Municipal Financing: the Latest Challenges

Although the legal regime for municipal financing has been significantly improved over the past years, there are still “legal technicalities” which should be considered when extending financing to Romanian municipalities, argues Matei Florea, Schoenherr si Asociatii

     Projects concerning financing of municipal infrastructure and provision of public services have been implemented for several years now. At first, this used to be an area of business reserved to international financial institutions, such as the World Bank, the European Investment Bank and the European Bank for Reconstruction and Development. Lately, more commercial financial services providers have entered this arena.
     The number of issuances of domestic municipal bonds has developed strongly between 2001 and 2005 (nevertheless volumes remained small) and some municipalities even mastered two bond issuances. A peak was reached in 2005 when the Bucharest municipality issued a 500 million Eurobond. Bilateral and syndicated credit facilities are also gathering momentum (for example Dexia Kommunalkredit recently arranged a 60 million Euro term credit facility for the Iasi municipality).
      In addition to attracting financial resources and developing infrastructure projects on their own, municipalities are increasingly interested in co-operating with the private sector in developing the infrastructure to ensure the provision of public services. Such public-private-partnerships (PPPs) are attractive to municipalities because, in addition to addressing the public budget constraints (i.e. the financing is ensured by the private partner), in a PPP scenario municipalities can also benefit from the know-how of the private sector, in particular in order to increase efficiency. Several PPPs have been recently implemented through concession agreements, such as in the waste management and water provision and the treatment of waste water areas. Also, a few PPP projects have been set up in accordance with Government Ordinance no. 16/2002 concerning PPP agreements (GO 16/2002) until its abrogation on 30 June 2006.
     At present, except Government Emergency Ordinance no. 34/2006 concerning public procurement (which also regulates public works concession agreements similar to the regulation of PPPs by GO 16/2002) and Government Emergency Ordinance no. 54/2006 concerning the concession of public property assets, there is no specific regulation of PPPs (in the detailed manner of GO 16/2002).
     Consequently, the legal framework for PPPs is not very clear and makes both municipalities and investors hesitant in developing PPP structures. One should note in this respect, that under European Community (EU) law, there is no specific system governing PPPs.
     PPPs that qualify as “public contracts” under the EU directives coordinating procedures for the award of public contracts will have to comply with the legal requirements set out in those directives. PPPs qualifying as “works concessions” are covered only by a few scattered provisions of secondary legislation and PPPs qualifying as “service concessions” are not covered by the “public contracts” directives at all (for further information see the “Green Paper on public-private partnerships and Community law on public contracts and concessions” at http://ec.europa.eu
     In relation to credit agreements entered into by municipalities and municipal guarantees, in addition to the legal requirements set out by Law no. 273/2006 concerning local public finances (inter alia, 30 per cent. indebtedness cap, approval by the Commission for the Authorization of Local Loans, registration with the Local Public Indebtedness Registry), three aspects should be noted:
a) Municipalities must carry out certain internal budgeting procedures (concerning, inter alia, credite de angajament for multi-annual investment projects and credite bugetare fixing yearly investment amounts) before initiating the contracting of credit facilities and/or the awarding of municipal guarantees
b) Public procurement regulations will have to be complied with for the selection of the credit institution(s) making the financing available (see further EC Regulation no. 2195/2002)
c) The validity of municipal guarantees may be subject to clearance of the respective guarantee under state aid regulations.*

*This article serves to give its readers a short overview of selected aspects of Romanian financial law only. It is not meant to substitute legal advice on any of the matters touched upon herein.

Matei Florea
Partner, Schoenherr si Asociatii SCA
m.florea@schoenherr.ro
Bucharest, Bd. Dacia no. 30,
4th floor; Tel + 4021 319 67 90; Fax + 4021 319 67 91
www.schonherr.ro