Town Development Fund (TDF) is a 31-year old institution established by the Government of Nepal (GoN) to offer financing to cities and municipalities in the country to expand infrastructure and services.

TDF, in turn, has been financed by loans and grants from the GoN, which in many cases were supported by development partners including the World Bank, Asian Development Bank and KfW. UNCDF assists TDF, on the demand side, to engage with municipalities to develop a pipeline of investment projects, and on the supply side, to access domestic and international capital including co-financing from UNCDF.

This investment is being featured by Suresh Balakrishnan who is Regional Team Leader of the Local Development Finance Practice for Asia-Pacific and supports ongoing programs in the region. Given the key role he played in establishing this partnership in Nepal, he answered the following questions:

• What made you enthusiastic about this investment partnership?
Since my initial engagement with UNCDF’s first municipal finance scoping study in 2012, I had looking out for an established partner institution to pilot a full-fledged municipal investment using debt finance. It was evident that the new federal constitution of Nepal had opened up the debt financing space for local governments, and UNCDF had a great opportunity to establish a financing platform that could go to scale in partnership with a national institution like TDF. The partnership meant that UNCDF could not only work on a municipal investment pipeline, but also to help crows in large ticket financing, both domestic and international to make TDF a game changer in municipal infrastructure finance.

• What were the challenges faced by this partnership?
Visionary law making that was a hallmark of Nepal’s federal constitution did not translate into transformational change in local government finance. The legacy of conservative administrative practices at the national level that constrained municipal borrowing, and the municipal tradition of looking at infrastructure investment from a grant financing lens, became a mutually reinforcing conundrum that challenged this partnership. In other words, policy makers were reluctant to allow municipalities to borrow freely, and municipalities kept seeking grant financing – instead of making the paradigm shift to developing a pipeline of revenue generating investments that could be financed with debt. Our initial investment in capacity building with a cohort of 15 pilot municipalities has created a groundswell of interest in using debt financing, leading to a pipeline that TDF and UNCDF can jointly finance. The next challenge has been to process the pipeline into a portfolio of converging investments that can be pooled and structured into an offering for the capital markets to finance. We are looking at multiple portfolios which include municipal markets, small scale hydropower and waste recycling.

• What are the lessons learned from this example?
I take three key lessons. First, good policy is necessary but not sufficient to make the transition to debt financing for municipalities. Our technical assistance is critical in making transitions successful. Second, it is not enough to align supply, demand and pricing of debt financing; we need to make both sides understand positive externalities and risks that have a bearing on investment decisions. Third, all successful pilots and models cannot automatically achieve scale; we need to invest in an enabling ecosystem and work with partners like TDF to make a transformational impact.

About Suresh Balakrishnan:
Prior to taking up the regional leadership position, Suresh formulated and implemented a series of local governance reform and finance programmes with UNDP and UNCDF across several countries. Over the last decade, he has focused on designing development finance pilots and successfully taken them through stages of progressive growth to achieve scale. Much of Suresh’s early work was on sectoral programming, entrepreneurship development and public accountability instruments. He played a key role in designing and promoting Citizen Report Cards which became a global best practice in promoting public accountability. He holds a Ph.D. in Management specializing in Organizational Design and Behaviour.

Contact:
suresh.balakrishnan@uncdf.org