Subnational Government, Infrastructure, and the Role of Borrowing and Debt

Abstract

This chapter addresses the role of subnational government (SNG) borrowing and debt management as the financing conduit for the provision of a nation’s investment in its public infrastructure. It begins with a brief review of recent literature on infrastructure deficit and the link between infrastructure services, economic growth, and development. It then describes intergovernmental organizational and institutional arrangements to promote efficiency in the allocation of scarce resources as well as satisfy the equity goal of matching the cost of using those resources to those who pay for them. Spatial considerations lead to the conclusion that SNGs must play a key role in infrastructure financing. And to play this role, the subnational sector must develop the capacity to take on and manage long-term debt. Having established this normative framework, the discussion turns to organizational and institutional arrangements that must be in place to enable a subnational government to carry out its capital financing and spending role. From there the chapter moves on to address financial risks related to SNG debt finance. Two appendices provide a summary of the intergovernmental fiscal rules for nine East Asian countries and the role of subnational borrowing and debt in China.