Municipal Loans
Go For Selective Approach

By Rup Khadka

MUNICIPAL functions can also be financed through loans. Municipalities can use both commercial and/or public sector loans. Since commercial banks or other types of financial institutions focus on commercially viable projects, it might be difficult to take commercial loans for poor municipalities that are in need of resources. So, from the perspective of regional balance or decentralisation, there is a need for the public sector loans for the municipalities of particularly underdeveloped areas.

Central governments provide loan to municipalities with no or subsidised rate of interest. Unlike grants that are provided on a pre-determined basis, loans could be tied up with the cash flow of the project.

In this context, there has been a growing practice to set up Municipalities Development Fund. The Ministry of Local Development generally runs them. In other countries the Ministry of Finance manages them. In other countries, an autonomous body also runs them. Theoretically, an autonomous body might be considered to be more professional than others regarding selection of the sound projects, monitoring and avoiding the situation of being implemented the politically motivated projects. Municipal governments are represented on the board.

Donors in various countries assist Municipal Development Funds. They also receive funds from the central government budget. In some countries, certain per cent of tax revenue is allocated directly to the fund. Thus, Municipal Development Funds are developed as revolving funds with money from central government and donors.

Municipal loan, like other types of public loans, is criticised on the ground that it causes inflation and "crowds out" private sector investment, which is considered more productive than public sector loan. Further, there is a risk of the money being used in the politically motivated projects. It is, therefore, necessary to adopt adequate safety measures to avoid such situation. It a necessary to follow up on cost recovery conditions of loans. Loans should not be sanctioned to the defaulters on the existing loans. Similarly, some conventional ratios of debt or debt service to revenue may be adopted.

Municipal loans should help generate income of the municipalities directly or indirectly so that municipalities are able to pay both principal and interests. Municipalities should insist in revenue generating projects. For example, in the case of self-liquidating investment such as water supplies, municipal loans could be paid through the user charges. There may not be much disagreement for the loan finance for this type of project. It may not be the case with non-self liquidating projects. Such a direct relationship cannot be established in the case of non-self liquidating projects such as roads. They need to be financed through tax revenues. Municipal Development Fund can also finance such projects which simplify tax procedures, broaden municipal tax base, strengthen revenue administration, set up tax procedures, increase the level of tax compliance that ultimately help enhance revenue collection of the municipalities.

In Nepal, a Municipal Development Fund was established in the name of the Town Development Fund (TDF) in 1989 as a semi-autonomous body. It was later set up under the TDF Act, 1997 as a fully autonomous financial institution, capable of administrating grants and loans to municipalities. A broad is created to provide directions to TDF.

TDF was financed from the loan assistance from the World Bank, grant and technical support from German Technical Co-operation (GTZ), and equity of HMG/N. Municipalities are divided into two groups viz, low-income municipalities and high-income municipalities for the purpose of the use of the TDF fund.

TDF is used for grants and loans to municipalities as well as for local consultancy services for project studies and construction supervision. In addition to the loan finance or grants, TDF also provides technical assistance in the form of design of the project, tender procedures and monitoring of the project. It also organises training for municipal officials in order to strengthen the capabilities of the municipalities.

Grants for social infrastructure projects are eligible up to 60 per cent for the high-income municipalities and 90 per cent for low-income municipalities of the project costs subject to a ceiling. Interest and loan repayment will be used by the TDF establish a revolving fund to finance further projects.

Loans are eligible for 90 per cent of the cost. After a grace period of two years, loans should be repaid at 6 per cent interest with constant repayments, over the next 10 years. The exceptions, however, are loans to high-income municipalities for income generating projects, which are charged at the interest rate of 12 per cent.

There are two types of projects that are eligible for TDF funds. They are social infrastructure projects and revenue generating projects. Social infrastructure projects include such projects as public and private toilets, strom-water drainage, parks and public green areas, paving of public open spaces, street lighting, municipal buildings, solid waste collection equipment and construction of disposal sites, footpaths, sidewalks, roads and bridges, pond rehabilitation, school improvement and extension, river bank protection, simple waste water treatment plants, slaughter-houses, drinking water supplies, and other similar social infrastructure projects. Revenue generating projects include projects like bus and truck parks, commercial centres and stores, public markets (retail and wholesale) and other similar revenue generating projects.

The total amount of loan raised by municipalities in 1998/99 was Rs. 53 million, while it was Rs. 20 million in 1997/98. The share of TDF and other loan in the total loan vary from year to year. For example, the share of TDF loan in the total municipal loan was 80 per cent in 1997/98 while the share of non-TDF loan was about 77 per cent in 1988/99.

Not all municipalities have made use of this source. There is a lack of detailed provisions relating to loans. Municipalities also lack technical know-how to develop economically viable projects to meet the requirements of the commercial banks or their financial institutions.

While municipalities could be borrow money from TDF or financial institutions to carry out their activities, particularly revenue generating projects, they should not depend excessively on this source, since excessive dependence on borrowing might lead to financial difficulties in the future. This is particularly important where projects might be viewed as risky projects, which might be politically motivated, and where municipalities lack managerial and administrative capabilities to run them successfully. It must be remembered that heavy dependence on loans now means large debt service and low level of municipal services in the future. So municipalities must be selective in taking loans, in line with their financial potential and managerial capabilities.

Poverty And Water Resource Management

By Rebati Raman Poudel

THE government of Nepal has made poverty alleviation its priority and has professed its commitment to uplift the standard of the more than 50 per cent of its people living below poverty line. However, in order to meet this highly ambitious objective, the government will have to adopt and implement sundries policies and programmes aiming at increased earning of the people. Accordingly, augmentation of employment opportunities and elimination of discrimination and inequality prevailing in the economy and social life of the country are the prominent areas where the government should concentrate.

To meet the principal objective of poverty alleviation, the government’s focus among several sectors (such as agriculture, tourism, physical infrastructure development, industry, commerce etc.) including water resources development and management must be clearly outlined. On the development of water sector the government on the suggestion and financial loan of the World Bank is understood to have been engaged in formulating a National strategy for the overall management of Nepal’s abundant surface and ground water resources.

Water resources have been one of the most important areas of development in the country’s previous plans also. Irrigation, hydropower, drinking water supply, river control, soil conservation, disaster prevention and sanitation are the most important investment water sub-sectors. However, all these sub-sectors have often encountered serious implementation, operational and social problems. A vicious cycle of poor quality and unreleable services resulting into the generation of inadequate operating funds and a further deterioration of services has been a common problem. Be it drinking water, irrigation or hydropower generation, water is an increasingly scarce resource requiring careful management. Delivering services effectively to users has remained a serious problem. The situation is getting worse due to rapid population growth and the unplanned urbanisation in the country.

At the same time, the engineering and environmental costs are much higher for new water projects than for sources already tapped. New challenges call for new orientation, new approach and unselfish motive among our politicians, policy makers, bureaucrats and the users. Generally, the finite development budgets have often been misallocated and wasted, institutional weaknesses are rampant, policies are not carefully drafted leave alone their proper implementation and there is no seriousness in the long term investment planning. Our projects are often planned by the international donors suiting their vested interest rather than serving our needs.

Nepal has participated in several international forums organised for improving water resources management. Water is treated as an economic commodity conroined with decentralised management and delivery structures, greater reliance on pricing and active participation of stakeholders have been the essence of comprehensive water resource policy framework prepared during the 1992 Durbin International Conference of water and Environment as well as the agenda 21 from the 1992 United Nations conference on Environment and Development. It could be suggested that in the National Water Resources Strategy Formulation the documents from such deliberation must be reviewed and the new strategies of based on the lessons of experience.

The government has repeatedly reiterated that it would remain fully committed to the effective implementation of the local Self Governance Act that is based on the policy of empowering the districts and villages. Decentralising the planning allocation of water resources and the delivery of water services to the District Water Resources Committees for inducing effficient use of water has been the essence of Nepal’s 1992 Water Resources Act. But for the effective implementation of this legal provision essentials such as adequate central directives in one hand and regulatory capacity at the district level on the other are immensely lacking. The policy of giving special attention to the views of all stakeholder is facing certain resistance at the implementation level.

In irrigation sector as outlined in the 20 year Agriculture Perspective Plan, efficient water use practices, greater attention to management cost recovery, improvements in operation and maintenance of existing systems and investment in small scale farmer, managed surface and groundwater systems need to be sincerely pursued. This does not imply that large irrigation projects are debarred from planning. This calls for the attitudinal change among the professionals and implementors. Development of technologies that respond to the need of farmers for higher quality services, including greater participation of local communities and user association is a essential ingredient. Particular attention would have to be given to small farmers who comprise most of the agricultural community in the country.

In hydropower, greater priority should be given to managing the demands for energy while enhancing small as well as econmically viable larger projects. Cost effectiveness of the hydropower project is an area where principles of value engineering could be applied to identify a range of economic options. Analysis of water resources at the river basin level should become part of the new strategy for water resource management.

In order to step up drinking water supply and sanitation, which is the foremost priority in the water allocation sector, greater involvement of the private sector, NGOs and user associations will be required. Cost recovery to ensure financial viability is possible only through the full participation of all stakeholders. Industry is another sector which should be gradually promoted and the water allocation for this sector needs to be on the norms of water and environmental conservation and the protection of water sources from polluton.

For poverty alleviation, low cost methods of developing new water schemes for agriculture, drinking, industry and hydropower must be pursued. Maintaining biodiversity and protecting eco system while putting special attention to new resettlements will have more positive impacts. Promoting watershed conservation practices is essential for the promotion of equitable, efficient and sustainable development of water resources, which could have a bigger impact on employment generation and poverty alleviation.