Funding capital expenditures: how countries around the world do it.

• Author: Anders, Alan L.
• Position: Includes related article on securities market terminology

Subnational governments in Europe and Japan show more differences than similarities in borrowing practices compared to municipalities in the U.S. and Canada, but convergence may be underway.

American municipalities are looking to global markets for the first time as the federal government has restricted purposes for which tax-subsidized U.S. municipal bonds can be issued. New York City has borrowed in both the yen-denominated Samurai market in Japan and, in June of this year, borrowed dollar-denominated in the Euronote market. Canadian issuers have been thinking and borrowing globally for many years.

Public debt managers will increasingly need to know about "best practices" in debt management not only of their counterparts in the U.S. and Canada but in Europe and Asia as well. How do major cities around the world fund their capital needs?

Sources of capital for subnational governments around the world have traditionally been regulated, protected, and subsidized. Despite this, local governments in Paris, Barcelona, Tokyo, and Naples have become among the most sophisticated and versatile borrowers in national and international capital markets. What follows is an examination, based upon interviews with municipal chief financial officers, of borrowing practices in six countries: France, Belgium, England, Spain, Germany, and Japan.

The French Devolution

When Jacques Chirac was elected President of the French Republic in May of 1995, it became necessary for him to resign the job which he had held for the previous 17 years as mayor of Paris. Prior to his election as mayor in 1978, Paris had been run essentially as an instrument of the French national government, by a prefect (administrator) reporting to the French Minister of the Interior.

Outside of Paris, there is a long tradition of a local town maire. These provincial mayors, however, had very little power compared to the departmental (county) prefects appointed by the national government in Paris, a practice which dates from the Revolution and France's transition into the Bonapartist era. While rural France traditionally has had its local maire, Paris, with its long and fabled past as the font of revolution and rebellion, was deemed too risky to entrust with local government. Instead, there have historically been two prefects for Paris, both of whom were appointed by and loyal to the national government: a prefect of police, and the prefect of the Seine, who was responsible for all city functions other than police.

There are now four levels of elected government in France, each with its own constitutional standing. The greatest citizen allegiances are to the local municipality or commune, which number 30,000, and to the national government. In between, however, are two additional levels of elected local government: the department, or county, and the new regional level of government, which was an innovation of the 1980s. Each has its respective areas of responsibility, which the French refer to as their competences.

The flowering of local government in France over the past decade and a half has resulted in an explosion of debt. This indebtedness has not resulted from issuance of bonds, however, except in the very largest cities, notably Paris. Most municipalities borrow, rather, from a recently privatized national banking institution, Credit Locale de France (CLF), created expressly for the purpose of making loans to them. CLF, a triple-A rated commercial bank, has a 42 percent market share of French local government and public authority borrowings. CLF is the primary supplier of credit - through bank loans - to local governments outside of Paris.

The case in Paris is different. The following comparison between Paris and New York City is particularly interesting.

Operating Capital Population Budget Budget (millions) (billions) (billions) Paris 2.2 $5 $2 New York 7.3 33 4 Paris, it can be seen, devotes almost 30 percent of its combined operating and capital budgets to capital projects, while New York City allocates 10 percent. Only 40 percent of the Parisian capital budget (approximately $800 million per year) is funded by borrowing, compared to over 80 percent debt financing in New York City. Of the remaining 60 percent of Paris' capital budget, as much as 15 percent is supplied by surplus from taxes raised in the operating budget.

Pay-as-you-go financing of Paris' capital projects is roughly equal to total annual debt service, each approximately 7 percent of the operating budget. The formula for the amount of pay-as-you-go financing for capital raised through taxes in the operating budget is spelled out as a matter of policy in Paris' annual operating budget. All ordinary repairs plus one-third of all other capital expenses are funded out of taxes rather than from borrowing.

In this important respect, Paris and New York City offer an important contrast. Paris is not only rich, but its problem neighborhoods are located outside of the city's borders in the suburbs. In addition, Paris is sufficiently relieved of important and costly responsibilities such as police protection and secondary education, both of which are deemed too important to the national well-being to delegate to the local administration and therefore are nationalized. Although the national government requires a significant financial contribution from the City of Paris for the costs of police and schools (a form of revenue mandate...