Municipal bonds as a means of accelerating local infrastructure investment

Abstract

Even today, the 2007 financial crisis imposes negative impacts on the ability of local authorities to raise funds for capital investment, particularly for infrastructure. A fundamental need thus exists for municipalities and regional authorities worldwide to broaden their financial channels and explore flexible financial options. In the USA, municipal bonds represent the backbone of local public finance. Nearly three-quarters of core infrastructures in the USA are financed by municipal bonds, with about $400 billion in issuances every year. However, the municipal bond market is not a rose without thorns. This paper examines different successful and unsuccessful experiences of local authority bond implementations for infrastructure investment. The limitations and advantages of more widespread use of bond issuance as a financial tool for infrastructure investments in the USA are examined. Next, the paper discusses how the problem of risk hinders investment, particularly in infrastructure. Thereafter, the paper enquires whether the example of collective solutions can become the financial cornerstone for infrastructure investment in a discussion of other European approaches, in particular the Swedish case under the mantle of the Nordic Local Government Funding Agencies. After describing effective strategies for local authorities to apply bond tools for infrastructure investments, policy recommendations are discussed.