For an efficient borrowing of local government

Before making any consideration on borrowing instruments at the hands of the local government in Albania and on improving the efficiency of their use, one is required to start presenting the latest territorial and administrative reform, implemented in the country.

A panorama of the territorial and administrative landscape will be of help to the reader, by going through the borrowing mechanism of the local government and getting the whole picture. Following the introductory part, this article intends to address and discuss on how local government can make use of the obtained financing, in an efficient way.

The Government of Albania undertook an important territorial and administrative reform, which reshaped the panorama of local government. Basically, as from the last local elections, the Republic of Albania has been divided in 61 (large) municipalities and 12 districts. The rationale behind the reform it is believed to be the creating of large municipalities (or super municipalities likewise Tirana), with efficient, although large, local administration, which will be able to offer more qualitative services.

The above reform obviously was driven and accompanied by the relevant amendments the legislation, regulating local government. The territorial and administrative reform in the Republic of Albania commenced with the approval of the law No.115/2014: “On the Administrative and Territorial Division of Local Government Units in the Republic of Albania”, as amended. The law was approved by the Albanian Parliament, on 31 July, 2014 and entered into force on 16 September, 2014, following its publication in the Official Gazette.

Further changes to the legislation regulating the local government units were adopted by the Albanian Parliament, including herein the law No. 30/2015, which amends the law No. 8652/2000: “On organization and functioning of the local government” as amended.

Concluding here the panorama of essential changes in the administrative and territorial landscape of the country and returning our focus to the issues of local borrowing, it is worth mentioning that, the main piece of legislation regulating local government borrowing is the law No. 9869, dated 04.02.2008: “On the borrowing of the local government” and the law No. 10158, dated 15.10.2009: “On bonds of joint stock companies and local government”.

Based on the provisions of the Law 9869/2008, local governments units can go out in the market and seek short and long term loans, either for investment purposes (long term), or to bridge liquidity shortages (short term). Local government can reach out capital markets, or financial institutions, to obtain the line of credit and this means in local or foreign currency at fixed/variable interest rate. As for the modus operandi to reach out and obtain the loan, both short and long term borrowing are somehow subject to the veto of the Ministry of Finance.

In the case of the short term loan, the local government unit is bound to obtain the ‘negative response’ by the Ministry of Finance that the state budget will not cover liquidity needs. With regard to long term loan, the Minister of Finance will have the final say on the approval, in case the loan will be obtained in the international markets, or is needed to service the debt of previous loan, or the local government unit is a distressed one that has demonstrated financial difficulties in the past five years. In such case, the approval of the Minister of Finance is decisive.

On cases other than the above-mentioned ones the approval of the Minister of Finance is limited to the procedural compliance on the loan authorization and verification the loan limits, as prescribed by the provisions of the above-mentioned law on local government borrowing. The approval by the Ministry of Finance should not be considered, in any case, a guarantee of the Republic of Albania, backing the borrowing of the local government.

Under current circumstances, by having no state guarantee backing the local government borrowing, the following issues need to be considered. The legislator’s intent is that creditors can , in case of default,  take all appropriate measures to collect the debt.

On the other hand, to the date of this publication, local government units are not allowed to go bankrupt, or undergo reorganization under the bankruptcy law. It is worth mentioning that the current draft law: On Bankruptcy foresee that local government units may be subject to reorganization procedures.

However, under the current e circumstances, no creditor will be able to ‘seek satisfaction’ through bankruptcy proceedings. Therefore, lenders would be willing to lend only to creditworthy borrowers, possessing an adequate level of financial stability and independence.

As indicated above, local government units are entitled to issue bonds, in accordance with the provisions of the Law 10158/2009, as the other form of local government financing through borrowing. As in case of loans, local government may issue short and long term bonds that mandatorily should be backed a relevant borrowing plan and audited by an external licensed audit entity.

Having evidenced the options of financing of the local government, regulated by the legislation in force, herein are some considerations on increasing financing options through borrowing and its efficient use. In first place, it goes without saying that large municipalities which emerged after last June’s local elections are more attractive to lenders. It can be also stated that these new local government units need to obtain the confidence (as well to restore) in the eyes of the lenders.

This can be done through financial discipline and efficient tax administration, during the process identification and collection and also in the use of collections. In terms of efficient administration of taxes, much is to be done by local government units. There is no need for official data to state that, up to this moment, that local tax collection is very poor and the government’s initiative these days to formalize the business is a proof of such a poor performance.

The legal tools towards a better tax administration process are already in the hands of local administrators, that based on such tools should undertake immediate actions aiming the improvement of the financial situation local units under their administration and the increase of credibility in the eyes of the lenders. Once the local government has attained an acceptable creditworthiness, financial institutions and investors would be more willing to jump on board and finance large projects and initiatives of local government.

Public - private partnerships (PPPs) are another form of cooperation that would improve the creditworthiness and satisfy the needs of local government units, for investments with financial exposures stretched over a long term of period. This specific form of cooperation, between public and private bodies, regulated by the Law 125/2013, dated 25.04.2013: “On concessions and public private partnership”, as amended, provides two favorable conditions to the local government units that aim to carry out investment, using this form of cooperation.

In one hand the risk and costs of immediate investment is transferred to the private partner and, on the other hand, cost repayment is stretched over the years of the contract entered with a private partner, thus avoiding the creation of short term repayable obligations in the finances of the local government. 

Notwithstanding the need for improvement and approximation with the European Union legislation, the current legal framework provides adequate regulation for the creation of a local government borrowing system and improvement of the efficiency in using such borrowings for the development of the local infrastructure and services.

Therefore, the reform initiated with the reshape of territorial and administrative division should continue with the financial discipline and efficient administration of taxes, collected by local government, aiming at increasing the creditworthiness of local government units in the eyes of lenders, and to benefit maximally from the opportunities provided by legal framework, on borrowing options and their efficient use.