Municipal pooled financing of infrastructure in the United States : experience and lessons

Despite a world awash with liquidity, large infrastructure supply gaps exist across developing and emerging markets. Infrastructure has been largely decentralized to subnational governments in many countries, and many policymakers are keenly interested in developing subnational bond markets to give subnational governments access to private financing for infrastructure. Despite this, the transaction costs of bond issuance are still prohibitive for many subnational governments to access financing. Pooled financing, through regional infrastructure funds, municipal funds, or bond banks, has become a sought-after solution for helping subnational governments access private financing for infrastructure. In the United States, municipal bond banks that were established since the 1970s have become a cost-effective and stable model for expanding subnational financing for many small municipalities, while maintaining strong credit ratings with virtually no defaults from sub-borrowers. The municipal bond banks have been successful in lowering financing costs for many small, unrated local governments, with loan sizes as low as less than $50,000. This paper examines the policies and structures that have made pooled financing successful in the United States, including regulatory frameworks, governance and managerial systems, the role of project appraisal, operations and pricing, and managing the default risks of borrowers. The paper also explores broader lessons for developing countries that are interested in establishing pooled financing for subnational infrastructure.