EU/EBRD Municipal finance facility

The Municipal Finance Facility is an initiative of the EBRD and the European Commission to develop and stimulate commercial bank lending to small and medium-sized municipalities and their utility companies (SMMs) in EU Accession countries joining the EU in 2004. This includes Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia with Bulgaria and Romania to follow.

The facility combines EBRD finance in the form of long-term loans and/or risk sharing with EU Phare grant support in the form of a maturity enhancement fee and technical cooperation for partner banks and/or SMMs.

Objectives

• Stimulate willingness of banks to lend to SMMs.
• Enhance abilities of banks to assess risks of SMMs and to manage their loans in the sector.
• Provide SMMs with access to medium and long-term financing.
• Assist SMMs to prepare and implement feasible and financially sound infrastructure investments suitable for credit financing.

Facilities

Loans
The EBRD will provide up to €75 million in long-term lines of credit from 10 - 15 years to partner banks for on-lending to SMMs in EUR or local currency. Loan amounts are €10 - 20 million per bank. Pricing reflects the credit risk of the partner bank.

Partner banks make loans up to €5 million with a maturity of 5 - 15 years available to SMMs for investment in infrastructure.

Risk sharing
The EBRD will provide up to €25 million for risk sharing on up to 35% of the partner bank's risk on a portfolio of loans to SMMs. The EBRD's support acts like a guarantee, and the EBRD will provide funding only in the event that a municipal loan defaults. The EBRD receives a pro rata share of the margin for the portion of the loan made by the partner bank. This reflects the risk the EBRD is taking. The EBRD pays an agency fee to the partner bank to off-set loan processing costs.

Maturity enhancement fee

To encourage longer-term lending, the EU provides a maturity enhancement fee to partner banks. The fee is paid on a good faith basis at a rate depending on the tenor of the loan. In the event of loan cancellation, prepayment or default within 5 years, partner banks are required to repay the fee in full.

Loan tenor	Maturity enhancement fee
6-7 years	Up to 100 bps
8-9 years	Up to 200 bps
10-11 years	Up to 300 bps
12-13 years	Up to 400 bps
14-15 years	Up to 500 bps

bps = basis points

Technical cooperation

For banks
EU funds provide short-term technical cooperation to banks to upgrade their capacity to appraise municipal infrastructure projects, assess risks and manage portfolios.

The EBRD makes municipal finance experts available to partner banks if requested to help establish specialised municipal finance units and to assist in developing lending practices of partner banks to the sector. This can include training of loan officers and credit personnel and preparing/adapting lending manuals.

For municipalities
EU funds provide support for project preparation, loan application and project implementation by SMMs. In addition, technical cooperation may include creditworthiness support, support for tariff changes or support to revenue enhancement/cost control in utility companies. Support for project preparation is only available upon confirmation by the partner bank to the EBRD that it has initiated due diligence on that municipality and is considering financing a project. Implementation support is only provided in relation to local loans financed.

Selection criteria

For banks

• Creditworthiness.
• Demonstrated commitment to extend long-term financing to SMMs.
• Commitment to promote the facility to SMMs.
• Acceptable standards of procedure for municipal credit appraisal.
• Willingness to co-operate with the EBRD regarding technical cooperation support.
• Willingness to provide visibility for the EU through means such as press conferences and featuring the EU logo in marketing materials and public events.

For municipalities
Municipalities should serve a population of under 100,000 people, or for Bulgaria and Romania, under 150,000 people. They should have sound financial management and a good cash flow. Investments can be in infrastructure sectors such as local transport, district heating, water supply, sewerage, solid waste management, public roads and parking.

Procurement rules for contracts

Partner banks are required to monitor that procurement is carried out on the basis of:

• Works contracts below €5 million: National procurement regulations, but no domestic preference should be applied.
• Works contracts above €5 million: EBRD open tender procedures.
• Goods contracts below €200,000: National procurement regulations, but no domestic preference should be applied.
• Goods contracts above €200,000: EBRD open tender procedures.
• Services contracts above €200,000: EBRD public procurement procedures.

Complete EBRD procurement policies and rules.
Procurement complaints should be reported to the EBRD.

Environmental requirements

• Investments must comply with national and EU environmental standards. Financing agreements and loan documentation should confirm the borrower's compliance.
• The partner bank is required to carry out environmental due diligence on proposed investments.
• The partner bank should confirm to the EBRD that it has reviewed the borrower's preparation work to verify that the project is structured to meet national and EU environmental standards
• Environmental impacts of projects should be reported to partner banks, who in turn report to the EBRD.

Last updated 28 June 2010