Council
Opinion of Regional Financial Council
Agent of the issue (documents – the prospectus)
Polish Financial Supervion Authority
Capital market – public offer / private offer
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Municipal Bonds - Ratings
Moody’s
Standard
& Poors
Aaa
AAA
AAA
Top quality bonds
Aa
AA
AA
High quality bonds
A
A
A
Bonds with a high credibility of payment; may be
downgraded in future.
Fitch
Interpretaction
Baa
BBB
BBB
Medium quality bonds. Payment of the principal and
interest is not fully secured but is not without
guarantee.
Ba
BB
BB
Bonds of somewhat speculative character.
B
CCC
CCC
Speculative bonds, highly uncertain.
C
DDD
DDD
Significant risk of default
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CATALYST – WSE Bond Market
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The organised debt securities market CATALYST
dedicated to corporate and municipal bonds opened
on the Warsaw Stock Exchange in September 2009
Trading in debt instruments is conducted on
transactions platforms of the WSE and BondSpot
Issuers and investors can use the platforms which
operate as (exchange) regulated markets together with
a mechanism of issue placement and authorisation
(registration) in the WSE IT system.
The Catalyst architecture ensures that the market can
accommodate issues of different sizes and parameters
and serve the needs of different investor groups:
wholesale and retail investors, institutions and
individuals.
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CATALYST – market participants:
1) investment firms;
2) foreign investment firms;
3) credit institutions;
4) other entities which fullfil the requirements of relevant
regulations and give the assurance of proper
performance of obligations related to operation on
Catalyst.
 Execution of transactions on all Catalyst markets is
guaranteed by the National Depository for Securities
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CATALYST – market structure
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Municipal Bonds – main advantages
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Alternative forms of financing (flexibility ≠ bank
loans)
Inexpensive capital for necessary investments
The broad variety of forms (e.g. revenue bonds)
Friendly procedure
Long maturity-period
The great marketing tool
Lack of the risk of losing control over the public
company
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CATALYST– main advantages
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Better access to capital and investors (e.g.
pension funds)
Issuers become more reliable to investors and
contractors
Extra promotion campaign
Better access to capital in the future
WSE IT System - the dematerialization of
municipal bonds
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Municipal Bonds – main disadvantages
The question of associated costs:
- fixed costs
- variable costs
(ratings, preparation costs, advisory costs, market
fees etc.)
 Information obligations (real, reliable and
complete reports = the execution of the annual
budget & investment plan + positive opinion of
RFO)
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Municipal Bonds mean …
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Credibility
Trust
Income
Development
”My name is Bond … Municipality Bond”
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Summing up
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Strategic planning → revision & reduction of key
documents
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New precise financial rules for local authorities –
Polish case
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Alternative tools e.g. municipal bonds, PPP
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Measureable effects: tasks & investments
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”Men build too many walls and not
enough bridges”
Isaac Newton
Thank you for your attention
Grzegorz Orawiec
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