Ukrainian Cities to Get Access Credits
18 July 2009
Ukrainian Cities to Get Better Access to Credit Resources
Ukrainian cities have now gained an opportunity for a significantly better access to credit resources, which would allow them to finance infrastructure projects in the conditions of a financial crisis. This has become possible thanks to cooperation between the Municipal Finance Strengthening Initiative (MFSI/USAID) project implemented by IBSER and the Access to Credit Initiative project (USAID).
Thus, a roundtable “Partnership between Banks and Local Governments as a Means of Overcoming the Economic Crisis” conducted by IBSER as part of MSFI project in Kyiv on 16 April 2009, as well as further fruitful collaboration between the experts of both projects and the Ministry of Finance, Verkhovna Rada, State Securities and Stock Market Commission, and other stakeholders resulted in the recommendations prepared by roundtable participants, some of which have subsequently been incorporated in and approved by Decree of the Cabinet of Ministers of Ukraine.
Among other things, the Cabinet Decree of 17 July 2009, No. 865 approved conceptual changes to the Procedure of Borrowing into Local Budgets (approved by Cabinet Decree of 24 February 2003, No. 207), which simplify the procedure of local borrowing approval by the Ministry of Finance, and in some cases, abolish the requirement of such approval; eliminate inefficient costs of obtaining conclusions from commercial rating agencies; establish clear and transparent requirements for cooperation with the Ministry of Finance, etc.
The key provisions approved by the said Decree and presented in the Recommendations by roundtable participants include the following:
1) a mandatory requirement is dropped of assigning a credit rating to the borrower (local government) for it to be able to borrow funds in the form of agreements to obtain loans, credits, and credit lines from financial institutions;
2) clear conditions are established for the Ministry of Finance to issue its conclusion regarding a noncompliance of a draft decision to the requirements imposed by the budget legislation, including the following:
- expenditures for servicing the local debt exceed 10 percent of the General Fund expenditures of the respective local budget based on the local budget execution report for a year preceding the year of passing a decision on borrowing or restructuring of debt obligations or undertaking another transaction;
- the sum total of payments to repay the local debt in any one year during the whole period of its repayment is in excess of the average annual revenues of the development budget in the last three years preceding the year of passing the decision, without the funds received through borrowing;
- if the Ministry of Finance fails to send its reasoned objection in writing within 30 working days after receiving a draft decision on borrowing from the Supreme Council of the Autonomous Republic of Crimea or a local council, the draft decision is considered to be in compliance with the budget legislation.
3) it is stipulated that a local borrowing can be implemented without the Ministry of Finance checking for compliance of a draft decision of the Supreme Council of the Autonomous Republic of Crimea or a local council, when:
- the amount of borrowing into a local budget will not exceed 25 percent of the average annual revenues of the development budget in the last three years preceding the decision year, without the funds received from borrowing;
- the total amount of debt in the local budget at the date of borrowing provided by the draft decision must not exceed 75 percent of the average annual amount of development budget revenues in the last three years preceding the decision year, without the funds received from borrowing;
- the amount of expenditures for servicing the local debt on the funds borrowed in previous years must not exceed 5 percent of the total local budget expenditures in a year preceding the year of a decision on borrowing or restructuring of debt obligations or conducting some other transaction.
In addition, local governments shall have the right of initial offering of municipal bonds at a price below the nominal price, in case of public offering at a stock exchange.
Thus, a roundtable “Partnership between Banks and Local Governments as a Means of Overcoming the Economic Crisis” conducted by IBSER as part of MSFI project in Kyiv on 16 April 2009, as well as further fruitful collaboration between the experts of both projects and the Ministry of Finance, Verkhovna Rada, State Securities and Stock Market Commission, and other stakeholders resulted in the recommendations prepared by roundtable participants, some of which have subsequently been incorporated in and approved by Decree of the Cabinet of Ministers of Ukraine.
Among other things, the Cabinet Decree of 17 July 2009, No. 865 approved conceptual changes to the Procedure of Borrowing into Local Budgets (approved by Cabinet Decree of 24 February 2003, No. 207), which simplify the procedure of local borrowing approval by the Ministry of Finance, and in some cases, abolish the requirement of such approval; eliminate inefficient costs of obtaining conclusions from commercial rating agencies; establish clear and transparent requirements for cooperation with the Ministry of Finance, etc.
The key provisions approved by the said Decree and presented in the Recommendations by roundtable participants include the following:
1) a mandatory requirement is dropped of assigning a credit rating to the borrower (local government) for it to be able to borrow funds in the form of agreements to obtain loans, credits, and credit lines from financial institutions;
2) clear conditions are established for the Ministry of Finance to issue its conclusion regarding a noncompliance of a draft decision to the requirements imposed by the budget legislation, including the following:
- expenditures for servicing the local debt exceed 10 percent of the General Fund expenditures of the respective local budget based on the local budget execution report for a year preceding the year of passing a decision on borrowing or restructuring of debt obligations or undertaking another transaction;
- the sum total of payments to repay the local debt in any one year during the whole period of its repayment is in excess of the average annual revenues of the development budget in the last three years preceding the year of passing the decision, without the funds received through borrowing;
- if the Ministry of Finance fails to send its reasoned objection in writing within 30 working days after receiving a draft decision on borrowing from the Supreme Council of the Autonomous Republic of Crimea or a local council, the draft decision is considered to be in compliance with the budget legislation.
3) it is stipulated that a local borrowing can be implemented without the Ministry of Finance checking for compliance of a draft decision of the Supreme Council of the Autonomous Republic of Crimea or a local council, when:
- the amount of borrowing into a local budget will not exceed 25 percent of the average annual revenues of the development budget in the last three years preceding the decision year, without the funds received from borrowing;
- the total amount of debt in the local budget at the date of borrowing provided by the draft decision must not exceed 75 percent of the average annual amount of development budget revenues in the last three years preceding the decision year, without the funds received from borrowing;
- the amount of expenditures for servicing the local debt on the funds borrowed in previous years must not exceed 5 percent of the total local budget expenditures in a year preceding the year of a decision on borrowing or restructuring of debt obligations or conducting some other transaction.
In addition, local governments shall have the right of initial offering of municipal bonds at a price below the nominal price, in case of public offering at a stock exchange.
Glyanec